If you are a salaried individual, you would be trying to find ways to make the most out of your income. You can either craft an efficient savings and expenditure plan or leverage reliable banking or financial instruments, like Bajaj Finance FDs, with the highest credit ratings and flexible payout options. If you fall in the high tax bracket, saving schemes become all the more important for efficient tax planning.
Every earning individual must possess a sound understanding of tax planning’s meaning to make the most out of their income. An efficient tax planning method not only reduces your tax liabilities but also helps you save up funds for rainy days. In this article, we will discuss tax planning meaning and types of tax planning. But before we dive into the types of tax planning methods to maximise savings, it is essential to understand what is tax planning.
What is tax planning
Tax planning is an efficient method of strategising investments in order to reduce tax liability. Tax planning involves the analysis of financial situations and investment strategies to ensure that you pay the lowest taxes. This can be achieved by using tax exemption and deduction methods and other benefits offered by the government to ensure that the smallest part of the income is paid out as tax. A plan is identified as the most tax efficient when these financial instruments are cumulatively used to minimise tax liability and maximise savings.
How to plan tax payments efficiently
For income tax planning, there are several factors that need to be taken into consideration. This includes the timing and size of your income, and any necessary expenditures. However, it should be in line with your tax filing status. This means your income tax planning should complement your chosen tax regime. Therefore, the first step is to choose the correct income tax regime.
In India, there are two types of tax regimes—the new tax regime and the old tax regime. Both tax regimes have a purpose of their own and cater to different sets of salaried individuals; the tax slabs and exemptions under both regimes are different. Hence, optimal income tax planning begins with choosing the right tax regime according to your pay.
While people are legally bound to pay their fair share of taxes according to the tax slabs defined by the government under each regime, the government also facilitates enhanced savings and lower tax payout through various tax saving schemes and deductions. These include investment instruments like the Public Provident Fund, the National Pension Scheme, the Equity Linked Savings Scheme, tax saving fixed deposits, and more.
Effective tax planning can not only reduce your tax burden but also diversify your investment portfolio. Depending on your areas of investments, some schemes and plans often help you earn more money, which can further increase your savings.
Types of tax planning
While we have briefly discussed tax planning meaning and the various instruments that can be used for effective income tax planning, it is now important to realise your goals and expectations before jumping into picking a plan. For this, it is crucial to understand the different types of tax planning strategies and what they cater to:
- Short-term tax plan - Tax planning for the short term is when the planning is executed at the end of a financial year. This involves taking relevant steps to reduce taxes in the current fiscal year. Investors can use such plans to park their money for a short period and also gain returns on it. With a short-term tax plan, you can take home good returns by investing for a defined period and gain tax benefits.
- Long-term tax plan- As opposed to short-term, long-term plans are executed at the beginning of a fiscal year and require you to commit to the investment plan. This does not provide immediate tax relief or benefits. However, it is an effective method to inculcate saving habits and plan for future expenses while saving on taxes.
- Permissive tax plan - As discussed earlier, under this plan, you can use the various deductions and exemptions offered by the government to minimise tax liability. You may use the various tax breaks available under the Indian taxation laws to maximise your savings. For example, you can use the exceptions offered under sections such as Section 80C or 80CCC of India’s Income Tax Act. This allows you to save on taxes by investing in various schemes listed under respective sections.
- Purposive tax plan - A purposive tax plan is when you use investment instruments with a specific purpose. This is a targeted method of saving on taxes but requires a thorough understanding of taxation laws. It involves using legal loopholes in the taxation structure to reduce tax liability.
Is tax planning right for you
In short, yes. Efficient tax planning reduces the tax you pay to the government while also helping you save more. Regardless of your salary, a comprehensive understanding of what is tax planning will help you manage your cash flow better, learn about strategic investments, and achieve financial goals. A robust tax plan also ensures long-term economic stability. Having understood the tax planning meaning and its benefits, you should be able to judge how you need to plan your taxes.
Conclusion
Tax planning is vital for maximising income and savings. It involves strategic use of investment tools and government benefits to minimise tax liabilities and diversify investments. Understanding tax regimes and types of planning—short-term, long-term, permissive, and purposive—helps customise strategies for your financial goals. Effective tax planning ensures reduced tax burden and fosters long-term economic stability. A well-structured tax plan facilitates better cash flow management and strategic investment and helps you achieve your financial goals in the long run. This makes tax planning essential for individuals of all income levels.
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