Tax Planning Objectives, Types and Limitations

See, literally nobody out there likes to pay taxes. Nobody! But taxes are something you can’t avoid, especially if you earn a sizable income, right? That’s the very reason why so many people prefer to plan things in a way that helps them cut down on taxes and save a little more of their hard-earned money. That is precisely the concept of tax planning, where you make some smart decisions or choices to reduce the amount of taxes you pay every single year. Though tax planning is kinda a popular thing these days, still, a lot of people out there don’t know much about it. So, here we are with a detailed post on tax planning, like what its objectives are, the different types of tax planning, and what the limitations you can face are. Here we go, then.

Objectives of Tax Planning

Well, let’s talk about what the main objectives of tax planning are and why so many people just go with this method instead of applying some other tips or tricks. Let’s see then:

1. Pay Less Tax (Legally): Actually, the best reason for tax planning is to reduce tax liability using the deductions or exemptions permitted by the government. Like, you’d be surprised by the fact that how much you can cut down on taxes by just having a proper tax planning strategy in place.
2. Save Even More Money: Paying less in taxes means more savings, which is just a simple calculation right there. You see, good planning keeps a majority of the money with an individual that can then be directed towards investments, savings, or the achievement of personal goals, and that’s what you should be aiming for.
3. Comply with the Law: When tax planning is done correctly, you become legal. Nothing to confuse here: we just mean that if you do everything right, there will be no notices, penalties, or audits. It’s all legal and you’ll be perfectly fine while still saving a lot more of your hard-earned money.
4. Better Cash Flow: Cash flow? How? Well, you see, with lower taxes, you have money in plenty to spend on important things. Get it now?
5. Build Wealth: Well, of course, time also helps you in wealth creation through tax planning because it is one of the investments made in tax saving options.
6. Your Financial Goals Fulfilled: Just tell us, like, do you want to own a house? Save for the child’s education? Want to retire early? All these objectives may certainly come under the reach of tax planning.
7. Work Without Worry: See, when you plan everything well, you know that less things are likely to go wrong, and that’s the same case with tax planning, like, when taxes are planned well, you won’t stress about last-minute filings or confusion during tax season.

Types of Tax Planning

Well, sure, it is not like tax planning is just one singular type and that’s all. Nah, based on what you want to achieve, there are actually different types of tax planning, so let’s talk about them one by one, shall we?

1. Short-Term And Long-Term Tax Planning

Short-term tax planning is meant for one calendar year only, where decisions are based on quick actions such as investments made before March for immediate tax benefit. Long-term tax planning, on the other hand, is all about tax planning for the years to come, for instance, depositing money in a Public Provident Fund( PPF) or taking out a pension plan for tax relief and the growth of funds.

2. Permissive Tax Planning

It means fully utilizing every benefit and deduction allowed under law, without hitting the law and dabbling in the gray area, just devising smart ways to use the rule to one’s own advantage.

3. Purposive Tax Planning

Here, you plan your funds so that they meet some sort of concrete goals like buying a house or getting your child educated, you know, while at the same time providing tax benefits.

4. Marginal Tax Planning

Planning vis-a-vis keeping income in the lower tax brackets is a lesser tax and more costly tax.

5. Structural Tax Planning

This type is adopted mainly by corporations. Structuring one’s business or personal finances in a tax-friendly manner; for example, by establishing a company or a trust.

Common Tax Planning Tools and Examples

Well, yes, there are some actual tools that you can use for tax planning and cut down on your taxes even more. That too, in a perfectly legal way. Here:

• Section 80C: Invest in PPF, ELSS (tax-saving mutual funds), life insurance, or pay for a child’s tuition fees. Maximum deduction allowable: ₹1.5 lakh.
• Section 80D: The health insurance expenses paid for self or family are eligible for deduction.
• Section 24(b): Claim tax benefits against the interest on a home loan (maximum: ₹2 lakh).
• Section 80E: Claim the interest paid for the education loan.
• NPS (National Pension Scheme): This will qualify you for deduction under Section 80CCD.

Keep in mind though, these are just a few of the tools used by an average taxpayer out there to save on taxes literally every single year and that too while still staying within the legal boundaries.

Limitations of Tax Planning

Tax planning really serves good purposes but not entire ones. You see, there still are a few challenges or limitations you can face with this method of saving taxes, but that’s perfectly fine as well. Here:

• What saves tax today may not save it tomorrow. When not updated, someone could use old methods, which are no longer allowed.
• Time and understanding of rules are needed in tax planning, without which it can become complicated as there are many experts involved.
• Several tax-saving tricks really delay payment of taxes instead of eliminating them, so that at a later date, one pays more.
• The income tax plan may not give optimum results in case an individual’s income goes up or down every single financial year.
• Income earned from other countries makes tax planning a complicated affair due to different rules, you know?
• If tax planning looks too aggressive or tricky, it becomes a question or audit for the tax man, plain and simple!