Dec 28, 2023 Value Broking 6 Mins 2.3K

Meaning of Tax Planning

Each individual has his/her personal financial goals, they can be short-, medium-, orlong-term. Often the income you earn, may not be enough to achieve financial objectives. Let’s say, you want to buy a house of your own, or, want to take an exotic vacation, you calculate the amount you need. Very often, you leave aside your plans because of shortage of funds. This is where tax planning comes in, you analyse, evaluate and review, how you can grow your wealth and save tax, simultaneously. Let us understand what is tax planning?

By definition, when you review and restructure your finances to become tax-efficient, you’re essentially planning your taxes. Tax planning, in a broader perspective also covers tax management. With it, you can make the most out of income tax exemptions and/or deductions, under the Income Tax Act of India—1961.

Difference Between Tax Planning and Tax Management

Now that you’ve seen what is tax planning, you need to understand differences between tax planning and tax management. These will give you a better idea of the importance of tax planning. The differences are subtle and the two terms are often used synonymously.

Tax PlanningTax Management
The objective of tax planning is to reduce tax liability.The objective of tax management is to comply with the legal provisions of Income Tax of India—1961.
Tax planning includes tax management.Tax management deals with timely filing of tax returns, regular financial audits, being compliant with deducting tax at source, etc.
Tax planning is carried out for the future.Tax management relates to the past, present and future. Past: Assessment processes, following up for refunds, making note of revisions, etc. Present: Filing tax returns, paying advance taxes, etc. Future: Taking corrective action and precaution (if required).
Tax planning helps reduce tax liability during short-and long-term horizons.Proper tax management circumvents the need to pay interest, or penalty. It also protects from legal prosecution.
Tax planning is optional.Each taxpayer (individual or entity), needs to manage taxes.

Effective tax planning and management helps you to make the most of all tax exemptions and deductions, available. This reduces your tax liability in each financial year.

Importance of Tax Planning and Management

Tax planning is a legal and smart way to ensure your taxable income is as low as permissible. It helps to have some knowledge of these exemptions and deductions. This makes it easier for you to compute and file your tax return.

Moreover, it won’t hurt to have a tax consultant, who can give great investment advice. You’ll probably get to know more tax saving options with a good consultant.

Sections 80C to 80U of the Income Tax Act of India—1961, lists and explains all permissible options to save tax and your eligibility to claim benefits. You will also find information on the maximum limits of each section. As mentioned before, it always helps to be aware of these sections.

You, as a responsible taxpayer, must ensure you’re complying the legal framework, provided by the Central Government. You must also remember, you cannot misuse tax laws to evade or avoid taxes. Tax avoidance and evasion are considered illegal in India, you may be liable to face prosecution.

Types of Tax Planning and Management

Now that you’ve seen what is tax planning, and the difference between tax planning and management, let’s understand the types. There are essentially four methods here’s a summary of each.

Short Range Tax Planning:

This type of tax planning has a limited objective or aim. Investors will often rush to invest toward the end of the financial year. This usually happens when there is a change in the taxpayer’s financial situation. For example, you get a promotion and a raise during a financial year. Your salary structure will obviously not be the same as the previous year. You realise, your taxable income is now higher. So, 3 to 6 months before your taxes are due, you look for investment options. These can be found mostly under section 80C. You’ll be requested to submit income tax proofs, if you have chosen any compliant financial product, to save tax, under this section.

Long Range Tax Planning:

In this method, you’re essentially taking calculated tax saving decisions, at the beginning of a financial year. The aim is to reduce tax liability for the long-term. For example, taking a home loan, or, an education loan. Another way to reduce your tax liability is, by transferring shares, or assets with family. If their taxable income is lower than yours, they can be eligible for tax benefits.

Permissive Tax Planning:

Through this method, you’re optimising each and every section of the Income Tax Act of India—1961. You need to be within the legal framework of compliance. Utilising all the sections legally, doesn’t mean you’re avoiding taxes. It simply means, you’re being smart about reducing your tax liability.

Purposive Tax Planning:

Here, you’re planning you have a specific purpose to save taxes. This method needs a detailed evaluation of investment options, assets, etc. At times, it may even require a complete restructuring of your personal finances, to reduce your tax liability.

Objectives of Tax Planning

The objectives of tax planning have been outlined below.

  •  To reduce tax liability.
  •  To be economically stable.
  •  To make productive investments.

Corporate Tax Planning

Corporate tax planning entails, registered companies that have the foresight to reduce their tax liability.

Companies do this by:

  •  Filing deductions for business transport.
  •  Health insurance coverage of employees.
  •  Child care provisions for employees’ dependent children.
  •  Retirement planning provisions for employees.
  •  Social responsibility and charity.

Registered companies can also optimise sections of the Income Tax Act. They have to ensure legal compliance of tax laws. Even companies are liable to face legal action for avoiding or evading taxes.

Higher profits, mean increased tax liability, clear corporate tax plans need to be in place to reduce tax liability. This protects a company against inflation, it also increases accountability. Moreover, corporate transparency is paramount especially in competitive markets.

Each taxpayer, whether individual or entity, has a responsibility to pay income tax. If you’re wondering how your taxes are being utilised, the evidence lies in national infrastructure development. Each rupee of income tax, goes toward, building roads, improving transport, even social welfare. However, you’re not alone when it comes to worrying about taxes.

Most taxpayers are concerned about changes in tax rates, which is why the need of tax planning is ten-fold. With each change in tax legislation, your tax liability may reduce, or become higher. You can always rely on good tax consultants to file your income tax returns. However, you, as a responsible taxpayer, need to be aware of changes in tax laws.

Knowledge of tax saving investment options and changes in tax laws, also allows you to explore more options, than you’d normally choose. Moreover, understanding the legal way to plan your taxes, gets you one step closer to tax efficiency.