Meaning & Method of Tax Planning

INTRODUCTION
The avid goal of every taxpayer is to minimize his Tax Liability. To achieve this
objective taxpayer may resort to following Three Methods :

1. Tax Planning
2. Tax Avoidance
3. Tax Evasion

It is well said that “Taxpayer is not expected to arrange his affairs in a such
manner to pay maximum tax “ . So, the assessee shall arrange the affairs in a
manner to reduce tax. But the question what method he opts for ? Tax
Planning, Tax Avoidance, Tax Evasion !
Let us see its meaning and their difference.

Meaning Of Tax Planning

Tax Planning involves planning in order to avail all exemptions, deductions
and rebates provided in Act. The Income Tax law itself provides for various
methods for Tax Planning, Generally it is provided under exemptions u/s 10,
deductions u/s 80C to 80U and rebates and relief’s. Some of the provisions are
enumerated below :

 Investment in securities provided u/s 10(15) . Interest on such securities

is fully exempt from tax.
 Exemptions u/s 10A, 10B, and 10BA
 Residential Status of the person
 Choice of accounting system
 Choice of organization.

For availing benefits, one should resort to bonafide means by complying with
the provisions of law in letter and in spirit.

Where a person buys a machinery instead of hiring it, he is availing the benefit
of depreciation. If is his exclusive right either to buy or lease it . In the same
manner to choice the form of organization, capital structure, buy or make
products are the assesse’s exclusive right. One may look for various tax
incentives in the above said transactions provided in this Act, for reduction of
tax liability. All this transaction involves tax planning.
Why Every Person Needs Tax Planning ?
Tax Planning is resorted to maximize the cash inflow and minimize the cash
outflow. Since Tax is kind of cast, the reduction of cost shall increase the
profitability. Every prudence person, to maximize the Return, shall increase the
profits by resorting to a tool known as a Tax Planning.

How is Tool of Tax Planning Exercised ?

Tax Planning should be done by keeping in mine following factors :

 The Planning should be done before the accrual of income. Any

planning done after the accrual income is known as Application of
Income an it may lead to a conclusion of that there is a fraud.
 Tax Planning should be resorted at the source of income.
 The Choice of an organization, i.e. Taxable Entity. Business may be done
through a Proprietorship concern or Firm or through a Company.
 The choice of location of business , undertaking, or division also play a
very important role.
 Residential Status of a person. Therefore, a person should arranged his
stay in India such a way that he is treated as NR in India.
 Choice to Buy or Lease the Assets. Where the assets are bought,
depreciation is allowed and when asset is leased, lease rental is allowed
as deduction.
 Capital Structure decision also plays a major role. Mixture of debt and
equity fund should be balanced, to maximize the return on capital and
minimize the tax liability. Interest on debt is allowed as deduction
whereas dividend on equity fund is not allowed as deduction

Methods Of Tax Planning

Various methods of Tax Planning may be classified as follows :

1. Short Term Tax Planning : Short range Tax Planning means the planning
thought of and executed at the end of the income year to reduce
taxable income in a legal way.

Example : Suppose , at the end of the income year, an assessee finds his taxes
have been too high in comparison with last year and he intends to reduce it.
Now, he may do that, to a great extent by making proper arrangements to get
the maximum tax rebate u/s 88. Such plan does not involve any long term
commitment, yet it results in substantial savings in tax.

2. Long Term Tax Planning : Long range tax planning means a plan chaled
out at the beginning or the income year to be followed around the year.
This type of planning does not help immediately as in the case of short
range planning but is likely to help in the long run ;

e.g. If an assessee transferred shares held by him to his minor son or spouse,
though the income from such transferred shares will be clubbed with his
income u/s 64, yet is the income is invested by the son or spouse, then the
income from such investment will be treaded as income of the son or
spouse. Moreover, if the company issue any bonus shards for the shares
transferred , that will also be treated as income in the hands of the son or
spouse.

3. Permissive Tax Planning : Permissive Tax Planning means making plans

which are permissible under different provisions of the law, such as
planning of earning income covered by Sec.10, specially by Sec. 10(1) ,
Planning of taking advantage of different incentives and deductions,
planning for availing different tax concessions etc.
4. Purposive Tax Planning : It means making plans with specific purpose to
ensure the availability of maximum benefits to the assessee through
correct selection of investment, making suitable programme for
replacement of assets, varying the residential status and diversifying
business activities and income etc.

