Maximize Your Income Tax Refund
File Your Taxes with the Experts

Start Today

  • TrustedTrusted by 1 Million+ Users
  • User Rating4.8 Star User Rating
  • Secure2500 Cr. Taxes Saved Already
Maximize Your Income Tax Refund

Tax Planning: Meaning, Objectives & How It Works

Updated on: 24 May, 2024 11:48 AM

Every individual needs to pay taxes on their income. Based on the provisions of the Income-tax Act, these taxes need to be paid. As income increases, the rate of paying taxes also increases. Tax Planning is a basic yet integral part of financial planning. Tax planning helps an individual to reduce tax liability and helps save more of their capital.

Year-end is when you will hear about the term “Tax Planning” a lot. Planning taxes at the last moment often leads to incorrect investment decisions. Hence, it is always recommended to plan taxes at the beginning of the year rather than at the last moment.

What is Tax Planning?

Tax Planning Meaning:

Tax planning is an essential part of financial planning and involves analyzing your financial situation, identifying tax-saving opportunities, and implementing strategies to reduce your tax liability. By minimizing your tax burden, you can increase your disposable income and allocate more resources toward achieving your financial goals. Effective tax planning requires a thorough understanding of tax laws and regulations and an awareness of current and potential changes to the tax code. In the excerpt below, we will help you with tax planning tips to maximize your tax savings while complying with all applicable laws and regulations.

What are the objectives of tax planning?

Tax planning is important for several reasons. Here are some of the key objectives of tax planning

  • Minimizing tax liability: Tax planning aims to reduce the amount of tax that an individual or business owes by taking advantage of all available deductions, credits, exemptions, and other tax-saving opportunities.
  • Manage Cash Flow: Effective tax planning allows you to anticipate and prepare for tax payments, avoiding any financial strain or disruption to your cash flow.
  • Plan for Life Changes: Major life events like marriage, divorce, the birth of a child, or starting a business can significantly impact your taxes. Planning helps you adapt your strategy and minimize tax implications during these transitions.
  • Invest Strategically: Understanding the tax implications of different investment options allows you to choose those that optimize your after-tax returns.
  • Optimize Business Operations: Businesses can benefit from tax planning by maximizing deductions, minimizing taxable income, and understanding the tax implications of business decisions.
  • Maximizing tax efficiency: Tax planning seeks to optimize the use of tax-advantaged investment vehicles and strategies, such as retirement plans, tax-deferred accounts, and tax-exempt investments.
  • Achieving financial goals: Tax planning is an integral part of financial planning and helps individuals and businesses achieve their financial objectives by minimizing taxes and maximizing after-tax returns.
  • Ensuring compliance: Tax planning also involves ensuring compliance with all applicable tax laws and regulations to avoid penalties, fines, and other legal consequences.
  • Managing risk: Tax planning also involves assessing and managing tax-related risks, such as the risk of an audit, and taking steps to mitigate those risks.

What are the types of Tax Planning?

Tax planning can be categorized into different types based on various criteria. Here are some common types of tax planning:

  1. Short-term tax planning: This type of tax planning involves taking actions to minimize taxes in the current tax year. It may include deferring income or accelerating deductions to reduce tax liability in the current year.
  2. Long-term tax planning: Long-term tax planning involves taking actions to reduce taxes over a longer period, typically several years or more. It may include strategies such as retirement planning, estate planning, or investment planning.
  3. Permissive tax planning: This type of tax planning involves taking advantage of tax breaks or incentives provided by the government to reduce tax liability. Examples include tax deductions for charitable donations or tax credits for energy-efficient investments.
  4. Purposive tax planning: Purposive tax planning involves structuring financial transactions or investments to minimize tax liability. It may involve using legal tax loopholes or tax shelters to reduce taxes.
  5. Marginal tax planning: Marginal tax planning involves analyzing the impact of additional income or deductions on the taxpayer's marginal tax rate. The goal is to identify the optimal level of income or deductions to minimize taxes.
  6. Structural tax planning: Structural tax planning involves reorganizing a business or personal finances to maximize tax efficiency. Examples include changing the legal structure of a business or using offshore accounts to reduce tax liability.

