tax planning definition

7/23/2019 Tax Planning Definition

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TAX PLANNING DEFINITION

Tax planning is a process individuals, businesses, and organizations use to evaluate their

financial profile, with the aim of minimizing the amount of taxes paid on personal income or

business profit. Effective tax planning entails analyzing investment instruments, expenditures,

and other factors such as filing status for their tax liability impact. Accounting, finance, banking,and insurance firms all emphasize slightly different aspects of tax planning in accordance with

the types of services they provide and the laws governing their industries. For example, the tax

planning advice banks give clients might revolve around choosing investments that provide the

most favorable return for the lowest tax liability, while an insurers approach to tax planning

might include using cash value life insurance for its tax!deferral features. Estate planning is a

form of tax planning, in that its intent is to minimize estate taxes after death. A number of

retail income tax software packages provide tax planning tips along with step!by!step guidance

on tax preparation, and tax planning advice is also available online from the "#$ and other sites.

Meaning of Tax Planning

"%T#&'()T"&%

The avid goal of every taxpayer is to minimize his Tax *iability. To achieve this ob+ective

taxpayer may resort to following Three ethods-

Tax lanning

Tax Avoidance

Tax Evasion

"t is well said that /Taxpayer is not expected to arrange his affairs in such manner to paymaximum

Tax /. $o, the assesse shall arrange the affairs in a manner to reduce tax. 0ut the 1uestion what

method he opts for2 Tax lanning, Tax Avoidance, Tax Evasion3

MEANINNG OF TAX PLANNING

Tax lanning involves planning in order to avail all exemptions, deductions and rebates provided

in

Act. The "ncome Tax law itself provides for various methods for Tax lanning, 4enerally it isprovided

(nder exemptions u5s 67, deductions u5s 87) to 87( and rebates and relief9s. $ome of the

provisions

are enumerated below -


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"nvestment in securities provided u5s 67:6;< . "nterest on such securities is fully exempt from

tax.

Exemptions u5s 67A, 670, and 670A

#esidential $tatus of the person

)hoice of accounting system

)hoice of organization.

For availing benefits, one should resort to bonafide means by complying with the provisions of

law in

letter and in spirit.

=here a person buys a machinery instead of hiring it, he is availing the benefit of depreciation. "f

is

his exclusive right either to buy or lease it . "n the same manner to choice the form of

organization, capital structure, buy or make products are the assesses exclusive right. &ne 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.

=hy Every erson %eeds Tax lanning 2

Tax lanning is resorted to maximize the cash inflow and minimize the cash outflow. $ince Tax

is kind

of cast, the reduction of cost shall increase the profitability. Every prudence person, to maximize

the

#eturn, shall increase the profits by resorting to a tool known as a Tax lanning.

>ow is Tool of Tax lanning Exercised2

Tax lanning should be done by keeping in mine following factors -

The lanning should be done before the accrual of income. Any planning done after the

accrual income is known as Application of "ncome an it may lead to a conclusion of that there isa fraud.

Tax lanning should be resorted at the source of income.

The )hoice of an organization, i.e. Taxable Entity. 0usiness may be done through a

roprietorship concern or Firm or through a )ompany.


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The choice of location of business , undertaking, or division also play a very important role.

#esidential $tatus of a person. Therefore, a person should arranged his stay in "ndia such a

way that he is treated as %# in "ndia.

)hoice to 0uy or *ease the Assets. =here the assets are bought, depreciation is allowed and

when asset is leased, lease rental is allowed as deduction.

)apital $tructure decision also plays a ma+or role. ixture of debt and e1uity fund should be

balanced, to maximize the return on capital and minimize the tax liability. "nterest on debt is

allowed as deduction whereas dividend on e1uity fund is not allowed as deduction

Tax Planning For Salaried Person:-

&ften, investment for most individuals begins and ends with tax planning. Although it is

pertinent to avail tax breaks, this should not be the sole focus. $tart by +otting down your key

financial ob+ectives, the tentative time of money re1uirement and the corpus needed to achieve

those goals. &ne can use tax saving investments effectively, to achieve financial goals. For

example, one can take a children9s plan that also provides tax benefit. )onsider the impact of

inflation on your needs. After your first few working years, as income goes up, it is wise to

invest beyond one9s tax saving investments to achieve your goals. Also, evaluate the life cover

re1uirement, while planning for your taxes. =e are giving below a brief on some of the opular

allowance 5 Exemption and deductions, benefit of which can be taken by the salaried taxpayers toreduce their tax burden.

the case of a minor falls within the exceptions as provided in the proviso to Section !"#A$%that

is, where a minor is disabled or has income derived by virtue of his special skill, talent, etc. then

the income of the minor is not clubbable with the income of his parent.

