Meaning of Tax Planning

INTRODUCTION

The avid goal of every taxpayer is to minimize his Tax Lia ility! To a"hieve this o #e"tive taxpayer may resort to follo$ing Three Methods %

Tax Planning Tax &voidan"e Tax 'vasion It is $ell said that (Taxpayer is not expe"ted to arrange his affairs in a s)"h manner to pay maxim)m tax ( ! *o+ the assessee shall arrange the affairs in a manner to red)"e tax! ,)t the -)estion $hat method he opts for . Tax Planning+ Tax &voidan"e+ Tax 'vasion / Let )s see its meaning and their differen"e!

0!1!

M'&NINN2 O3 T&4 PL&NNIN2

Tax Planning involves planning in order to avail all exemptions+ ded)"tions and re ates provided in &"t! The In"ome Tax la$ itself provides for vario)s methods for Tax Planning+ 2enerally it is provided )nder exemptions )5s 16+ ded)"tions )5s 76C to 76U and re ates and relief8s! *ome of the provisions are en)merated elo$ %

Investment in se")rities provided )5s 16910: ! Interest on s)"h se")rities is f)lly exempt from tax!

'xemptions )5s 16&+ 16,+ and 16,&

Residential *tat)s of the person

Choi"e of a""o)nting system

Choi"e of organization!

3or availing enefits+ one sho)ld resort to onafide means y "omplying $ith the provisions of la$ in letter and in spirit!

;here a person )ys a ma"hinery instead of hiring it+ he is availing the enefit of depre"iation! If is his ex"l)sive right either to )y or lease it ! In the same manner to "hoi"e the form of organization+ "apital str)"t)re+ )y or ma<e prod)"ts are the assesse8s ex"l)sive right! One may loo< for vario)s tax in"entives in the a ove said transa"tions provided in this &"t+ for red)"tion of tax lia ility! &ll this transa"tion involves tax planning!

0!1!1! ;hy 'very Person Needs Tax Planning .

Tax Planning is resorted to maximize the "ash inflo$ and minimize the "ash o)tflo$! *in"e Tax is <ind of "ast+ the red)"tion of "ost shall in"rease the profita ility! 'very pr)den"e person+ to maximize the Ret)rn+ shall in"rease the profits y resorting to a tool <no$n as a Tax Planning!

0!1!=! >o$ is Tool of Tax Planning 'xer"ised .

Tax Planning sho)ld e done y <eeping in mine follo$ing fa"tors %

The Planning sho)ld e done efore the a""r)al of in"ome! &ny planning done after the a""r)al in"ome is <no$n as &ppli"ation of In"ome an it may lead to a "on"l)sion of that there is a fra)d!

Tax Planning sho)ld e resorted at the so)r"e of in"ome!

The Choi"e of an organization+ i!e! Taxa le 'ntity! ,)siness may e done thro)gh a Proprietorship "on"ern or 3irm or thro)gh a Company!

The "hoi"e of lo"ation of )siness + )nderta<ing+ or division also play a very important role!

Residential *tat)s of a person! Therefore+ a person sho)ld arranged his stay in India s)"h a $ay that he is treated as NR in India!

Choi"e to ,)y or Lease the &ssets! ;here the assets are o)ght+ depre"iation is allo$ed and $hen asset is leased+ lease rental is allo$ed as ded)"tion!

Capital *tr)"t)re de"ision also plays a ma#or role! Mixt)re of de t and e-)ity f)nd sho)ld e alan"ed+ to maximize the ret)rn on "apital and minimize the tax lia ility! Interest on de t is allo$ed as ded)"tion $hereas dividend on e-)ity f)nd is not allo$ed as ded)"tion

0!1!?! Methods Of Tax Planning

@ario)s methods of Tax Planning may e "lassified as follo$s %

1! *hort Term Tax Planning % *hort range Tax Planning means the planning tho)ght of and exe")ted at the end of the in"ome year to red)"e taxa le in"ome in a legal $ay! 'xample % *)ppose + at the end of the in"ome year+ an assessee finds his taxes have een too high in "omparison $ith last year and he intends to red)"e it! No$+ he may do that+ to a great extent y ma<ing proper arrangements to get the maxim)m tax re ate )5s 77! *)"h plan does not involve any long term "ommitment+ yet it res)lts in s) stantial savings in tax!

=! Long Term Tax Planning % Long range tax planning means a plan "haled o)t at the eginning or the in"ome year to e follo$ed aro)nd the year! This type of planning does not help immediately as in the "ase of short range planning )t is li<ely to help in the long r)n A

e!g! If an assessee transferred shares held y him to his minor son or spo)se+ tho)gh the in"ome from s)"h transferred shares $ill e "l) ed $ith his in"ome )5s BC+ yet is the in"ome is invested y the son or spo)se+ then the in"ome from s)"h investment $ill e treaded as in"ome of the son or spo)se! Moreover+ if the "ompany iss)e any on)s shards for the shares transferred + that $ill also e treated as in"ome in the hands of the son or spo)se!

?! Permissive Tax Planning % Permissive Tax Planning means ma<ing plans $hi"h are permissi le )nder different provisions of the la$+ s)"h as planning of earning in"ome "overed y *e"!16+ spe"ially y *e"! 1691: + Planning of ta<ing advantage of different in"entives and ded)"tions+ planning for availing different tax "on"essions et"!

C! P)rposive Tax Planning % It means ma<ing plans $ith spe"ifi" p)rpose to ens)re the availa ility of maxim)m enefits to the assessee thro)gh "orre"t sele"tion of investment+ ma<ing s)ita le programme for repla"ement of assets+ varying the residential stat)s and diversifying )siness a"tivities and in"ome et"!