If you need to plan and manage your taxes, our Tax Advisory Service can be your best bait to save more taxes so you can keep more of what you earn. Book Consultation Today!

What are the steps to follow while planning the taxes?

  1. Start Early-It is generally advisable to start tax planning as early as possible rather than waiting until the last minute. Tax planning involves taking advantage of deductions and credits, contributing to retirement accounts, and making charitable donations, among other strategies. By starting early in the year, individuals can ensure they are on track to meet their financial goals while minimizing their tax liability.
  2. Assess your tax situation: The first step in tax planning is to assess your tax situation, including your income, expenses, and deductions. This will help you determine your tax liability and identify areas where you can reduce your taxes.
  3. Identify tax-saving opportunities: The next step is to identify tax-saving opportunities such as deductions, credits, and exemptions that taxpayers can use to lower their tax liability.
  4. Develop a tax-saving strategy: Based on your tax situation in Step 1 and the available tax-saving opportunities in Step 2, you can develop a tax-saving strategy that minimizes your tax liability and maximizes tax efficiency.
  5. Implement your tax-saving plan: Once you have developed a tax-saving plan, you need to implement it by taking action to reduce your taxes. This may involve investing, donating to charity, or structuring your business finances tax-efficiently.
  6. Monitor your tax situation: Tax laws and regulations can change over time, so it's important to monitor your tax situation regularly and make adjustments as needed to ensure that your tax plan remains effective.

How to save taxes in India with the help of Tax Planning?

In India, there are several ways in which individuals can save income tax through tax planning. Here are some strategies that individuals can use to minimize their tax liability:

  1. Invest in tax-saving instruments: Tax planning is about how wisely you invest in the right instruments to achieve your financial goals. The following sections under the Income Tax Act offer tax deductions and exemptions to reduce your tax liabilities. The deductions are available from Sections 80C through to 80U and can be claimed by eligible taxpayers.
    Sections Income Tax Deduction for FY 2022-23((AY 2023-24) Who can Invest? Maximum deduction available for FY 2022-23 (AY 2023-24)
    Section 80C Investing into very common and popular investment options like LIC, PPF, Sukanya Samriddhi Account, Mutual Funds, FD, child tuition fee, ULIP etc Individual
    Upto Rs 1,50,000
    Section 80CCC Investment in Pension Funds Individuals
    Section 80CCD (1) Atal Pension Yojana and National Pension Scheme Contribution Individuals
    Section 80CCD(1B) Atal Pension Yojana and National Pension SchemeContribution (additional deduction) Individuals Upto Rs 50,000
    Section 80CCD(2) National Pension SchemeContribution by Employer Individuals Amount Contributed
    14% of Basic Salary + Dearness Allowance (in case the employer is Government)
    10% of Basic Salary+ Dearness Allowance(in case of any other employer)
    - Whichever is lower
    Section 80D Medical Insurance Premiums, preventive health checkups, and Medical Expenditure Individual
    Upto Rs 1,00,000
    Section 80DD Medical Treatment of a Dependent with Disability Individual
    Normal Disability (at least 40% or more but less than 80%): Rs 75000/-
    Severe Disability (at least 80% or more): Rs 125000/-
    Section 80DDB Medical expenditure for treatment of Specified Diseases Individual
    Senior Citizens: Upto Rs 1,00,000
    Others: Upto Rs 40,000
    Section 80E Interest paid on Loan taken for Higher Education Individual No limit (Any amount of interest paid on education loan)upto 8 assessment years
    Section 80EE Interest paid on Housing Loan Individual Upto Rs 50,000 subject to some conditions
    Section 80EEA Interest Paid on Housing Loan Individual Upto Rs 1,50,000/- subject to some conditions
    Section 80EEB Interest paid on Electric Vehicle Loan Individual Upto Rs 1,50,000 subject to some conditions.
    Section 80G Donation to specified funds/institutions. Institutions All Assessee (Individual, HUF, Company etc) 100% or 50% of the Donated amount or Qualifying limit:
    Allowed donation in cash upto Rs.2000/-
    Section 80GG Income Tax Deduction for House Rent Paid Individual Rs. 5000 per month
    25% of Adjusted Total Income
    Rent paid - 10% of Adjusted Total Income
    - whichever is lower
    Section 80GGA Donation to Scientific Research & Rural Development All assessees except those who have an income (or loss) from a business and/or a profession 100% of the amount donated.
    Allowed donations in cash upto Rs.10,000/-
    Section 80GGB Contribution to Political Parties Companies 100% of the amount contributed
    No deduction available for contributions made in cash
    Section 80GGC Individuals on Contribution to Political Parties Individual
    f100% of the amount contributed.
    No deduction is available for contributions made in cash.
    Section 80RRB Royalty on Patents Individuals (Indian citizen or foreign citizen being resident in India) Rs.3,00,000/-
    Specified Income
    - whichever is lower
    Section 80QQB Royalty Income of Authors Individuals (Indian citizen or foreign citizen being resident in India) Rs.3,00,000/-
    Specified Income
    - whichever is lower
    Section 80TTA Interest earned on Savings Accounts Individual
    HUF (except senior citizen)
    Upto Rs 10,000/-
    Section 80TTB Interest Income earned on deposits(Savings/ FDs) Individual (60 yrs or above) Upto Rs 50,000/-
    Section 80U Disabled Individuals Individuals Normal Disability: Rs. 75,000/-
    Severe Disability: Rs. 1,25,000/-
  2. Claim deductions for expenses: Individuals can claim tax deductions for certain expenses such as home loan interest, medical expenses, donations to charity, tuition fees, etc. These deductions can be claimed under various sections of the Income Tax Act.
  3. Opt for tax-exempt allowances: Some allowances, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and conveyance allowance, are tax-exempt up to a certain limit if the taxpayer submits the required proof.
  4. Split income with family members: Individuals can split their income with family members such as spouses or children in lower tax brackets. This can be done by investing in their names, making them a nominee in investments, etc.
  5. Consider tax implications before making investments: Individuals should consider the tax implications before making any investments. For example, long-term capital gains from equities and equity mutual funds are tax-exempt up to Rs 1 lakh, but any gains above that are taxed at 10%.
  6. Use the tax calculator: Individuals can use the online tax calculator or Tax2win Income Tax calculator, which helps them to calculate their tax liability and plan investments accordingly.