Tax Planning
Definition: Tax Planning can be understood as the activity undertaken by the assessee to
reduce the tax liability by making optimum use of all permissible allowances, deductions,
concessions, exemptions, rebates, exclusions and so forth, available under the statute.

Put simply, it is an arrangement of an assessee’s business or financial dealings, in such a way

that complete tax benefit can be availed by legitimate means, i.e. making use of all beneficial
provisions and relaxations provided in the tax law, so that the incidence of the tax is
minimum. This ensures savings of taxes along with conformity to the legal obligations and
requirements. Therefore, it is permitted by law.

Objectives of Tax Planning

 Reduction of Tax Liability: An assessee can save the maximum amount of tax, by properly
arranging his/her operations as per the requirements of the law, within the framework of the
statute.
 Minimization of Litigation: There is a war-like situation between the taxpayers and tax collectors
as the former wants the tax liability to be minimum while the latter attempts to extract the
maximum. So, a proper tax planning aims at conforming to the provisions of the tax law, in such a
way that incidence of litigation is minimized.
 Productive Investment: One of the major objective of tax planning is channelisation of taxable
income to different investment plans. It aims at the optimum utilization of resources for
productive causes and relieving the assessee from tax liability.
 Healthy Growth of Economy: The growth and development of the economy greatly depend on
the growth of its citizens. Tax planning measures involve generating white money that flows
freely and results in the sound progress of the economy.
 Economic Stability: Proper tax planning brings economic stability by various techniques such as
mobilizing resources for national projects or availing ways for investments which are productive
in nature.
Tax Planning follows an honest approach, to achieve maximum benefits of tax laws, by
applying the script and moral of law. Therefore the objectives do not in any way contradict
the concept of tax laws.
 Types of Tax Planning

1. Short-range and long-range Tax Planning: The tax planning which is made every year to arrive at
specific or limited objectives, is called short-range tax planning. Conversely, long-range tax planning
alludes to such practices undertaken by the assessee which are not paid off immediately.
2. Permissive Tax Planning: Tax planning, wherein the planning is made as per expressed provision of
the taxation laws is termed as permissive tax planning.
3. Purposive Tax Planning: Purposive tax planning refers to the tax planning method which misleads
the law. Under this type, there is no expressed provision of the statute.

Tax planning means intelligently applying tax provisions to manage an individual’s affairs, in
order to avail the tax benefits based on the national priorities, in accordance with the interest
of general public and government.

Tax Planning
Tax Planning is an activity conducted by the tax payer to reduce the tax liable upon him/her by
making maximum use of all available deductions, allowances, exclusions, etc. feasible under law.
In other words, it is the analysis of a financial situation from the taxation point of view. The
objective behind tax planning is insurance of tax efficiency. Tax planning allows all elements of
the financial plan to function in sync to deliver maximum tax efficiency.

Tax planning is critical for budgetary efficiency. A reduced tax liability and maximized the ability
of retirement plans.
 Objectives of Tax Planning
 Minimal Litigation: There is always friction between the collector and the payer of tax. In
such a situation, it is important that the compliance regarding tax payment is followed and
used properly so that friction is minimum.

 Productivity: Among the most important objectives of tax planning is channelization of

taxable income to various investment plans.

 Reduction of Tax Liability: As a tax payer, you can save the maximum amount from
payable tax amount by using a proper arrangement of your enterprise working as per the
required laws.

 Healthy Growth of Economy: The growth in an economy depends largely upon the
growth of its citizens. Tax planning estimates generation of white money that is in free
flow.

 Economic Stability: Stability is supplemented when the tax planning behind a business
is proper.

Types of Tax Planning

1. Short-range and long-range Tax Planning: The tax planning which is done annually to
arrive at specific objectives is called short-range tax planning. Whereas, long-range tax
planning does not include immediate pay-offs of any kind.

2. Permissive Tax Planning: Here the planning conforms to law provisions of tax.

3. Purposive Tax Planning: This is the tax planning method that is based on loopholes in
the laws.

Tax planning is a term that stands for calculated application of tax laws, so as to effectively
manage a person’s taxation. Leading to avail the tax benefits as per the law and in accordance
with the interest of the nation and its people.

Tax Planning in India

Indian law offers a variety of tax saving options for the taxpayers, allowing for a large range of
options for exemptions and deductions through which you could limit your overall tax output.

 The deductions are available from Sections 80C through to 80U and can be utilised by
eligible taxpayers.

