Tax Planning
Tax planning is a legal way of reducing your tax liabilities in a year. It will help you to
utilise the tax exemptions, deductions, and benefits in the best possible way for
minimising your tax burden. However, it should be done in a legal manner.
What is Tax Planning?
Tax planning is the analysis of one’s financial situation from a tax efficiency point of view so as to
plan one’s finances in the most optimized manner. Tax planning allows a taxpayer to make the
best use of the various tax exemptions, deductions and benefits to minimize their tax liability over
a financial year. Tax planning is a legal way of reducing income tax liabilities, however caution
has to be maintained to ensure that the taxpayer isn’t knowingly indulging in tax evasion or tax
avoidance.
Tax Planning in India:
In India, there are a number of tax saving options for all taxpayers. These options allow for a
wide range of exemptions and deductions that help in limiting the overall tax liability. The
deductions are available from Sections 80C through to 80U and can be claimed by eligible
taxpayers. These deductions are made against the quantum of tax liabilities. There are various
other sections under the Income Tax Act, 1961 that can reduce your tax liabilities such as
exemptions and tax credits.
When tax planning is done inside the frameworks defined by the respective authorities, it is fully
legal and in fact a smart decision. However, using shady techniques to avoid tax payments is
illegal and you may get into trouble for doing so. Tax saving practices include tax avoidance, tax
evasion and tax planning. Out of these tax planning is the only legal manner of reducing your tax
liabilities. The government offers the different opportunities to save on taxes with the intention of
reducing tax burden on a taxpayer through legal income tax planning methods.
Corporate Tax Planning:
Corporate tax planning is a means of reducing tax liabilities on a registered company. The
common ways to do this includes taking deductions on business transport, health insurance of
employees, office expenses, retirement planning, child care, charitable contributions etc.
Through the various tax deductions and exemptions provided under the Income Tax Act, a
company can substantially reduce its tax burden in a legal way. Once again, tax planning should
not be confused with tax avoidance and all the planning should be done within the framework of
law.
Increasing profits for a company results in higher tax liabilities. As such, it becomes imperative
for them to devote enough time on tax planning to reduce the liabilities. With proper tax planning,
the direct tax and indirect tax burden is reduced at times of inflation. It also assists in proper
planning of expenses, capital budget and sales and marketing costs, among others. A good tax
planning results out of:
Disclosing correct information to relevant IT departments.
Not being ignorant of applicable tax laws as well as court judgements regarding the same.
Legal tax planning should be done which is under the purview of law.
Planning must be done with business objectives in mind and should be flexible enough to
incorporate possible changes in the future.
Types of Tax Planning:
Purposive tax planning: Planning taxes with a particular objective in mind
Permissive tax planning: Tax planning that is under the framework of law
Long range and Short range tax planning: Planning done at the start and end of a fiscal
year respectively.
Tax Saving Objectives:
The primary objectives of your tax planning should be the following:
Reduction in overall tax liability
Economic stability
Growth of economy
Litigation minimization
Productive investment.
Tax Planning
Definition: Tax Planning can be understood as the activity undertaken by the assessee to
reduce the tax liability by making optimum use of all permissible allowances, deductions,
concessions, exemptions, rebates, exclusions and so forth, available under the statute.
Put simply, it is an arrangement of an assessee’s business or financial dealings, in such a way
that complete tax benefit can be availed by legitimate means, i.e. making use of all beneficial
provisions and relaxations provided in the tax law, so that the incidence of the tax is
minimum. This ensures savings of taxes along with conformity to the legal obligations and
requirements. Therefore, it is permitted by law.
Objectives of Tax Planning
Reduction of Tax Liability: An assessee can save the maximum amount of tax, by
properly arranging his/her operations as per the requirements of the law, within the
framework of the statute.
Minimization of Litigation: There is a war-like situation between the taxpayers and tax
collectors as the former wants the tax liability to be minimum while the latter attempts to
extract the maximum. So, a proper tax planning aims at conforming to the provisions of
the tax law, in such a way that incidence of litigation is minimized.
Productive Investment: One of the major objective of tax planning is channelisation of
taxable income to different investment plans. It aims at the optimum utilization of
resources for productive causes and relieving the assessee from tax liability.
Healthy Growth of Economy: The growth and development of the economy greatly
depend on the growth of its citizens. Tax planning measures involve generating white
money that flows freely and results in the sound progress of the economy.
Economic Stability: Proper tax planning brings economic stability by various techniques
such as mobilizing resources for national projects or availing ways for investments which
are productive in nature.
Tax Planning follows an honest approach, to achieve maximum benefits of tax laws, by
applying the script and moral of law. Therefore the objectives do not in any way contradict
the concept of tax laws.
Types of Tax Planning
1. Short-range and long-range Tax Planning: The tax planning which is made every year to
arrive at specific or limited objectives, is called short-range tax planning. Conversely, long-
range tax planning alludes to such practices undertaken by the assessee which are not paid off
immediately.
2. Permissive Tax Planning: Tax planning, wherein the planning is made as per expressed
provision of the taxation laws is termed as permissive tax planning.
3. Purposive Tax Planning: Purposive tax planning refers to the tax planning method which
misleads the law. Under this type, there is no expressed provision of the statute.
Tax planning means intelligently applying tax provisions to manage an individual’s affairs, in
order to avail the tax benefits based on the national priorities, in accordance with the interest
of general public and government.
