Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimises how much you pay in taxes is referred to as tax efficient. Tax planning should be an essential part of an individual investor's financial plan.

Advantages of tax planning:

1. To minimise litigation: To litigate is to resolve tax disputes with local, federal, state, or foreign tax authorities. There is often friction between tax collectors and taxpayers as the former attempts to extract the maximum amount possible while the latter desires to keep their tax liability to a minimum. Minimising litigation saves the taxpayer from legal liabilities.

2. To reduce tax liabilities: Every taxpayer wishes to reduce their tax burden and save money for their future. You can reduce your payable tax by arranging your investments within the various benefits offered under the Income Tax Act, 1961. The Act offers many tax planning investment schemes that can significantly reduce your tax liability.

3. To ensure economic stability: Taxpayers’ money is devoted to the betterment of the country. Effective tax planning and management provide a healthy inflow of white money that results in the sound progress of the economy. This benefits both the citizens and the economy.

4. To leverage productivity: One of the core tax planning objectives is channelising funds from taxable sources to different income-generating plans. This ensures optimal utilisation of funds for productive causes.

Types of Tax Planning

Most people merely perceive tax planning as a process that helps them reduce their tax liabilities. However, it is also about investing in the right securities at the right time to achieve your financial goals.

Following are some of the various methods of tax planning:

1. Short-range tax planning
   Under this method, tax planning is thought of and executed at the end of the fiscal year. Investors resort to this planning in an attempt to search for ways to limit their tax liability legally when the financial year comes to an end. This method does not partake long-term commitments. However, it can still promote substantial tax savings.

2. Long-term tax planning
   This plan is chalked out at the beginning of the fiscal and the taxpayer follows this plan throughout the year. Unlike short-range tax planning, you might not be offered with immediate tax benefits but it can prove useful in the long run.

3. Permissive tax planning
   This method involves planning under various provisions of the taxation laws. Tax planning offers several provisions such as deductions, exemptions, contributions, and incentives. 

4. Purposive tax planning
   Purposive tax planning involves using tax-saver instruments with a specific purpose in mind. This ensures that you obtain optimal benefits from your investments. This includes accurately selecting the appropriate investments, creating an apt agenda to replace assets (if required), and diversification of business and income assets based on your residential status.

How to save taxes?

Taxpayers are provided with several options to reduce their tax liabilities. Various sections of the income tax law offer tax deductions and exemptions.

The best and the most optimum way to save taxes is by laying out a financial plan whenever there is a revision in your income and sticking to it. Also, it is a good habit to make tax-saving investments at the beginning of the year rather than making hasty and often incorrect investment decisions at the last moment. To do this, it is crucial to be aware of all the exemptions and deductions available to you.