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Tax planning is essential because it minimises your tax liability by smartly using deductions See this and exemptions available under the Act. It will provide better allocation of resources toward savings or investments. It also ensures legal compliance by reducing the risk of audits, penalties, or fines due to errors or missed deadlines.
Additionally, effective tax planning improves cash flows, reduces financial risks, and helps manage taxes efficiently. These are very essential for long-term financial stability and security. Finally, it will enable people to make better financial decisions, avoid surprises, and achieve their financial objectives.
Limitations of Tax Planning
Effective tax planning requires much time and expertise. Many individuals and small businesses may not have the resources to be updated on tax laws or to hire professional advisors, and therefore, may rush or inadequately plan. Tax laws are constantly changing, and what was once an effective strategy may become obsolete or even illegal. This unpredictability creates legal risks for individuals and businesses relying on outdated tax planning methods.
Types of Tax Planning
The types of tax planning are:
Permissive Tax Planning: This type involves using all the exemptions and deductions, available under tax laws to legally minimise tax liabilities.
Purposive Tax Planning: The tax strategies aim at achieving specific financial goals such as investing in shares or buying a new phone.
Short-term Tax Planning: It is for minimisation of taxes for the present fiscal year and thus making proper decisions on time.
Long-term Tax Planning: It involves long-range strategies and considerations of future financial goals and obligations.
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