Tax planning is much more important than you think it is!

Tax planning is much more important than you think it is!

Many a times, especially during tax returns season, you may wonder about the objectives of tax planning. Tax planning plays a pivotal role in financial management, offering strategic avenues to optimise tax liabilities within legal boundaries. As individuals and businesses navigate complex tax landscapes, understanding the objectives of tax planning is essential. Let us take a look at the multifaceted goals that guide effective tax planning strategies for, by aligning financial decisions with these objectives, taxpayers like you can enhance your financial well-being, ensure compliance, and maximise your resources for growth and stability. So, here is everything you need to know about tax planning. 

What is tax planning?

Tax planning refers to using legal ways to reduce your tax burden. It simply means to use investments like Equity Linked Savings Schemes (ELSS) or an ongoing home loan to lower your income tax for a financial year as per the prevailing tax laws.

What are the objectives of tax planning?

It may seem like the objectives of tax planning are pretty obvious – to save tax, what else? But tax planning has several objectives, as explained below:

1. Reduce tax:Tax is the unwanted leech that attaches itself to your leg as you hike around the financial world. Tax planning is the salt you sprinkle to get rid of the leech and continue climbing the high peaks of wealth creation and financial security.
2. Ensure better financial growth: If you start a tax-saving SIP in one of the best long term mutual funds in the market, you don’t just save tax. You may also gain inflation-beating returns in the long run and live a financially abundant life. This is what we call killing two birds with one stone!
3. Minimise litigation:Tax planning helps you keep at bay any kind of judicial actions from state, central, or foreign tax authorities.
4. Stabilise the country’s economy:Tax planning ensures that you pay the right amount of tax due to the government and contribute to the development and progress of the nation.

What are the different types of tax planning?

Here are the fantastic four of tax planning. You can choose one as per your goals:

1. Short-range: The investment planning that we sometimes undertake right before the financial year ends in March is short-range tax planning.
2. Long-range: Investment planning from the start of the year to ensure tax savings along with financial growth is long-range tax planning.
3. Permissive: Using permitted means to lower tax under the prevailing tax laws, such as Section 80C and others of the Income Tax Act, 1961, is known as permissive tax planning.
4. Purposive: The last type is when you have a particular purpose in mind. Under this, the focus is on financial planning so you can reap the maximum profits. Additionally, it also involves switching between assets, diversification, portfolio rebalancing, etc., for best outcomes.

Conclusion

If tax planning seems complex to you, there are financial consultants to help you out. Another thing that can help is being up to date about tax laws and investment planning, such as knowing how do mutual funds work, what are the different types of taxes, etc. You can do so by reading blogs on financial planning like this one!

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