Types of Tax planning

• Tax planning is an efficient way of saving tax.
• There are three different types of tax planning. Opt for the type whichever suits you the best.

Tax planning: Tax planning is a process of analyzing one’s financial situation logically with a view to reducing tax liability. Tax planning involves planning your income in a legal manner so to avail various exemptions and deductions. Under Section 80C, you can avail tax deduction if specific investments are made for a specific period up to a limit of Rs 1, 50,000. The most popular methods for saving tax are investing in PPF accounts, National Saving Certificate, Fixed Deposit, Mutual Funds, and Provident Funds. Tax planning involves applying various advantageous provisions which are legal and entitles the assesse to avail the benefit of deductions, credits, concessions, rebates, and exemptions. Or we can say that Tax planning is an art in which there is logical planning of one’s financial affairs in such a manner that benefits the assesses with all the eligible provisions of the taxation law. Tax planning is an honest approach of applying the provisions which come within the framework of taxation law.

Here are the three types of tax planning:

1. Purposive Tax planning

2. Permissive tax planning

3. Long-range and Short-range tax planning

Purposive Tax planning: Purposive tax planning means applying tax provisions in an intellectual manner so to avail the tax benefits based on national priorities. It includes tax planning with the purpose of getting the maximum benefit by making a suitable program for replacement of assets, correct selection of investment, varying the residential status and diversifying business activities and income. Also, Under the Income Tax Act, Section 60 to Section 65 is related to the income of other persons included in the income of the assessee. Here, assesse can plan in a way that the provisions do not get attracted so as to increase the disposable resources. This is known as purposive tax planning.

Permissive tax planning: Permissive tax planning refers to the plans which are permissible under various provisions of the law, for example, planning of earning income covered by Section 10, Section 10(1), planning of taking advantage of various deductions, incentives for getting the benefit of different tax concessions, etc. In other words, it means planning made as per the provision of the taxation laws.

Long-range and Short-range tax planning: Short-range planning means planning made annually to fulfill the limited or specific objectives. It is executed at the end of the year to reduce taxable income legally. Also, in short-range tax planning, there is no permanent commitment. An individual may invest in NSCs (National savings certificate) or PPF (Public Provident Fund) within the prescribed limit when income is increased. It is not advisable to take LIC/ULIP/Pension Plan etc. Long-range tax planning refers to the practices undertaken by the assessee. Long term planning is done at the beginning or the income year to be followed around the year.  Long term planning does not help immediately, for example, transfer of assets without consideration to a minor child. In this case, the income will be combined to transferor up to the child in minor but once the child turns 18, this will be the child’s income.

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