Tax Planning VS Tax Management: Understand the Difference

If tax is a fact of life, minimising your taxes is a life hack. Effective tax handling involves both tax planning and tax management, two critical strategies that taxpayers use to minimise their tax liabilities legally. And, in this article, we define, differentiate, and explain the best practices of these two concepts for you to optimise your tax-saving strategies.

What is tax planning?

Tax planning is the process of analysing one's financial situation to identify strategies that maximise tax breaks and minimise liabilities within the legal framework. It involves utilising various provisions and incentives offered by tax laws to achieve the most tax-efficient outcomes.

What is the meaning of tax management?

Tax management is the process of ensuring you comply with all tax laws and regulations when filing your tax return. It involves maintaining accurate records, meeting filing deadlines, and adhering to proper tax payment procedures.

What is the difference between tax planning and tax management?

While the two may seem overlapping, the key difference between tax planning and tax management is that while the former aims to lower future tax bills, the latter aims to avoid potential tax penalties in the present.

Below, we delve into them deeper in different aspects:

Focus and Objective:

• Tax Planning: Focuses on future financial planning to minimise tax liability through legal avenues like deductions, exemptions, and rebates.
• Tax Management: Concentrates on current compliance with tax laws, accurate record-keeping, and timely tax payments to avoid penalties.

Timeframe:

• Tax Planning: Primarily forward-looking, involving long-term strategies for tax efficiency.
• Tax Management: Ongoing and operational, dealing with current tax obligations and ensuring adherence to regulatory requirements.

Scope:

• Tax Planning: Encompasses a wide range of financial activities and decisions to optimise tax benefits.
• Tax Management: Limited to tax compliance, payment, and administrative tasks.

Example Activities:

• Tax Planning: Investing in tax-saving instruments under Section 80C, planning charitable donations, and optimising business expenses.
• Tax Management: Filing tax returns on time, maintaining detailed financial records, and making quarterly tax payments.

Best practices of saving tax with tax planning and tax management

First thing first: The sooner you begin tax planning, and the more rigorous you are in tax management, the more opportunities you'll have to leverage tax benefits. With that in mind, below we look at some industry best practices:

• Invest in Tax-Saving Instruments: Utilise Section 80C deductions by investing in the Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity-Linked Savings Scheme (ELSS).
• Retirement Planning: Invest in the National Pension System (NPS) to get additional deductions under Section 80CCD(1B).
• Timely Filing of Tax Returns: Ensure all tax returns are filed within the deadlines to avoid penalties and interest.
• Accurate Record Keeping: Maintain detailed and accurate records of all financial transactions, income, and expenses.
• Compliance with Tax Regulations: Stay updated with current tax laws and regulations to ensure full compliance and avoid legal issues.

In addition, experts advise regularly reviewing and updating your tax planning strategy to align with changes in your financial situation, tax laws, and personal goals.

Endnote

Tax planning and tax management are both essential components of a sound financial strategy. By understanding the distinctions and implementing best practices, you can navigate the tax landscape with confidence and minimise your tax burden.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.