Financial Planning For Tax Efficiency
Tax planning refers to financial planning for tax efficiency. It aims to reduce one’s tax liabilities and optimally utilize tax exemptions, tax rebates, and benefits as much as possible. Tax planning includes making financial and business decisions to minimise the incidence of tax. This helps you legitimately avail the maximum benefit by using all beneficial provisions under tax laws. It enables one to think of their finances and taxes at the beginning of the fiscal year, instead of leaving it to the eleventh hour.
Short-term: This is usually done at the end of the fiscal year, with the primary objective of reducing the upcoming tax outflow. There are no real long-term commitments created out of such tax planning, and the approach is generally short-sighted.
Long-term: A prudent investor and saver would follow the long-term tax planning approach by planning the entire fiscal year's financial activity at the beginning of the year. Contrary to short-term tax planning, this approach may not result in immediate tax reduction/ benefits. However, the process supports the long-term overall return objectives of the planner
Purposive tax planning: This approach involves combining your expected returns from proposed investments and the tax benefits of such investments. The result is a selection of those investments which are linked to specific or general tax benefits. A tax-averse investor would follow this approach to maximize returns while paying the least possible tax on such returns.
Permissive tax planning: This approach involves studying all the benefits available to any planner under the Act and leveraging them to minimize tax outflows.