Tax planning involves legally arranging one's financial affairs to minimize tax liability and takes advantage of deductions and exemptions allowed by law. It is different from tax avoidance and tax evasion which are not legitimate ways to reduce taxes. Tax planning works within the legal framework while tax avoidance uses loopholes and may be illegitimate. Tax evasion involves illegally underreporting income or overreporting expenses. The objectives of tax planning are to reduce liability, minimize litigation and support economic growth. It is important for taxpayers to understand tax laws and plan accordingly to maximize benefits.

1. TAX PLANNING;TAX AVOIDANCE AND TAX EVASION

2. WHAT DO YOU MEAN BY TAX PLANNING?Tax planning can be defined as an arrangement of one’s financial and business affairs by taking legitimately in full benefit of all deductions, exemptions, allowances and rebates so that tax liability reduces to minimum.

4. KEY POINTS TO BE REMEMBEREDIt is not avoidance to payment of tax.

5. Tax planning should not be done with an intent to defraud the revenue.

6. All transactions with respect to tax planning should be in correct form and substance.

7. Tax planning works within the framework of law and its not illegal.RIGHT TO PLAN TAX LIABILITYThe Supreme Court held in case of McDowell & Co. v. CTO(1985) 154 ITR 148(SC) has said that it is true that planning may be legitimate provided it is within the framework of the law.

8. Using dubious methods to avoid the payment of tax is not permissible.

9. It is obligation of every citizen to pay taxes honestly without resorting to subterfugesTAX AVOIDANCE AND TAX EVASIONTaxpayers generally plan their affairs so as to attract the least incidence of tax.

10. Taxpayer spares no efforts in maximising his profits and attracting the least incidence. The tax gatherer, on the other hand. Tries to break the plans whose sole objective is to save taxes.

11. Three common practice to save taxes:Tax Evasion;Tax Avoidance;Tax Planning.

12. TAX EVASIONTax evasion refers to a situation where a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure which results into showing of income lower than the actual and resorting to various types of deliberate manipulations.

13. An assessee guilty of tax evasion is punishable under the relevant laws.TAX AVOIDANCEThere is a thin line of difference between Tax Avoidance and Tax Planning.

14. Any planning done according to legal requirements defeats the basic intention of Legislature behind the statute could be termed as Tax Avoidance.

15. Tax Avoidance is done in such a manner that no infringement of taxation laws and by taking full advantage of loopholes to attract least incidence of tax.

16. Earlier tax avoidance was considered completely Legitimate, but at present it may be illegitimate in certain situations.TAX PLANNINGIt means arranging the financial activities in such a manner that maximum tax benefits are enjoyed by making use of all beneficial provisions mentioned in the law.

17. Tax planning is permitted and not frowned upon by law.