Tax efficiency primarily refers to the strategies an individual can use to save on income and prevent a significant portion from being allocated for tax payments. These strategies, however, are completely legal and carry no penalty or risk for the individual following them.
In fact, adopting these strategies is one of the best ways for both individuals and businesses to save their income and maximize their tax benefits. Therefore, this article will explore some useful strategies that businesses and individuals can employ to make the most of their tax benefits.
Here are some fair and honest ways to make the most of your tax benefits.
Optimizing input tax credit utilization for regular taxpayers
The input tax credit is nothing but the GST that a registered person gets to pay when he makes a purchase of goods and services for his business. The input tax credit helps an individual offset the liability that comes from the supply of these goods and services.
The most effective way to do this is to ensure that you make all credit claims as soon as possible, thereby avoiding problems that often arise from late claims. In the case of a refund or excess input tax credit, it is very important that these claims be made within the stipulated period.
As a business, you must monitor the balances on input tax credits, and you should do this constantly. This way, businesses and individuals can forfeit excessive credits that go beyond the maximum limit.
Keeping records of all transactions updated and accurately maintained helps an individual. This ensures the smooth operation of input tax credit utilizations.
It would be helpful to know that the CGST Act has introduced two new subsections, which are as follows:
Section 49A
This section requires proper maintenance of input tax credits. This applies to central, state, or union territory taxes for the application and payment of integrated taxes.
Section 49B
You can use the input tax credits mentioned above to pay any tax. You must follow the order or method that the management prescribes to do this. Additionally, you need to take care of Regulation 88A, which is as follows:
Before using an input tax credit against integrated tax, you must ensure that all consolidated taxes are paid in full.
Identifying and implementing tax-saving strategies for regular taxpayers
One of the best ways to prevent unnecessary deductions from income due to taxes is by proper tax planning. That said, the following are some strategies to help you with effective tax planning.
Buy a home loan
This can present an individual with the required benefits, which often come under Section 80C. These benefits help minimize the monetary liability associated with lower tax burdens. Additionally, Section 24B exempts an individual from paying taxes on the interest that comes with a home loan.
Renting a home also spares one from the interest component that comes as a part of annual income tax computations. You must purchase property to build a home, provided you build the home within five years.
Buy a health insurance policy
Only by doing this can a citizen avail all the right benefits. These benefits often occur as part of the tax deductions under Section 80D. However, the amount deducted can vary based on one’s age and the sum set aside for insurance.
Buy a life insurance policy
Here, too, one can greatly benefit from Section 80C. This section exempts you from the payment of a certain amount. Additionally, Section 10D allows for a certain sum in the event of an early death or maturity.
Invest in government schemes.
Government-mandated schemes are those that can often reward one’s investments with some really high returns.
This happens mainly because these often come as part of Section 80C, which can go up to an amount of Rs 1.5 lakh. In addition to this, Section 80C also offers several options that give individuals a chance to invest in areas that help reduce their tax payments.
You can include items such as medical insurance, home loans, and charity donations, all of which Section 80C covers.
However, tax-saving investments must be planned at the beginning of the financial year to get the best out of this.
However, waiting until the last quarter can often lead to hurried decisions, which may result in major blunders at the end of the year.
Starting early helps develop long-term goals in the form of additional perks. This provides individuals ample time to review all tax expenses and make informed decisions, ultimately avoiding risks that could arise by the end of the financial year.
Planning and structuring business operations for tax efficiency
Tax planning is as important as financial planning. This is why businesses must handle it efficiently to fully enjoy the optimum benefits of tax exemptions at the end of the financial year.
This involves making careful decisions in one’s business and other financials. This way, one can greatly avoid the payment of unnecessary taxes in a legal and legitimate way.
This way, businesses can direct returns toward smart and productive investments that contribute to the country’s national development. While the options are many, they mainly fall under three types, which we will now explore.
Short and long-range tax planning
Short-range tax planning refers to the tax planning conducted on an annual basis. This is with a specific aim and objective that one sees at the end of the fiscal year. Long-range tax planning, on the other hand, happens at the beginning of the year. This is when the assessee sees to certain practices, though payments do not happen immediately.
Permissive tax planning
These are the kinds of taxes carried out under the provision of the country’s taxation laws.
Purposive tax planning
Here, too, taxes are planned with a particular purpose and objective. This can include anything from income assets to the diversification of one’s business. Here, the taxes are based on the individual’s residential status and various assets.
These are some ways in which an individual can reduce the liability that comes with paying taxes. This helps in having fewer burdens and obstacles in the way of his financial dreams and goals.
Apart from reducing tax liabilities, these strategies also contribute to productive investments. As a result, they lead to the growth of the economy and give the individual the satisfaction of being a good citizen of the country.
Utilising tax software and tools for regular taxpayers
Tax software comes in different kinds, so here is a brief overview of some of the most popular ones you can read and understand.
GST Tax Filing Software
Chartered accountants often use GST tax filing software to help fulfil their operational requirements and enhance the productivity of their work. This way, they can handle customer records with greater care and consistency and according to the stipulated deadlines.
