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Tax Planning

Reviewed by Bhavana | Updated on Sep 30, 2020

Catalogue

Introduction

Tax planning is the process of analysing a financial plan or a situation from a tax perspective. The objective of tax planning is to make sure there is tax efficiency. With the help of tax planning, one can ensure that all elements of a financial plan can function together with maximum tax-efficiency. Tax planning is a significant component of a financial plan. Reducing tax liability and increasing the ability to make contributions towards retirement plans are critical for success.

Tax planning comprises various considerations. Considerations such as size, the timing of income, timing of purchases, and planning are concerned with other kinds of expenditures. Also, the chosen investments and the various retirement plans should go hand-in-hand with the tax filing status as well as the deductions in order to create the best possible outcome.

Understanding Tax Planning

Tax planning plays an important role in the financial growth story of every individual as tax payments are compulsory for all individuals who fall under the IT bracket. With tax planning, one will be able to streamline his/her tax payments such that he or she will receive considerable returns over a specific period of time involving minimum risk. Also, effective tax planning will help in reducing a person's tax liability.

Tax planning can be classified into the following:

  1. Permissive tax planning: Tax planning which falls under the framework of the law.
  2. Purposive tax planning: Tax planning with a specific objective.
  3. Long-range/short-range tax planning: Planning executed at the beginning and towards the end of the fiscal year.

Highlights of tax planning:

  1. Tax planning is the process of analysing finances from a tax angle, with an aim to ensure maximum tax efficiency.
  2. Considerations concerning tax planning will include timing of income, timing of purchases, planning for expenditures, and size.
  3. Tax planning is vital for small as well as large businesses since it will be helpful for achieving business-related goals.

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