Tax2win tax planning optimizer tool helps you plan the taxes that help you maximize your tax savings. You can plan your investments and save more money using recommendations provided by the tool. This tool will also analyze the additional deductions you can avail to obtain tax relief and get a higher in-hand salary.

Tax planning is important so is the filing of Income Tax Returns! If you didn’t plan your taxes before the end of the financial year, you can still optimize your taxes with our team of expert online CAs. Don’t wait for the last date to file ITR; Book eCA Now!

Frequently Asked Questions

Q- Is tax planning legal?

Tax planning is legal as long as it is done legally and ethically. Tax evasion, on the other hand, is illegal and can have serious legal and financial consequences.

Q- When should I start tax planning?

Tax planning should ideally start at the beginning of each financial year, as it allows individuals and businesses to adjust their financial affairs and take advantage of available tax-saving opportunities. However, there is always time to start tax planning, and individuals can still benefit from it at any point during the year.

Q- Who needs tax planning?

Tax planning benefits everyone, including individuals, small business owners, and large corporations. Anyone subject to taxes can benefit from tax planning to reduce tax liability and keep more of their hard-earned money.

Q- What is the difference between tax planning and tax evasion?

Tax planning is the legal and ethical way to minimize your tax burden through proactive strategies like deductions and investments, while tax evasion is the illegal and deceptive act of hiding income or filing false returns to avoid paying taxes altogether, which can result in severe penalties.

Q- What is the difference between tax planning and tax management?

Tax planning and tax management are two sides of the coin when it comes to handling your taxes effectively. Tax planning focuses on the strategic, long-term approach. It involves analyzing your financial situation and making choices throughout the year to minimize your tax liability legally. This could involve things like maximizing deductions and credits, choosing tax-efficient investments, or timing income and expenses strategically. In contrast, tax management is about ensuring compliance with tax laws and regulations. It's the day-to-day or year-to-year process of accurately filing your tax returns, keeping proper records, and avoiding penalties. So, tax planning helps you pay the least amount you legally owe, while tax management ensures you pay it correctly and on time.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.