Taxes can eat into one’s annual earnings. Tax planning is a process of analysing one’s financial situation in order to reducing tax liability in any given financial year. It involves planning income in a legal manner for availing different exemptions and deductions. Tax Planning helps you effectively utilise tax exemptions, deductions, and benefits offered by the concerned authorities in the best possible way to minimise your liability.
Tax Planning helps reduce litigation. Litigation involves resolving tax disputes with concerned tax authorities. Friction usually happens between tax collectors and taxpayers because the collectors try to take the maximum amount possible while the taxpayers want to keep their tax liability to a minimum. So reducing litigation saves the taxpayer from various legal liabilities.
Every taxpayer desires to save money by reducing their tax burden. One can reduce the payable tax by arranging the investments in a proper way or within the various benefits offered under the Income Tax Act, 1961. This income tax act provides an idea of various tax planning investment schemes that helps radically reduce the tax liability
Taxes are collected for furthering economic progress. Effective tax planning offers a healthy inflow of white money results in growth of the economy. This will benefit both the citizens and the economy in the long run.
Tax planning effectively helps channelize funds from taxable sources to various income-generating plans. This will result in best utilisation of funds for productive causes and minimize losses.
Permissive tax planning refers to the planning which is permissible under various provisions of the law. It involves planning under different provisions of the taxation laws laid down by the Indian government. Tax planning here offers various provisions like exemptions, deductions, contributions, and incentives.
Purposive tax planning involves using tax-saver instruments with a particular objective in mind. This type of planning makes sure that the tax payer gains optimal benefits from the investments. Purposive Tax Planning includes meticulously choosing the right investments, developing a plan to replace assets if required, and diversification of business and income assets.
Here tax planning is conducted and implemented at the end of the fiscal year. Investors choose this planning in order to search for ways to reduce their tax liability legally when the financial year comes to an end. This method is not intended to plan and encourage long-term commitments. Short-range tax planning can result in substantial tax savings.
This method is implemented at the beginning of the fiscal year and the taxpayer follows this plan throughout the year. Unlike short-range tax planning, tax payers will not receive immediate tax benefits, but it will remain effective in the future.
