Tax planning is the process of assessing your financial situation and identifying measures Check this you can take to reduce the burden of income tax on your finances. The primary scope of tax planning is to look for opportunities to save taxes, so your overall tax liability is reduced to the maximum extent possible. This allows you to have more disposable income, which you can redirect towards your investments and focus on achieving your financial goals as planned.
Irrespective of whether you are a salaried employee, a self-employed person or a retiree, tax planning and tax management are crucial to streamline your finances and ensure that your taxes do not eat into the income you earn.
Objectives of Tax Planning
Now that you know the meaning of tax planning, let’s take a closer look at the purpose of this exercise. The key objectives of tax planning include the following:
To minimise your tax liability
To ensure tax efficiency
To facilitate legal tax savings
To increase your disposable income
To encourage voluntary compliance with tax laws
To enable prudent investment planning
To forecast tax obligations
To optimise retirement planning
To reduce tax-related litigation
Types of Tax Planning
Although the scope of tax planning may seem straightforward, it’s a multi-pronged approach that helps satisfy various goals. It can also be adopted for varying time frames. Depending on these criteria, we have the following types of tax planning:
Purposive Tax Planning
This strategy involves tax planning with a specific objective in mind. You might have particular goals like saving for retirement or buying a home. Purposive tax planning focuses on achieving these goals while simultaneously maximising tax benefits. It requires a careful selection of investments and financial instruments that align with your objectives and offer tax advantages.
Permissive Tax Planning
This type of tax planning is all about making the most of the allowances, deductions, exemptions and rebates permitted under the Income Tax Act, 1961. It’s a straightforward approach where you utilise all legal opportunities provided in the tax laws to minimise your tax liability. This might include investing in government schemes, making charitable contributions or utilising business expense deductions.
Structural Tax Planning
Structural tax planning involves restructuring your personal financial affairs to gain tax advantages. It requires a strategic reorganisation of your assets and income sources to optimise tax benefits. This could mean changing investment strategies, altering income sources or adjusting asset allocations. The goal is to create a financial structure that meets your needs and also maximises tax efficiency, often leading to long-term tax savings.
Marginal Tax Planning
In marginal tax planning, you focus on making decisions that affect your incremental or marginal tax liability. This might involve strategies to tailor your income and expenses to stay within a lower tax bracket. It requires careful timing and consideration of how much income to recognize in a given year and the potential tax benefits or consequences of such financial decisions.
Short-Term Tax Planning
As the name indicates, this type of tax planning prioritises planning for the immediate future, typically within the current financial year. It focuses on reacting to current or upcoming financial events and involves making quick decisions to minimise any tax liability you may face over the short term. This could involve year-end tax moves like deferring your income or accelerating deductions to reduce your taxable income for the current year.
Long-Term Tax Planning
Long-term tax planning focuses on strategies that yield benefits over an extended period, often spanning several years or even decades. This approach involves making financial decisions with a forward-looking perspective and considering the future tax implications of current actions. It encompasses retirement planning, estate planning and investments in long-term assets or savings schemes.
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