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Tax Planning

Definition: Tax Planning can be understood as the activity undertaken by the assessee to reduce
the tax liability by making optimum use of all permissible allowances, deductions, concessions,
exemptions, rebates, exclusions and so forth, available under the statute.

Put simply, it is an arrangement of an assessee’s business or financial dealings, in such a way

that complete tax benefit can be availed by legitimate means, i.e. making use of all beneficial
provisions and relaxations provided in the tax law, so that the incidence of the tax is minimum.
This ensures savings of taxes along with conformity to the legal obligations and requirements.
Therefore, it is permitted by law.

Objectives of Tax Planning

 Reduction of Tax Liability: An assessee can save the maximum amount of tax, by properly
arranging his/her operations as per the requirements of the law, within the framework of the
 Minimization of Litigation: There is a war-like situation between the taxpayers and tax
collectors as the former wants the tax liability to be minimum while the latter attempts to
extract the maximum. So, a proper tax planning aims at conforming to the provisions of the
tax law, in such a way that incidence of litigation is minimized.
 Productive Investment: One of the major objective of tax planning is channelisation of
taxable income to different investment plans. It aims at the optimum utilization of resources
for productive causes and relieving the assessee from tax liability.
 Healthy Growth of Economy: The growth and development of the economy greatly depend
on the growth of its citizens. Tax planning measures involve generating white money that
flows freely and results in the sound progress of the economy.
 Economic Stability: Proper tax planning brings economic stability by various techniques
such as mobilizing resources for national projects or availing ways for investments which are
productive in nature.
Tax Planning follows an honest approach, to achieve maximum benefits of tax laws, by applying
the script and moral of law. Therefore the objectives do not in any way contradict the concept of
tax laws.

Types of Tax Planning

1. Short-range and long-range Tax Planning: The tax planning which is made every year to
arrive at specific or limited objectives, is called short-range tax planning. Conversely, long-range
tax planning alludes to such practices undertaken by the assessee which are not paid off
2. Permissive Tax Planning: Tax planning, wherein the planning is made as per expressed
provision of the taxation laws is termed as permissive tax planning.
3. Purposive Tax Planning: Purposive tax planning refers to the tax planning method which
misleads the law. Under this type, there is no expressed provision of the statute.

Tax planning means intelligently applying tax provisions to manage an individual’s affairs, in
order to avail the tax benefits based on the national priorities, in accordance with the interest of
general public and government.