Financial Planning vs Tax Planning: Understand the Difference

Looking at your finances as they are now and creating a step-by-step plan to get them where you want them to be is the process of financial planning. That can entail coming up with a strategy to get out of debt or finding out how to save money for a down payment on a new property. On the other hand, tax planning is a major component of financial planning. It guarantees tax savings while abiding by the regulations set forth in the Income Tax Act of 1961. Saving money and lowering the tax liabilities of an individual are the main goals of tax planning. Tax planning can be defined in a few words. It involves examining one’s financial status from the perspective of tax efficiency. 

The terms “financial planning” and “tax planning” are frequently used. Preparing your taxes and finances enables you to achieve your financial goals. Both can help you choose the investment plan that best suits your needs. Yet, there are important distinctions between financial planning and tax planning. Here is a basic guide to the same. 

How does a financial plan work?

The key steps of a financial plan comprise the following: 

  • Understanding Your Financial Goals- To do this, you must evaluate your existing financial situation and make a list of your financial objectives. You can further divide these objectives into short, medium, and long-term categories.
  • Choosing Suitable Financial Solutions– The next step is to choose instruments or investment options based on your goals. If you desire future financial security for your family members in your absence, then you should look at life insurance plans. If you are looking for wealth-creating options, you can look at ULIPs and other market-linked avenues. It all depends on your risk appetite and future goals. 
  • Implementation And Review- It’s crucial to regularly assess your portfolio after choosing the appropriate financial instruments based on your investment preferences. This makes it easier to make sure that the portfolio’s performance follows the strategies that have been developed.

How does a tax plan work?

Tax planning is evaluating your investments from a taxation standpoint. As a result, it assists you in lowering your tax obligation. Your disposable income may also increase as a result of lower tax obligations. You can invest the money you save on taxes or use it to pay for other important obligations. There are three categories of tax planning:

  • Purposive Planning- This attempts to make fully utilise the applicable provisions of the Income Tax Act of 1961. These advantages include the ability to deduct certain forms of income from gross income and exempt from others.
  • Permissive Planning- Using the pertinent rules and tax advantage clauses, the tax planner employs this strategy to make plans within the bounds of the law.
  • Short-Term And Long-Term Planning- Short-term plans are restricted to a single fiscal year. These include making an investment in a specific tax-saving device that is eligible for tax deductions. Long-term plans, on the other hand, cover a larger area. For instance, the transfer of an asset to a minor kid without regard necessitates the clubbing of income until the minor reaches the age of majority, which is 18 years. After that, it is considered the child’s income.

Based on the amount of taxes you can and need to save, you can consult a financial advisor and invest in options enabling the same. For example, you can use a life insurance calculator to estimate the premium amount for a certain coverage amount. This amount will help you get deductions under Section 80C of the Income Tax Act. This Act covers several other types of investments with a maximum deduction limit of Rs. 1,50,000. Similarly, Section 80D offers deductions for premiums paid for health insurance coverage. There are many other options for saving taxes that are worth considering in this regard. 

Difference Between Financial Planning And Tax Planning

A summary of the primary differences between financial planning and tax planning is provided below.

Particulars Financial Planning Tax Planning
Personnel who can assist Financial Advisor Tax planner
Plan objectives
  • To have enough money for a variety of things, such as planning for retirement, paying for children’s weddings or higher education, buying a home, etc. 
  • It also looks at future financial security of the family members in case of the primary income-earner’s demise or a variety of other scenarios including medical emergencies and accidents. 
  • Moreover, tax preparation can be a component of financial planning, since it seeks to lower your financial obligations. 
  • It seeks to lower your tax obligations through availing of applicable deductions. 
  • It also looks at exemptions for returns on investments to determine overall tax efficiency. 

Now that you know about the basic differences between financial and tax planning, you should know a little more about investments like life insurance plans which combine both financial and tax planning wonderfully.

How Life Insurance is a Key Component of Both Financial and Tax Planning 

Here’s how life insurance makes its way into both tax and financial planning blueprints: 

  • Life insurance secures your dependents and family members in case of your untimely demise within a certain tenure
  • It helps them meet debt repayments, pay for future goals, and maintain their lifestyles by covering monthly costs as well
  • Some life insurance plans like ULIPs or endowment plans come with maturity benefits or returns as well. These may help you build wealth or future savings while securing life coverage simultaneously. 
  • Life insurance also offers tax deductions under Section 80C, as mentioned above. It also comes with tax exemptions under Section 10 (10D) for the amount received by the nominees as the sum assured in case of the insured person’s demise within the policy period. Adding critical illness or other health-related riders to life insurance policies will also help get deductions on the premiums paid, as per Section 80D. This can be either Rs. 25,000 for non-senior citizens or Rs. 50,000 for senior citizens. 

Hence, life insurance plans are indispensable for any tax planning strategy while being pivotal financial planning moves as well. Moreover, they take care of both needs with aplomb, making them all-weather investments in any portfolio. 

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