You spend your time and effort to earn more every year. You work hard while pursuing your job or business, have a few passive income sources as well, and everything seems bright and optimistic. But as the financial year reaches its end, you get to know your tax liability which is also higher than usual. You may also feel that the applicable taxes are eating away a significant portion of your income. This keeps you wondering if there’s anything you can do about it. Fortunately, strategic tax planning can be the answer to all such woes.
The prevalent tax laws simply say that you have to pay certain taxes based on your income and the applicable income tax slab rates. In simple terms, the higher your income, the more taxes you will need to pay. This is where tax planning can come to your rescue, helping you to reduce your tax liability.
Want to know more about tax planning meaning in practical terms and how you can save taxes? This blog post has all the information you need to minimize tax outgo.
What is Tax Planning?
Tax planning refers to the process of analyzing the financial status of an entity or individual in reference to tax efficiency. The primary purpose of tax planning is to ensure there is tax efficiency and that all the elements of your financial plan – investments, expenses, etc. are aligned together to reduce the overall tax burden. Besides bringing down tax liability, tax planning also involves making investments in the right avenues at the right time.
Although tax planning deals with reducing tax obligations, it does not mean that you (as a taxpayer) need to indulge in tax evasion or tax avoidance. What you will pay as taxes and invest in different investment options will ultimately boost the country’s economic growth.
You should also know that tax planning is not a one-time activity in any financial year but continues as you move through various stages of the year. While you need to file the taxes and returns during the assessment period, tax planning decisions need to be spread across the financial year.
If you are still mulling over the need for tax planning, let’s go over its worth.
Why is Tax Planning Important?
Reconsider the meaning of tax planning once again here –
Tax planning involves analyzing your financial situation to figure out and determine legal ways through which you can reduce the taxable income and hence, the total tax outgo.
In financial terms, the next taxable income refers to the difference between your gross income and any deductions/tax-saving investments in a particular financial year. It means when you plan your taxes, you need to spend money on buying insurance, borrowing home loans, or investing in tax-saving FDs and other instruments. What many people do not realize is that tax planning also boosts their savings and helps them stay on track to fulfilling various financial goals in life.
Let’s take a closer look at some of the key advantages or objectives to cement the importance of tax planning in your mind.
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Advantages of Tax Planning
Tax planning for new business/old business and individuals bodies in the following ways:
Proper usage of funds
When you know you need to plan your taxes, you will most likely channel funds from different income sources into the right tax-saving investment options. For example, you can reinvest the earnings back into the business to grow both revenue and profits. This ensures optimal usage of funds and minimize unnecessary expenses.
Contribution toward the country’s economic growth
One of its core objectives is to strengthen our country’s economy. The tax you pay is utilized to support various government schemes and development projects that are aimed at improving the state of the economy.
Reduced tax liabilities
It enables reduced tax liability as defined under the Income Tax Act, 1961. You can make tax-saving investments or claim deductions for expenses like the ones defined in Section 80C or 80D as per the current tax laws.
Reduced risk of litigation
Tax planning also reduces the risk of litigation by local, state, or other tax authorities. You can resolve tax disputes that may arise in relation to tax collectors issuing notices for alleged evasion of taxes.
Boost to savings
Paying tax adequately and planning for it with the right means also ensure that you will have more money by your side to fulfill your financial goals in life. The importance of tax planning can be realized from the fact that it can also boost your savings in the longer term.
You might have heard of different types of taxes. But what about types of tax planning? Let’s find out.
Four Different Types of Tax Planning
Short-term tax planning
It typically involves making one or a few investments/expenses to reduce tax liability at the end of a fiscal year. While this types of tax planning for new business/old business or individuals can be useful, it can upset your financial budget for a few months. The key limitation here is that you may need to invest or spend a large amount all at once to fulfill tax planning goals.
Long-term tax planning
Long-term tax planning simply means drafting a multi-year strategy after a financial year commences. In some cases, it may not provide any instant tax benefits but proves effective in the long run. This includes investing in a Public Provident Fund (PPF), National Pension Scheme (NPS), or starting an SIP in an ELSS mutual fund.
Purposive tax planning
Purposive tax planning, as the name suggests, is aimed at fulfilling a specific purpose of a business body or individual. Here, you select investment options in a way that they fulfill goals like complete use of Section 80C limit or asset diversification.
Permissive tax planning
This strategy can be defined as per the provision of the Indian tax laws like tax deductions, exemptions, incentives, etc. As a taxpayer, you can claim these benefits or provisions on different expenses or investments as defined under different Sections of the Income Tax Act, 1961.
Interesting Read: All About Corporate Tax in India
How to Save Taxes in India?
You can plan to save taxes through different types of expenses and investments that are aimed at reducing your tax liability.
Common expenses for tax planning in India
The following table covers some of the most common expenses you can choose to plan taxes:
| Instrument | Related Section of the Income Tax Act | Permissible Limit to Save Tax In a Year |
| Life insurance | Section 80C | Up to Rs. 1.5 lakh |
| Health insurance or mediclaim | Section 80D | Up to Rs. 25,000 (family) and Rs. 50,000 (senior citizens/parents) |
| Medical expenses for certain diseases | Section 80DDB | Up to Rs. 40,000 |
| Tuition fees of your children | Section 80C | Up to Rs. 1.5 lakh |
| Donations to trusts or other institutions | Section 80G | No limit |
| Repayment of home loan principal | Section 80C | Up to Rs. 1.5 lakh |
| Repayment of home loan interest | Section 24 | Up to Rs. 2 lakh |
| Repayment of education loan interest | Section 80E | – |
Other than these expenses, you can also benefit from various tax-saving investments in India.
Popular investments for tax planning in India
| Investment | Type |
| Equity Linked Savings Scheme (ELSS) | Market-linked investment |
| Public Provident Fund (PPF) | Govt-backed fixed return scheme |
| National Savings Certificate (NSC) | Govt-backed fixed return scheme |
| National Pension System (NPS) | Market-linked investment |
| Tax-saving Fixed Deposit (Five Year) | Fixed return investment |
| Employee Provident Fund (EPF) or Voluntary Provident Fund (VPF) | Govt-backed fixed return scheme for salaried employees |
FAQs
What is corporate tax planning?
Corporate tax planning is about reducing the tax obligations for your registered organization. It can be executed via different types of deductions, including the ones made on business transport, office expenses, charitable contributions, and more.
I have no idea about taxes. How can I do tax planning effectively?
The first step you need to take toward effective tax planning is to gain knowledge about different ways to reduce tax liability. If you still face difficulties, you can hire a tax consultant.
What will happen if I do not pay taxes?
Any individual who does not pay the taxes will be declared a tax defaulter and may face severe actions on the grounds of tax evasion. With tax planning, you can save taxes while also staying compliant with the prevailing tax laws.
What are the different types of tax planning?
It is broadly classified into four main types, which are purposive, permissive, short-term, and long-term.
What is tax planning and its objectives?
Tax planning mainly refers to the process of adopting legal methods to reduce the overall tax burden. It also includes benefiting from different types of tax-saving investments that can help lower the income tax payable in a financial year.
What are the benefits of tax planning?
The primary benefits of tax planning is lower tax liability. As a result, it ensures that you have adequate funds for future use. You can reduce the payable tax by optimizing investments as per the deductions defined under the Income Tax Act.
