What is Tax Planning?

Tax planning is an analysis of a financial plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency, with the elements of the financial plan working together in the most tax-efficient manner possible. Tax planning is an important part of a financial plan, as reducing tax liability and maximizing eligibility to contribute to retirement plans are both crucial for success. It is not a device to reduce tax burden but helps to save by investments in government securities.

Savings reduce extravagance, and correspondingly inflation. Tax savings are permitted only for an investment made in government securities and bonds of priority sectors which ultimately help the nation. Therefore, the savings in tax help the Central and state governments to mobilize funds by way of investments and as such the government earns much by way of other benefits, by sacrificing a small amount of tax.

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Savings and investments are interconnected

Before making investments the person has to consider various factors such as:

  • Liquidity– when he requires the amount to meet the educational expenses of children, for marriage, house construction or for a secure future after retirement.
  • Security of the investment.
  • The return and tax on income on such investments.

Factors of tax planning varies from one person to other. A person by investing in NSC saves on his tax. Whereas, the interest on the investment is taxable. If the investment is made in PPF, he is not liable to pay the income tax on interest. But the period of NSC is six years whereas in the case of PPF the period of repayment is 5 years. However, a portion can be claimed after 7years. Thus the person who makes the investment has to consider whether he requires the amount after 5 years or he can wait for a longer period.

Advantages of Tax Planning

  • Spread the taxable income among various members of your family
  • Take full advantage of tax exemptions available under the law
  • Take full advantage of permissible tax deductions and rebates available on stipulated tax- saving investments
  • Make optimum use of tax-exempted incomes
  • Simple tax planning is smart tax planning