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Difference Between Tax Planning and Tax Management

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Both tax planning and tax management can help us minimise taxes and ensure legal compliance, but they often need clarification as the same. Every taxpayer needs to understand the difference between tax planning and management and how these strategies can help us retain more of our hard-earned money.

Difference Between Tax Planning and Tax Management

Before we take a detailed look at the two strategies, here’s an overview of the difference between tax planning vs tax management

Tax PlanningTax Management
Tax planning is a process that allows you to minimise your tax liabilities legally. Tax management is the process of making sure that you comply with all tax laws to avoid penalties such as hefty fines or worse.
Tax planning is elaborate. It is done by making investments and taking advantage of the several tax deductions, exemptions, and benefits allowed by the government under the Income Tax Act.With tax management, one can fulfil their annual tax obligations accurately and on time.
The main goal of tax planning is to make a plan that helps you take maximum advantage of the tax benefits, which maximises your tax savings in the long term.Tax management is more focused on the past and the present. It focuses on maintaining financial records such as salary slips, investment proofs, and interest certificates. 
The scope of tax planning is much more comprehensive.Scope in this case is limited.
Tax planning is generally done by professionals such as tax advisors or tax planners.The tax management process is done by both the taxpayers as well as tax advisors.
Some examples of tax planning are – making investments in Section 80C instruments such as PPF, ELSS, and EPF to maximise the Rs. 1.5 lakh deduction, restructuring your salary to include tax exempt components such as House Rent Allowance and Leave Travel Allowance, and taking advantage of deductions under Sections 80E, 80D, and 80G.Examples of tax management include – filing income tax returns on time, maintaining necessary financial documents to support your tax filings, accurately calculating tax liabilities, and staying updated with changes in tax laws and regulations. 
Tax Planning vs Tax Management

Also Read: What are the 5 Heads of Income Tax?

Understand What is the Tax Planning

Simply put, tax planning is the process of legally reducing one’s tax burden. This long-term strategy is made with the individual’s unique financial situation, goals, and risk tolerance in mind. There are various ways in which tax planning helps individuals minimise their tax liabilities, such as:

  • Making tax saving investments – Investing in instruments such as the National Pension Scheme (NPS), Senior Citizen Savings Scheme (SCSS), Public Provident Fund (PPF), and Equity Linked Savings Schemes (ELSS) can reduce your taxable income by Rs. 1.5 lakh every year under Section 80C.
  • You can claim a deduction of up to Rs. 2 lakh on the repayment of your home loan interest under Section 24.
  • Section 80E allows you to claim a deduction on repayment of education loan interest without any upper limit.
  • Under Section 80D, you can claim deductions on the annual health insurance premiums you pay for covering yourself, your family, and your dependent parents. 
  • You can even make charitable donations to eligible NGOs and institutions to get tax deductions from 50% to 100% of the donated amount under Section 80G.
  • Restructuring your salary to include more tax-exempt components such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and other reimbursements can also reduce your taxable income.

As you can see, tax planning involves taking advantage of the various deductions and exemptions given under the Income Tax Act to reduce your tax liabilities. It’s important to note that most of these tax benefits are available only under the old tax regime, which offers a much broader range of deductions compared to the new tax regime introduced in 2020-21. 

To understand which tax regime and investments are best for your unique circumstances, consider consulting with a tax advisor. A tax advisor can assess your financial situation, goals, and risk tolerance, and recommend suitable investment options that not only help you save tax but also bring you closer to realising your financial dreams. A tax advisor can make sure that your plan lies within the bounds of the law so you don’t have to worry about any legal consequences.

Understand What is Tax Management

Tax Management, on the other hand, is an ongoing process that ensures compliance with tax laws. You can manage tax by:

  • Keeping detailed records of your income, transactions, and expenses. Records such as proof of investment, previous income tax returns, certificates of interest, and salary slips should be kept handy for accurately filing tax returns and claiming deductions.
  • Filing your ITR accurately and on time. This avoids any extra charges or penalties associated with late or incorrect filing.
  • Preparing for audits by maintaining transparency in the finances you report.
  • Adhering to tax laws and keeping up with any changes.
  • Reviewing your tax plan and making necessary adjustments to stay aligned with your financial goals.

If you follow this process effectively, you can save yourself from penalties and unnecessary stress during tax filing season. That’s why it could be wise to seek a professional’s help. A tax advisor can give you expert guidance on tax management, and help you keep up with complex tax laws. They can maximise tax savings, make sure your returns are accurately filed, and keep you safe from audits or any legal issues.

FAQs on Tax Planning and Management

How does tax planning and management benefit any individuals?

Tax planning and management help individuals keep more of their hard-earned money while making sure that they comply with the law to avoid penalties.

What are strategies for tax planning that anyone can implement?

Some effective tax planning strategies include investing in tax-saving options such as the Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS) to benefit from deductions up to Rs. 1.5 lakh under Section 80C. One can also maximise Section 80D benefits by taking health insurance for family and dependent parents. Making donations to eligible institutions and NGOs can also help reduce the tax burden under Section 80G. Individuals can also restructure their salary to include components exempt from tax such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA). These benefits can help reduce taxable income and thus maximise savings.

Why is tax management very crucial for any business?

Tax management helps prevent legal issues, so businesses with solid tax management can avoid hefty penalties that come from incorrect or delayed filings. These penalties are not only costly but can also harm the reputation of a business. This can cause stakeholders to lose confidence in the business and back out.