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Tax Planning: A Clever Method for Lowering Tax Obligations
Tax Planning: What Is It?
The strategic management of finances to guarantee tax efficiency while adhering to legal requirements is known as tax planning. By maximising the utilisation of tax law exemptions, deductions, and perks, it assists taxpayers in minimising their tax obligations.
Tax planning is legal and a way to reduce the amount of tax payable by omitting all these things above.
Objectives of Tax Planning
Effective tax planning serves multiple financial and economic goals, including:
Types of Tax Planning
Tax planning is highly individualized and varies based on income, financial goals, and investment preferences. It is classified into different types:
1. Purposive Tax Planning
1) Focuses on specific financial goals, such as retirement planning. 2) Helps individuals structure their investments to maximize tax benefits. 3) Example: Investing retirement savings in tax-exempt instruments.
2. Permissive Tax Planning
1) Involves tax-saving strategies within the legal framework. 2) Utilizes government-approved tax-saving schemes for maximum benefits. 3) Example: Investing in tax-saving fixed deposits or ELSS mutual funds.
3. Long-Range and Short-Range Tax Planning
1) Short-range tax planning: Done annually to reduce immediate tax liability. 2) Long-range tax planning: Designed for future financial benefits, balancing returns and tax efficiency. 3) Example: A portfolio of short-term and long-term instruments for regular returns.
Key Provisions in an LLP Deed
An LLP Agreement typically includes the following essential elements:
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LLP Name and its registered office address.
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Names and addresses of all designated partners.
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Primary business activities of the LLP.
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Other permitted activities.
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Clauses regarding admission or retirement of partners.
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Guidelines for financial management, including account maintenance and financial statements.
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Profit and loss sharing ratio among partners.
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Additional terms and conditions mutually agreed upon by partners.
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Dissolution clause, defining how the LLP will be dissolved if required.
If any of these provisions need to be modified, an amendment in the LLP Agreement is required.
Change in business activities or expansion into new domains.
Addition or removal of partners.
Wherein a company never conducted any activity of business over the last two financial years nor has it sought an application in Dormant Company under Section 455 of Companies Act, 2013.
Mistaken Tax Planning
Despite a plethora of options for saving, many individuals still commonly end up making mistakes with their taxes:
1. Procrastination
Tax planning during the last quarter is often reactive; decisions are made quickly, and opportunities for investment are missed, leading to excessive tax payments.
2. Buying Insurance Only for Tax Saving
Many people purchase insurance policies at the last minute just to save tax, without considering whether they actually need the coverage.
3. Ignoring the Power of Compounding
Tax-saving mutual funds (ELSS) not only offer tax benefits but also long-term wealth growth. Many investors overlook their potential.
4. Not Exploring All Tax-Saving Options
Tax planning is not limited to Section 80C. There are multiple sections under the Income Tax Act that provide deductions, such as:
- Section 80D – Health insurance premium deductions.
- Section 24(b) – Home loan interest deductions.
- Section 10(14) – Allowances like HRA and LTA.
What Happens After the Application is Submitted?
Once the ROC receives the application, it follows a structured process:
1. Public Notice (STK-6):
The ROC publishes a public notice about the proposed strike off.
2. Objection Period:
Any objections must be submitted within 30 days.
3. Publication in Newspapers:
The notice is published in an English and vernacular newspaper, as well as on the MCA website and Official Gazette.
Be solvent (not bankrupt)
Have no criminal convictions
What Happens When You Don't File the Forms on Time?
If you don’t submit the required forms by the deadline, you’ll face penalties:
Late Fee:
You’ll have to pay INR 100 for each day you delay filing.
On the Company:
INR 1,000 per day, subject to a maximum of INR 10 Lakhs.
On Every Officer in Default:
INR 1 Lakh, plus INR 100 per day of delay, subject to a maximum of INR 5 Lakhs.
What is a Director Identification Number (DIN)?
A Director Identification Number (DIN) is an 8-digit unique identification number issued to directors of companies. It is a mandatory requirement under the Companies Act and has lifetime validity.
Compliance and Deadlines
An LLP Agreement typically includes the following essential elements:
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The Supplementary LLP Agreement must be executed and filed with the ROC within 30 days of passing the resolution.
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Failure to file within this timeframe may result in penalties under the LLP Act.
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The ROC may request additional documentation or clarifications before approving the changes.