Tax planning is a process of analyzing one’s financial situation logically with an aim to reduce tax liability through the best use of all available allowances, exclusions, deductions and exemptions under the income tax act 1961.
The Income Tax Act contains a total of 23 chapters and 298 sections according to the official website of the Income Tax Department of India.These different sections deal with various aspects of taxation in India. The various heads for which you have to pay income tax include:
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 means a definite plan chalked out at the beginning of the income year to be followed around the year. This type of planning does not help immediately as in the case of short range planning but is likely to help in the long run ; Long range tax planning refers to the practices undertaken by the assesse. 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 minor child. In this acase, 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.
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 benefit of different tax concessions etc. In other words, it means planning made as per provision of the taxation laws.
Purposive tax planning means applying tax provisions in an intellectual manner so as to avail the tax benefits based on national priorities. It includes tax planning with a purpose of getting the maximum benefit by making suitable program for replacement of assets, correct selection of investment, varying the residential status and diversifying business activities and income. Also, Under Income Tax Act, Section 60 to Section 65 is related to the income of other persons included in the income of assesse. 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.
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