Tax Planning - Definition & Advantages of Tax Planning | What is Tax Planning?

What is Tax Planning?

Tax Planning is a legitimate approach to lowering your income tax obligations. It will assist you in making the best use of tax exemptions, deductions, and perks to reduce your tax liability. But it needs to be carried out legally. Understanding the idea of tax planning is important so you can lower your taxes and make the most of your money. Tax planning is a legitimate and smart financial strategy that involves making smart decisions and using available tax benefits to reduce the amount of tax payable. 

Tax planning is reviewing one's financial condition from the perspective of tax efficiency to optimise how one plans their money. Tax planning enables taxpayers to use all available tax exemptions, deductions, and perks to reduce their overall tax burden for the financial year.

Importance of Tax Planning

Tax planning is not about evading taxes or engaging in illegal activities to avoid paying taxes; instead, it is about using the available legal provisions like deductions, exemptions etc., to optimise your tax liability. Proper tax planning can result in substantial tax savings, which can be redirected towards your financial goals, such as investments, retirement planning, or building an emergency fund. Tax planning in advance can also help you avoid unnecessary penalties, fines, and legal disputes with the tax authorities.

Your tax planning should focus on the following main goals:

1. Reduction in total tax liability

2. Financial stability

3. Expanding the economy

4. Reduction of litigation

5. A fruitful investment.

How to do tax planning?

To effectively plan your taxes, it's important to understand some key concepts related to income tax:

1. Taxable Income: This refers to the total income earned by an individual who is subject to tax. It includes income from various sources like salary, business, investments, and capital gains, after reducing the exemptions, deductions, and rebates.

2. Exemptions: These are types of income that are not subject to tax. For example, the House Rent Allowance (HRA) received by salaried individuals for rented accommodation is exempt from tax up to certain limits.

3. Deductions: These are expenses or investments made by an individual or entity that can be subtracted from the total taxable income, resulting in lower tax liability. For example, investments in tax-saving instruments like Public Provident Fund (PPF), National Pension Scheme (NPS), or life insurance premiums are eligible for deductions under Section 80C of the Income Tax Act.

4. Rebates: These are directly reduced from the tax payable amount. This rebate can bring down your tax to zero. Rebate is given as per Section 87A of the Income Tax ActFor instance, individuals with an annual income of up to INR 5 lakh under the old tax regime are eligible for a rebate of INR 12,500 under Section 87A of the Income Tax Act. This means people with an income below Rs 5 lakhs will not be required to pay tax.

Benefits 

1. Tax savings. The fundamental goal of tax planning is to maximise your company's tax deductions to lower your tax amount.

2. More money to invest. By being aware of your tax obligations, you can redirect money that would have been set aside for taxes into your company.

3. To strategise: While we are carefully analysing your company's data, tax planning is a terrific time to look at the possibilities available to your firm and adjust all of its plans.

4. Gain confidence: By working through our tax planning process, business owners may learn more about compliance and how it operates, develop tax-saving measures, and take a more active role in managing their company.

5. Understand where operations are taking place, get a sense of the potential profit areas currently untapped or underexplored, find new investment options, and decide how best to structure those investments with the help of tax planning. 

6. Utilise recent Budget adjustments, and This ensures that your company gets the best tax result possible and won't miss out on any beneficial incentive programmes.