Tax Planning 101 – Objectives and Methods of Tax Planning (2024)

Learn all the fundamental objectives and methods of Tax Planning in India.

Moneycontrol News

January 31, 2020 / 04:59 PM IST

Tax planning is an activity that enables you to reduce your tax liability. It is one of the most basic yet integral parts of the financial plan, and it helps you save your capital. Several options enable taxpayers to reduce their tax liabilities, especially those that fall under Section 80C of the Income Tax Act of 1961.
Under this section of the IT Act, you can claim tax deductions of ₹150,000 on various kinds of investments such as tax-saving fixed deposits, PPF contributions, EPF contributions, Unit Linked Insurance Plans (ULIPS), and National Pension System, among other things. Here’s everything you need to know about tax planning objectives and methods, especially if you are a first-time taxpayer.

Objectives of tax planning

First-time taxpayers must understand the fundamental objectives of planning their taxes. They are as under:

To reduce tax liability: Tax planning primarily revolves around reducing your tax liability. Every single taxpayer wishes to reduce the burden of paying the taxes while saving their money for their future. Fortunately, the Government offers several different investment schemes through which liabilities can be reduced significantly. However, it is essential not to leave tax planning to the last moment. Plan to invest in tax-savings instruments from the beginning of the financial year and avail all the advantages to reduce your tax payments.

To minimise litigation: Minimising legal litigations is essential while planning taxes. If you don’t have one, you must avail the services of a legal advisor. Consult your advisor and adopt the adequate provisions of tax planning laws, so that you can minimise the litigation. Minimising litigation saves you from judicial harassment.

To stabilise the economy of the country: The taxes you pay are devoted to the betterment of the country. If you pay all the taxes which are legally due, you can contribute towards creating a more productive economy. Planning your taxes is beneficial for you and the economy of the country in which you’re living.

To leverage productivity and financial growth: Planning your taxes prudently can facilitate economic growth for you. Chalking out clear and precise financial objectives from your investments, over specific time frames and investing in the right tax-saving instruments can help you create a good corpus, thereby contributing to your economic growth.

Different ways in which you can plan your taxes

While most people think of tax planning as a process that helps in reducing their tax liabilities; it is also about investing in the right instruments, at the right time, so that you can achieve your short, medium and long-term financial goals. Fundamentally, there are four varied methods of tax planning. They are as under:

Short-range tax planning: This is a term used in reference to tax planning that is both, though of and executed when the financial year comes to an end. Investors resort to this planning on the heels of the end of the fiscal year, attempting to find ways to reduce their tax liabilities legally. For instance, if, at the end of the financial year, assesses find that their taxes are high as compared to the previous year; they may want to reduce it. Assesses may be able to do that by adequately arranging to get tax rebates under Section 88. Short-range tax planning does not involve long-term commitments, while it still can promote substantial tax savings.

Long-range tax planning: The long-range tax plan is one chalked out when the financial year begins, and which the taxpayer follows throughout the year. Such an arrangement may not provide immediate tax-relief benefits as short-range plans do but can prove to be beneficial in the long run. You typically have to start investing when the new financial year begins and hold on to the investment for a period exceeding one year.

Permissive tax planning: Permissive tax planning, as the term suggests, means planning investments under various provisions of the taxation laws of India. In India, there are many provisions of law, offering exemptions, deductions, incentives and contributions. Section 80C of the Income Tax Act of 1961, for instance, offers several different types of exemptions (on the amount invested, interest earned and the amount at maturity) on tax-savings investments.

Purposive Tax planning: Purposive tax planning refers to the act of planning investments with specific purposes in mind, thereby ensuring that you can avail maximum benefits from your investments. It involves the accurate selection of investment instruments, creating a suitable agenda to replace assets (if necessary) and diversification of income and business assets based on your residential status.

Final word: Paying income tax is a moral and financial responsibility that all of us share as citizens of India. The taxes we pay are used for the development of our country. In a way, the taxes paid by us are used for our benefit. As per our separate income slabs, all of us pay a different percentage of taxes, but the benefits are distributed equally among all Indian citizens alike. If you’re earning an annual income exceeding ₹250,000, Congratulations; you’ve finally moved into a tax-paying slab.