 All these deductions happen against quantum of tax liabilities.

  There many other sections under the Income Tax Act, 1961 such as exemptions and tax
credits that can lower your tax liabilities.

Corporate Tax Planning

This is a way of lowering the liabilities on a registered company. One of the most used methods
is by including the deductions on business transport, health insurance of employees, etc. With
tax deductions and exemptions provided under the Income Tax Act, 1961, your enterprise can
largely reduce its tax burden in a legal way.

Rising profits of an enterprise means higher liabilities of tax. In such a situation, it is important
that they dedicate enough time on tax planning that reduces liabilities. With a tax plan, both direct
tax and indirect tax is lessened at the time of inflation. Not just this.

Tax planning means a proper planning of:

 Expenses.

 Capital budget.

 Sales and Marketing costs.

A good tax planning results from the following

 All you need to do is to claim the tax benefits is invest in eligible instruments.

 Giving correct information to relevant IT authorities.

 Being well informed of applicable tax laws and court judgements on the same.

 Tax planning should be done completely under the purview of law.

 Planning should take into consideration business objectives and flexibility for the
incorporation of future changes.

 You could be a long-time taxpayer or a first-time payer, in case you did not plan your
taxes properly, you are probably paying more in tax than you should.

 Income Tax clauses seem so complex that the common man is averse of dealing with
taxes.

This is the arrangement of a tax payer’s business or financial dealings, in such a way that
complete tax benefit can be availed by legitimate means, so that the amount of the tax is
minimal.
 Common mistakes people make regarding
income tax
 Procrastination: This is the root of all follies you will make as a tax planner. This will
eventually lead to you paying more taxes, instead of making timely investment leading to
optimum planning of taxes.

 Investing in insurance products for tax saving: When approaching the last of a
financial year, a lot of us receive phone calls from insurance companies that insist that
you buy an insurance policy that saves tax. This isn’t one of the wisest things to do.

 Power of compounding through tax saving mutual funds: Many people don’t
consider the power of compounding despite all supporting factors.

 Failing to optimise all available options for tax saving: Don’t be the person who
believes that tax planning starts and ends with Section 80C of Income-tax Act, 1961- that
only describes investment instruments for saving tax.

Generic Saving Methods in Tax Planning

Let’s talk about tax saving expenses. We end up paying tax on various expenses which are
otherwise eligible for tax benefits that we fail to grasp due to ignorance about them. Read on to
understand some such expenses where you can save tax.

 Medical expenses of disabled dependent: For a dependent person in your family who
has a disability, there is tax benefit under section 80DD. This tax deduction is a social
support for disabled family member from the government, so as to ease that person’s
dependence on you. This means a saving of up to Rs 1,25,000 on the taxable income.

 Expenses for a disabled individual: Same as section 80DD deductions. A person who
has disability gets benefit through section 80U. Maximum deduction is INR1,25,000.

 Treatment of specified diseases:

o Treatment of diseases like cancer and AIDS is very expensive and Section
80DDB offers the much needed financial relief to the person suffering from such
ailment and his family members.

 Charitable donations:

o There is another reason to rejoice when you make donations. Besides

supplementing your good deeds, you also gather the right to claim another tax
exemption covered under section 80G.
 o There is an upper limit on cash donations. Such donations are capped at Rs
2,000.

 Donations for scientific research or rural development:

o Donations towards scientific research are open for deduction through section
80GGA.

o There are some other situations too where you get to save tax.

The Difference Between ‘Tax Planning’ And ‘Tax

Management’
THE DIFFERENCE BETWEEN ‘TAX PLANNING’ AND ‘TAX MANAGEMENT’ .

Tax Planning Tax Management

(i) The Objective of Tax Planning
is to minimize the tax liability
(ii) Tax Planning also includes Tax
Management
(iii) Tax Planning relates to future.
(iv) Tax Planning helps in
minimizing Tax Liability in Short-
Term and in Long Term.
(v) Tax Planning is optional.
The objective of Tax Management is to
comply with the provisions of Income Tax
Law and its allied rules.
Tax Management deals with filing of
Return in time, getting the accounts
audited, deducting tax at source etc.
Tax Management relates to Past ,. Present,
Future.
Past – Assessment Proceedings, Appeals,
Revisions etc.
Present – Filing of Return, payment of
advance tax etc.
Future – To take corrective action
Tax Management helps in
avoiding payment of interest, penalty,
prosecution etc.
Tax Management is essential for every
assessee.

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