Tax Planning

Meaning Of Tax Planning

Tax Planning involves planning financial affairs in such a way that without breaking up any law you avail all exemptions, deductions and rebates provided in Act so that your tax liability will be reduced. Actually Government or 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 One 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 mind 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.
  • 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 NRI 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.

Objective of Tax Planning:

  • Claim Deductions under sections 80C to 80U,
  • It will reduce your tax liability and you have to pay less tax,
  • Minimize the war between Tax Payer and Tax Administrator, Tax payer wants to pay less tax and Tax Administrator wants to extract most of the tax, by using Tax Planning this war is minimized as tax payer is using all legal ways to reduce tax liability,
  • Makes Investment: By tax planning, an Tax payer will invest his money in some good funds which will result in productive returns for tax payer and transfer money to government for investment too.
  • Helps in growth of economy,
  • Makes society grow,
  • Money saved by you will result in investment which will result in employment generation.

Importance of Tax Planning:

  • For Tax Payer: Tax payer has to pay less tax by using tax planning because he is using all available exemptions, deductions, reliefs, and rebates. All is done within the boundaries of Law.
  • For Government: To use deduction or exemptions you have to invest money in some scheme which results that you money is transferred back to government and then they can use it to develop the country.
  • For Society: If government invest or start any new project or even tax payer invest his saved money so he will generate employment, Government can invest in better projects which develops society.

Methods Of Tax Planning

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.

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

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.

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.