What is tax planning?
Going by the definition, tax planning is the process of organizing your finances in a way that minimizes your tax liability. It involves taking advantage of all the deductions and credits you are entitled to and using strategies to minimize your taxable income.
There are several different methods of tax planning, and the best approach for you will depend on your individual circumstances. However, there are some general tips that can help you get started. If you are looking for ways to reduce your tax bill, read on for some important tax planning tips.
Why is tax planning important?
There are several fundamental objectives of tax planning. Some of the most prominent objectives include:
Reduce tax liability: The main goal of tax preparation is to lower your tax liability. Every single taxpayer aspires to pay less in taxes while putting money aside for the future. Fortunately, the government provides a variety of investment plans that can considerably decrease liabilities.
Minimise litigation: Planning taxes must include reducing legal litigations. Consult with your advisor and implement the appropriate tax planning laws so that you can reduce the likelihood of litigation.
Leverage productivity & financial growth: Prudent tax planning can support your personal economic growth. You may build a solid corpus and contribute to your economy by setting clear and defined financial goals for your investments over certain time periods and investing in the appropriate tax-saving tools.
Stabilise the country’s economy: Your taxpayer funds are used to advance the welfare of the nation. You can help build a more productive economy if you pay all the taxes that are legitimately owed. Tax planning benefits both you and the economy of the nation in which you reside.
Methods of tax planning:
Fundamentally, there are 4 different methods of tax panning. These are:
Short Term Tax Planning: Short range tax planning refers to the strategy developed and put into action at the conclusion of the fiscal year to legally reduce taxable income. Such plan does not involve any long-term commitment, yet it results in substantial savings in tax.
Long Term Tax Planning: Long-term tax planning refers to a strategy that is laid out at the start of the fiscal year and is implemented all year long. Unlike short-term planning, this kind of preparation does not have an immediate benefit but is likely to be beneficial in the long run.
Permissive Tax Planning: Making plans that are acceptable under various legal provisions, such as planning to earn income covered by Sec. 10 and especially by Sec. 10(1), planning to take use of various incentives and deductions, planning to take advantage of various tax concessions, etc.
Purposive Tax Planning: It involves developing plans with the explicit goal of ensuring the availability of the maximum benefits to the assesses through appropriate investment selection, creation of a programme for asset replacement, modification of residential status, and diversification of business activities and income, among other things.