Tax Planning

Tax planning involves evaluating your financial status and identifying strategies to minimize the impact of income tax on your finances. The main objective is to seek avenues for tax savings, thereby reducing your overall tax obligation as much as feasible.

This enables you to retain more disposable income, which can then be allocated towards investments, aligning with your predetermined financial objectives.

Objective of Tax Planning

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

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:

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

Purposive tax planning strategically manages taxes toward specific financial goals like retirement or home purchase, selecting investments and tools for both objectives and tax benefits.

Permissive Tax Planning

This type of tax planning maximizes all legal opportunities under the Income Tax Act, 1961, to minimize tax liability through strategies like investing in government schemes and deducting business expenses.

Structural Tax Planning

Structural tax planning involves reorganizing your financial setup to gain tax advantages. This includes adjusting investments, income sources, and asset allocations strategically to optimize tax benefits.

Marginal Tax Planning

Marginal tax planning targets decisions influencing incremental tax liability, adjusting income and expenses to stay in a lower tax bracket. It demands timing and weighing potential tax implications of financial choices.

Short-Term Tax Planning

Short-term tax planning focuses on immediate future within the current fiscal year, reacting swiftly to upcoming events to minimize short-term tax liabilities, such as deferring income or accelerating deductions.

Long-Term Tax Planning

Long-term tax planning involves forward-looking strategies spanning years or decades, focusing on future tax implications, retirement, estate planning, and long-term investments.