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Do pay your tax and file returns regularly.

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When it comes to income tax, people are a bit reluctant to disclose their actual income and pay tax. After all, why should you pay a portion of what you have earned working so hard, Isn’t it?

It’s important to understand the logic of tax collection in the right spirit. The government collects tax from all those who have income above a certain limit in order to run the whole show. It’s collected for the welfare of each one of us. It’s the taxpayer’s money that’s used to maintain roads, build new bridges,  highways, railways, bus terminals, airports,   provide health care and education to the poor, build stadiums , maintain drainage systems , provide street lights and traffic signals, waste disposal,  protect the environment etc..

Not only that, the equipments for defence forces, expenses for disaster relief, maintenance of historic monuments, and running systems like elections, judiciary, and treasury requires a lot of funds. Once source for the government is the tax that we pay.

The government can impose tax through several methods directly and indirectly. We do pay taxes indirectly through sales tax and service tax that’s imposed on us when we buy goods and services. When it comes to income tax, there is no mechanism like sales tax and service tax where tax is automatically collected at every transaction point. Instead, we are supposed to make a list of our net income from various sources and work out the total tax liability and voluntarily disclose it to the government. Of course, the government does ensure that a portion of your tax liability is deducted from the source itself.

So it’s basically for the betterment of the country, for our security and well being. More tax is collected from people that earn more.  All of us are directly or indirectly benefited from this. Hence, it’s our responsibility to pay taxes.

Having a tax clearance has lot of advantages. Here’s a list of points that came into my mind in no particular order:

The income tax return is considered as a valid income proof not only in India but also globally. If you are looking for higher education or employment overseas, your present tax status may add more credibility to your application. So it is a standard proof that you have income and that you have paid your taxes due to the government.

If you are not paying income tax, it would be difficult to get a loan sanctioned in your name.  But if you have all the tax papers, it immediately creates an impression that you are a responsible citizen and that you’ll not make default in repayments. Having proof that you have disclosed your income and has paid tax speeds up your loan application process.

The PAN or permanent account number card is a valid proof for your signature and date of birth. This card is required for all monetary transactions above a certain limit. It’s also required to buy a car, to open bank accounts, to subscribe to mutual funds and to invest in stocks.

Income tax law imposes severe penalties and fines for those who are not proper in disclosing and filing tax. So, to be on the safer side, it’s always better to disclose your income and pay the tax that’s due from you to the government so that you can be proud that you did your bit for the development and prosperity of your country.

Before filing returns.

The income tax Act contains various provisions that may help you to reduce your tax bill. It may not be possible for everyone to understand the language of law and hence, it’s prudent to consult a tax practitioner who will guide you on the matter. By properly planning your tax, you can reduce your tax liability to the minimum. By planning we mean an early planning of tax – not at the fag end of the deadline. Tax planning is done by legitimately using tax exemptions, rebates, reliefs and deductions to your advantage. To utilize the provisions of deductions, you may be required to invest money in certain instruments like tax saver bonds or life insurance premiums or may be required to donate to eligible schemes of the government. All this cannot be done just before the deadline. There is a time limit for making such investments and payments. Following steps should give a brief idea about how to plan your tax:

  • First,  list down all your sources of income. Possible sources can be – employment, business, profession, gains from selling assets like land or shares, winnings from speculation, interest, dividends, rent, commissions and brokerage.
  • Estimate the total income for the year from each source.
  • Add up everything and you get your expected total income.

If you have incurred loss from any source, make sure that you’ve deducted it from the total. You need to pay tax only for the net amount.

  • Calculate the probable tax liability.
  • See if you can make any investments or donations that are allowed as deductions. Such investments would reduce your tax liability. Keep minimizing your projected tax by utilizing all those provisions. You may require the services of a tax consultant for this.

Keep your tax bill at the minimum. If you’ve done that, you’ve planned your tax bill very well.

 

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