Tax Planning

Tax planning is defined as “Considering the tax implications of an individual throughout the year with the goal of minimizing the tax liability”.Tax planning is an essential part of personal financial planning. Tax liability can be minimized by taking care of all tax exemptions, rebates, deductions, and allowances. While understanding what tax planning is, it is also necessary to understand what tax planning is not. It is not tax evasion, not difficult and not just putting money in 80 C investments. Tax consequences have to be considered while making any financial decisions:

There are two types of taxes – Direct, and Indirect taxes.

• Direct taxes such as income tax, wealth tax are collected directly by the     

   Government. They form 30% of government’s revenue. 

• Indirect taxes comprise excise duty/sales tax/customs duty, and they form 70%

   of the Government’s revenue.

Significance Of Tax Planning

Tax planning is basically an ongoing and year-round activity.

• It involves use of investment vehicles, retirement programs/estate distribution to reduce/shift/defer taxes;

• It reduces taxes by using the techniques that create tax deductions; shifts taxes by using gifts or trusts to shift some of the income to other family members who are in lower tax brackets;

• Deferring taxes can be done by reducing or eliminating taxes today by pushing them to the future;

• By way of tax planning, one can take advantage of all deductions and tax provisions to minimize tax liability, and

• Tax planning is closely related to many personal financial planning activities –investment/retirement and estate planning.

Basic Assumptions Of Tax Planning

There are two basic assumptions of dignified and honorable tax planning:

i. All relevant facts are clearly presented to the tax authorities, and no material information is deliberately concealed with intent to defraud.

ii. There are no bogus transactions or make-believe devices resorted to in order to circumvent any legal provisions.

Methods of Reducing Tax

The Two methods of reducing tax are:

Tax Evasion: Practice by a person, organization or corporation avoiding paying taxes by illegal means. 

Tax Avoidance: Using legal methods to modify an individual’s financial position, so as to reduce the amount of tax owed.

Related Links:

• Tax Saving/Benefit Schemes