Tax Planning

Tax planning refers to a legal way of minimizing tax liabilities in a year. This process will help an individual to use tax exemptions, deductions, and benefits in the best possible manner for minimising the burden of tax. However, it is important to keep in mind that this should be done by following a legalised way.

What is tax planning?

Tax planning is a way of analysing one's financial situation from tax efficiency viewpoint so that finances can be managed in an optimized manner. Tax planning enables taxpayer to make best use of various tax exemptions, deductions and benefits. Simply out, tax planning is legal way of reducing the liabilities of income tax. However, caution is required to be maintained to ensure that taxpayer isn't knowingly indulging in tax evasion.

Tax planning in India

In India, there are several tax saving options for the taxpayers. Such options enable wide range of exemptions and deductions which help in limiting overall tax liability. Deductions are available from Sections 80C to Section 80U. These deductions can be claimed by eligible taxpayers. Such deductions are made against quantum of tax liabilities. There are several other sections under Income Tax Act, 1961 which can help reduce tax liabilities like exemptions and tax credits.

Tax Planning
Corporate tax planning

Corporate tax planning points to the way of reducing tax liabilities on registered company. Most common ways to do this includes availing deductions on transport related to business, health insurance of employees, expenses related to office, retirement planning, etc. Because of various tax deductions and exemptions given under Income Tax Act, a company can significantly minimize tax burden and that too in a legal way. Again, tax planning is not required to be confused with tax avoidance and all planning should be done within framework of law.

Hight profits for a company results in significantly higher tax liabilities. Therefore, it becomes utmost important for such companies to devote enough time on tax planning to reduce liabilities. With the help of proper tax planning, direct tax and indirect tax burden is minimised during inflation.

Corporate tax planning can also assist in proper planning of expenses, capital budgeting, management of sales and marketing costs, etc. Good tax planning includes disclosing accurate information to relevant IT departments, not being ignorant of prevailing and applicable tax laws and planning of business activities with the framework of law. This planning should be done in a flexible way to incorporate relevant changes which might arise in the future.

Types of tax planning

  • Purposive tax planning: This type of tax planning includes managing finances with a particular objective in mind.

  • Permissive tax planning: This sort of planning means reducing the burden of taxes by following ways that are permissible under framework of law.

  • Long range and short-range tax planning: Long range planning includes planning to reduce taxes at the start of a financial year. On the contrary, short-range tax planning means planning at the end of a financial year.

Tax saving objectives

Why are we doing the tax planning? The principal objectives of tax planning include reducing overall tax liability, economic stability, economic growth, productive investment, etc.

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