DEFINITION of 'Tax Planning'

Logical analysis of a financial situation or plan from a tax perspective, to align financial goals
with tax efficiency planning. The purpose of tax planning is to discover how to accomplish all of
the other elements of a financial plan in the most tax-efficient manner possible. Tax planning
thus allows the other elements of a financial plan to interact more effectively by minimizing tax
liability.

INTRODUCTIONThe avid goal of every taxpayer is to minimize his Tax Liability. To achieve
this objective taxpayer may resort to following Three Methods :

o Tax Planning
o Tax Avoidance
o Tax Evasion

It is well said that “Taxpayer is not expected to arrange his affairs in a such manner to pay
maximum tax “ . So, the assessee shall arrange the affairs in a manner to reduce tax. But the
question what method he opts for ? Tax Planning, Tax Avoidance, Tax Evasion !Let us see its
meaning and their difference.

5.1. MEANINNG OF TAX PLANNINGTax Planning involves planning in order to avail all
exemptions, deductions and rebates provided in Act. 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.

5.1.1. Why Every Person 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.

5.1.2. How is Tool of Tax Planning Exercised ?

Tax Planning should be done by keeping in mine 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.
 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 NR 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

5.1.3. Methods Of Tax Planning

Various methods of Tax Planning may be classified as follows :

1. 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.
Example : Suppose , at the end of the income year, an assessee finds his taxes have been too high
in comparison with last year and he intends to reduce it. Now, he may do that, to a great extent
by making proper arrangements to get the maximum tax rebate u/s 88. Such plan does not
involve any long term commitment, yet it results in substantial savings in tax.

2. 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 ;

e.g. If an assessee transferred shares held by him to his minor son or spouse, though the
income from such transferred shares will be clubbed with his income u/s 64, yet is the income is
invested by the son or spouse, then the income from such investment will be treaded as income of
the son or spouse. Moreover, if the company issue any bonus shards for the shares transferred ,
that will also be treated as income in the hands of the son or spouse.

3. 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.

4. 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.

What Is Tax Evasion, Tax Avoidance And Tax Planning?

While dealing with financial terms many time you might heard some unknown terms of which
meaning you might not know or you are not fully aware of it. You might have heard term like
Tax Evasion, Tax Planning and tax Avoidance. Today I am going to tell you meaning of these.
So lets start

Tax Evasion

When any individual make false claims to reduces his total income or by not providing any
information regarding his total income then its called Tax Evasion. By doing so his tax
liability is reduced which will result that he has to pay less tax.

Tax Evasion is an illegal act and its also an immoral, anti-social and anti-national act. To deal
with such kind of activities, Direct Tax Laws has made strict provisions which will results in
heavy penalties or even tax evaders can be put behind the bars.

How can an person reduces his taxable income :-

 By not recording sale made by him,

 Claiming bad debts or losses which never occurred,
 Making personal expenses as business expenses,
 Claiming false donation made under different sections like u/s 80G,
 By not showing capital gain,
 By not showing income from benami transaction,
 By showing excessive salary paid,

Tax Avoidance

Tax avoidance means reducing your tax liability without breaking any law. In this an individual
look for loopholes in the law and make most of those loopholes to reduce the tax liability.In
simple word you can say that Tax Avoidance is a legal means to reduce your tax liability by
taking advantage of lack of provision in the law and it will result in less tax paid by you. By
using Tax Avoidance you satisfy all provisions of law but in same time you reduce your tax
liability too.

In tax avoidance no penalties or such things is imposed on you as you are not breaking any law
you just using loopholes in laws. However now legislature has added an provision in Direct Tax
laws to check tax avoidance.
Tax Planning

Tax planning is a way by which you arrange your financial affairs in such a way that without
breaking up any law you take full advantage of all Exemptions, Deductions, Rebate and
Reliefs allowed by law so that your tax liability will be reduced.

Actually Government provide deductions, exemptions, reliefs or rebate for the benefits of
economy and society. Like if you made donation to Scientific research [u/s 8GGA] then its good
for Society and economy too.

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.

What tax planning really means Tax planning is the art of arranging your affairs in ways that
postpone or avoid taxes. By employing effective tax planning strategies, you can have more
money to save and invest or more money to spend. Or both. Your choice. beneficial tax-law
provisions, increasing and accelerating tax deductions and tax credits, andgenerally making
maximum use of all applicable breaks available under our beloved Internal Revenue Code.