Tax Planning can be understood as the activity undertaken by the tax assessee to reduce the tax liability by making optimum use of all permissible allowances, deductions, concessions, exemptions, rebates, exclusions available under the statute for him/her.
To put it simply, it is a planned arrangement of an assessee’s business or financial dealings, in such a way that complete tax benefit can be availed through legitimate means, by making use of all beneficial provisions and relaxations provided in the tax law, so that the incidence of paying tax is minimum. This ensures saving of taxes along with conformity to all the legal obligations and requirements. Therefore, it is permitted by the law.
Tax planning is the analysis of a financial situation from a tax perspective. The main purpose of tax planning is to ensure tax efficiency. Through tax planning, all the elements of the financial plan work in the most tax-efficient manner possible. Tax planning is an essential aspect of financial planning. Reduction of the tax liability and maximizing of the ability to contribute to retirement plans are crucial for future success.
Objectives of Tax Planning
Reduction in Tax Liability: An assessee can save a maximum amount of tax, by properly planning his/her operations as per the requirements of the law, all within the framework of the statute.
Productive Investment: One of the important objectives of tax planning is the channelisation of taxable income according to different investment plans. It aims at the optimum utilization of available resources for productive causes and relieving the assessee from maximum tax liability.
Minimizing Litigation: There is always a war-like situation between the taxpayers and tax collectors as the former wants the tax liability to be as minimum as possible whereas the latter attempts to extract the maximum possible. So, a well-thought-out planning aims at conforming to the provisions of the tax law, in a way that the incidence of litigation is minimized.
Economic Stability: Properly planned tax planning brings economic stability through various techniques such as mobilizing the required resources for national projects or availing ways for investments which are productive for the country.
Healthy Economic Growth: The growth and development of an economy greatly depend on the growth of its citizens. Tax planning measures involve generating only white money that flows freely in the economy and results in the sound progress of the economy.
Various Tax Planning methods are as follows
Short-Term Tax Planning
It means the planning thought of and executed at the end of the financial year to reduce taxable income in a legal way.
Long-Term Tax Planning
It means a proper plan chalked out at the beginning of the financial year to be followed around the year. This type of planning is made to help in the long run.
Permissive Tax Planning
It means making the tax plans which are permissible under different provisions of the law, such as planning of earning income covered by the planning of taking advantage of different incentives and deductions, planning for availing different tax concessions & so on.
Purposive Tax Planning
It refers to making plans with a specific purpose or a goal to ensure the availability of maximum benefits to the assessee through correct selection of the investment channels, making a suitable programme for replacement of assets, varying the residential status and diversifying business activities and income & so on.
Properly Planned Tax planning is the basic duty every person should carry out religiously. We help you compare the advantages of several tax saving schemes and depending upon your age, liabilities, tax slabs and personal preferences, to decide upon a right mix of investments, which shall reduce your tax liability to the minimum possible.