In other words, it makes their chores simpler, which is very important because GST gets revised multiple times. The software helps reduce liabilities that come with VAT and other kinds of service taxes.
XBRL filing software
This software mainly helps handle the internal and external reports within a company by way of preparation, analysis, and communication of all information in a business.
This way, fragile documents like load reports and credit risk assessments are better handled in the end. Firms can manage their costs and other financial information with utmost productivity.
The software is reliable and can even be customised according to the task that is at hand, be it recording, saving, or transforming information within the company.
ROC Filing Software
This method can be very useful when taxes need to be filed on a manual basis.It is for this reason that the technology is not very popular today.
Income tax filing software
This software helps save records of client’s information more efficiently and allows an individual to access them at any time conveniently.
This way, data can be maintained more simply, consuming less time. It is for this reason that the software is popular among chartered accountants. Computing taxes now becomes easy with fewer chances of human errors, which are otherwise common.
TDS return filing software
This is a kind of software used in tax filing, mainly in the task of furnishing returns. The software helps reduce manual work to a great extent and is highly compatible with a user’s needs. It helps access records with ease and manage the entire process more efficiently.
Work process tax filing software
Last of all, you have the work process tax filing software, which is nothing but the kind of software you use to complete raw tax data, fill sheets, and check tax returns.
The software makes it easier to input data from different forms and calculate taxes accurately and appropriately.
Seeking professional advice to maximise tax benefits
While there are many strategies that one can resort to in order to maximise tax benefits, seeking the right professional help is of utmost importance.
This way, one can get all the tax-saving tips that could help him as an individual or an entrepreneur looking to enhance his tax-saving benefits.
One of the best things you can do here is hire a family member or relative.
Tax accountants are another set of people experienced in dealing with taxes, the consequences of non-compliance, and the penalty that one gets to pay for it. They provide valuable information on how to set long and short-term goals, in addition to the strategies on minimizing tax and making the most of tax benefits.
This way, one can learn better how to handle taxes and plan yearly finances.
Achieving tax compliance while minimising tax liabilities
There is a degree to which every citizen needs to comply when it comes to paying taxes to the country.
This is because every individual, business, or other such entity owes some amount of tax to the government, failing which he will be faced with a penalty.
While the Income Tax Act is very particular about this, this can be minimised with the right arrangements of one’s finances and practices that must be followed efficiently.
One of the most important things that one should do here is a good self-assessment. Do this constantly and regularly, and you will not be facing blunders about your tax liabilities.
Additionally, it is crucial to have a good understanding of tax credits and deductions while minimizing risks. This way, you can also maximize your investment losses, turning them into financial gains.
Conclusion
Taxes are inevitable. Yet, they can be carried out in a way that they do not become a burden and an unwanted liability.
This is possible if you are smart in learning how to handle it all by gathering the necessary information.
An individual can achieve this by staying open to learning, as tax rates may increase, policies and regulations may change, and new benefits can arise daily.
Lesser liability, more efficiency, and greater financial goals are some of the benefits one can enjoy as a result.
FAQs
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What is tax efficiency?
This is simply a method to ensure that the money flowing from your income to taxes is minimized, while simultaneously fulfilling the standards set by the country’s laws.
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What is the purpose of tax efficiency?
Take, for instance, if you buy materials for your business at the cost of Rs 10,000, with a total of Rs 1,800 as GST. You can use this amount to offset the GST you would otherwise need to pay for the finished goods.
Now, let’s assume that your finished goods are worth Rs 15,000, which demands a GST of Rs 2,700. You can apply the GST of Rs 1,800 from the materials purchase, reducing the amount you owe to Rs 900.
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What is tax optimisation?
This is a process where a business follows an efficient strategy to reduce obligations on the taxes they have to pay in a way that falls within the legal framework and fulfils governmental regulations.
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How can we optimise our tax efficiency?
The secret lies in placing investments in the right account so that, in the end, there are fewer returns to taxes for better management of your taxable accounts.
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What is the most important factor for effective tax planning?
One of the most important factors is a good evaluation of your total annual income, after which you can carefully assess what tax-saving instruments are best for you to invest in.
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Which is the biggest source of taxes for an individual?
Personal income is where an individual contributes 35 per cent of his tax, which makes it the biggest contributor to his taxes.
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What is the main factor that affects the taxation of an individual?
A person is mainly taxed on his ability to work, save and invest. These are the factors that determine the taxes that he has been imposed for the income he earns.
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Does every country follow the system of income tax?
No, countries like Bermuda, Monaco, UAE, and the Bahamas do not impose any personal income tax on their citizens.
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Which is the country that follows the most efficient system of tax?
The survey shows that Estonia scores the highest in the positive features of its tax regulations.
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Which is the country that demands the least amount of taxes from its citizens?
The answer is Kuwait, as the country demands no income tax, which is why it is a favourite of ex-pats who like to make a living in this tax-free country.