>owever, there are certain other cases where a minor9s income is to be independently assessed

and is not to be included in the income of any other person. $uch is the case where the minor is

an orphan, that is, where he has lost his parents.

"n such a case, the income of the minor out of the funds belonging to the minor, as a result of

succession or inheritance or gifts, etc. would not be includible in the income of the grandfather,

grand other or uncle or aunt or any other guardian. "n such a case the income of the minor

would be assessable separately through the guardian of the minor.

"f the minor orphan makes an investment in a partnership firm and receives some interest on his

capital, the interest so received would, however, be treated as the business income of the minor


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and would be independently assessable in his hands. &f course, his share of the profits from the

firm would be completely exempt from income tax as mentioned above under $ection 6 7:?A< of

the "T Act.

Another very interesting and simple formula to let your minor children +oin your band for tax

planning with a separate income tax file is to have a 677@ specific beneficiary trust prepared for

the minor child. The aspect of special hi!tech tax planning would be to mention in the Trust

'eed very clearly that so long as the minor child is a minor, then during such period of minority

no part of the income of such a Trust would be spent on the minor child. This small little care if

is taken into account while drafting a Trust 'eed for the minor child then there would be

no clubbing of the income of the minor child9s trust with the income of father or the mother of

such minor child. This theme is based on the findings given in a very famous $upreme )ourt of

"ndia9s decision in the case of )"T v. #. 'oshi 6BB;C ?66 "T# 6 :$)#A a component of there

salary.

$ome of The opularly nown Exemptions5#eimbursements

>ouse #ent Allowance

inimum of !

6. Actual >#A

?. #ent aid D 67@ of 0asic

. G7a@ of 0asic :%on!etros< or ;7@ of 0asic :etrosowever, the only problem is its lack of li1uidity. 0ut when your target is fixed, youdont have to worry much about it.

The loan on F is available from third year onwards. The rate of interest charged on loan taken

by the subscriber of a F account shall be ?@ p.a. >owever, the rate of interest of 6 per cent

p.a. shall continue to be charged on the loans taken before 7.66.?766.

The subscription can be paid into the account in one lump sum or instalments not exceeding

twelve in a year.

National Sa&ing +ertificate "NS+$

%ational $avings )ertificate is again a tax!saving instrument, offering secure returns at the rate

of 8.I per cent and 8.B per cent per annum for the investment for ; years and 67 years

respectively w.e.f. April 6, ?76?, compounded half yearly. As the maturity period is fixed, it is

advisable to buy a new %$) with the maturity amount, especially those who are keeping their

eye set on retirement.

%$)s can be bought either in your name or under the name of minor, trust, two adults +ointly or

>indu (ndivided Family. )ertificates are available for minimum of #s 677 up to the amount you

wish to invest.

>owever, here again, the li1uidity issue may haunt people as encashment of the certificate is not

permissible, except in the case of death of the holder:s


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"n such a case, the income of the minor out of the funds belonging to the minor, as a result of

succession or inheritance or gifts, etc. would not be includible in the income of the grandfather,

grand other or uncle or aunt or any other guardian. "n such a case the income of the minor

would be assessable separately through the guardian of the minor.

"f the minor orphan makes an investment in a partnership firm and receives some interest on his

capital, the interest so received would, however, be treated as the business income of the minor

and would be independently assessable in his hands. &f course, his share of the profits from the

firm would be completely exempt from income tax as mentioned above under $ection 6 7:?A< of

the "T Act.

Another very interesting and simple formula to let your minor children +oin your band for tax

planning with a separate income tax file is to have a 677@ specific beneficiary trust prepared for

the minor child. The aspect of special hi!tech tax planning would be to mention in the Trust

'eed very clearly that so long as the minor child is a minor, then during such period of minorityno part of the income of such a Trust would be spent on the minor child. This small little care if

is taken into account while drafting a Trust 'eed for the minor child then there would be

no clubbing of the income of the minor child9s trust with the income of father or the mother of

such minor child. This theme is based on the findings given in a very famous $upreme )ourt of

"ndia9s decision in the case of )"T v. #. 'oshi 6BB;C ?66 "T# 6 :$)

tax planning definition

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