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.