Tax planning helps to reduce one’s tax liabilities and make the best effort to use tax exemptions and benefits each financial year. Tax planning is an essential part of financial planning. The most popular planning methods for saving tax are PPF accounts, National Saving Certificate, Fixed Deposits, and Mutual Funds.
How Does Tax Planning Help?
Minimizes litigation: Dispute between taxpayers and tax collectors is common as the latter would always try to extract more money from the former. Therefore, minimizing litigation can minimize legal liabilities.
Reduces tax liabilities: The Income Tax act 1961 offers various investment schemes that reduce tax liability. One can take the benefit of these schemes, reduce their tax burden and save for the future.
Economic stability: Taxpayer’s money is used in a country’s progress. So a proper tax planning and execution can lead to the inflow of white money which will benefit the country as well as its citizens.
Types of Tax Planning
Short-range Tax Planning: Under this method, tax planning is contemplated and executed at the end of a fiscal year. This method involves choosing the best investment plan in an attempt to reduce tax liability.
Long-term Tax Planning: Under this method, tax planning is done at the beginning of each financial year. In the case of long-term tax planning, immediate tax benefits may not be provided but they are useful in the long run.
Permissive Tax Planning: This kind of planning helps the taxpayer to avail various concessions, deductions, or incentives under the Indian taxation laws.
Purposive Tax planning: This method requires an objective to obtain optimal benefits from one’s investments.
Some Commonly Asked Questions
1. What is Income tax?
It is a tax levied by the Government of India on the income of every person.
2. Who is supposed to pay the taxes?
It is supposed to be paid for by every person.
3. How does the Government collect income tax?
There are three ways of collecting taxes by the Government, they are-
i. Voluntary payment by tax-payers into designated banks.
ii. Taxes deducted from the receiver’s source of income (TDS)
iii. Taxes collected at source
4. How much Income Tax do I have to pay?
Several free online tax calculators are available on the internet. The rates of Income Tax and Corporate Tax are available in the Finance Act passed by the Parliament.