Year End Tax Planning
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Tips to Start Your Year End Tax Planning for Maximum Benefits

One must pay taxes. However, there is no reason to not put in place strategies and practices that will result in minimum tax incidence. Look at Donald Trump. A billionaire, but the reported taxes he paid were $ 750. The logic is simple. You pay tax money and it goes out of your pocket forever unless you file returns in which you can claim refunds. Most businesses start thinking of tax saving when it is time to file returns. However, smart businesses will start tax planning at the start of the new financial year. This may be better than year end tax planning. Still, if you overlooked it you can always plan taxes at the end of the year. 

Advance start of the year plan for taxes is always better

Salaried persons have little choice but to experience tax deducted at source. You can mitigate the amount you pay by advance planning and informing your employers of steps taken so that they deduct less amount of tax. If this is not done you can engage in year end tax planning, make appropriate investments and claim deductions or claim refunds. This is an involved process but that is how it is. You can increase investments in tax deductible portfolios or savings and claim relief by submitting form 15G and 15H to avoid TDS. 

For businesses there is much more flexibility if they plan for taxes at the start of the year. Your chartered accountant will take a look at your past financial records, arrive at a reasonable conclusion of how much profits you will make and how much taxes you will be paying. He knows under which heads you can claim tax reliefs and legal deductions and will plan for you to spend under such heads or account spending under headings that get you tax deductions. Your month to month accounting can incorporate appropriate entries. You can also make investments in tax deductible securities, insurance or PPF or under section 80C. If you have not planned at the start of the year then you will find that year end tax planning will involve quite a bit of jugglery to minimize tax outgo. 

Interestingly, you can interpret year end tax planning in different ways. It could mean looking at the next year’s tax planning at the end of the current financial year so that you have a clear picture where you stand at the moment and how to plan for taxes for the next year. In plain terms, year end tax planning can mean just that: plan for taxes as the financial year draws to a close. 

Year end tax outgo reduction

Instead of advance planning many business owners engage in year end tax planning at the last moment, when they are finalizing books or when it is time to file returns. This is practical but could impose a financial burden on you.  

  • Understand section 80C and invest in PPF, National Savings Certificate, Mutual Funds or equity linked saving schemes. Your accountant will help you to decide on the amount of investment you need to make to reduce tax outgo. Your funds will be locked for a long time, say 3 to 5 years or more but they remain yours. You will need to stay within the defined permissible limit under applicable section such as section 80C.
  • Some manufacturing industries may decide to invest in capital equipment and claim tax deductions on such investment. 
  • Some even go as far as to “manufacture” expenses, payment of salaries or travel expenses that can be claimed as tax deductions. 
  • Manufacturers have been known to show “rejections” leading to losses that can be used to offset tax outgo since profits are reduced. 
  • You can show marketing and advertising expenses and claim deductions permissible under various heads. 
  • You could claim deductions under entertainment expenses but it depends on applicable laws. For instance, such expenses may not be deductible in the US but may work in India. 

As a side note it is interesting to note that many businesses in India employed more accountants than other staff. The reason was simple. Each accountant handled the accounts of a separate company and businesses routed sales through different companies under their ownership to minimize profit and maximize expense. However, amendments in laws put paid to such practices. Still, you can reduce the amount of profit you show by routing sales through an intermediary company held by someone close to you. 

The problem of going into a huddle with accountants at the last minute is that you will take decisions in a hurry and make questionable entries open to audit queries and challenges by the income-tax department.  Call in expert accounting services providers for year end tax planning by all means if you have not planned in advance. However, for the future, plan ahead, distribute expenses judiciously, invest in small amounts and stay compliant while enjoying maximum savings and minimum tax incidence.

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