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Tax Planning vs Financial Planning | Know the difference between tax planning and financial planning | YES BANK

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Tax planning and financial planning are two terms many people in India seem to be confused about. In fact, for most, both these aspects of wealth management mean one and the same thing. However, this is a wrong notion.

While tax planning and financial planning do go hand-in-hand and ultimately help you save money, there are some key differences that set them apart.

Difference Between Tax Planning and Financial Planning

Tax planning can be best described as the process of becoming tax-efficient by reducing your tax liability to a minimum. It involves formulating a plan that allows you to avail tax benefits by making use of legal tax deductions, exemptions, rebates, and the like. Tax planning also helps you identify the best investments that will help reduce your taxable income. For instance, mutual funds and life insurance policies can provide a tax-efficient avenue for investment. 

Financial planning refers to the process of developing strategies and procedures to achieve your life goals through effective management of finances. Sound financial planning helps you control your income, expenditures and investments optimally. So, essentially, financial planning involves assessing your life goals and then creating a financial plan that will help you achieve them.

Let’s take a closer look at the difference between tax planning and financial planning based upon some important parameters.

PARAMETERS

TAX PLANNING

FINANCIAL PLANNING

Objective

Tax planning is aimed at reducing your tax liability by helping you avail tax benefits allowed under the relevant sections of the Income Tax Act, 1963. As an efficient tax planner, you should always be keen on reducing your tax burden in the short-term. Planning your taxes beyond the current year can often be a redundant exercise as the Indian Government announces a new budget each year.

The primary objective of financial planning is to help you create and manage wealth in order to eventually meet your financial goals in the long run. An efficient financial planner should look ahead and plan for short-term as well as long-term financial goals.

Scope

The scope of tax planning is solely limited to helping you receive the maximum possible tax benefits each successive year. So, even if you employ the services of a professional tax planner, all they can help you with is filing efficient tax returns and helping you invest in tax-free avenues.

In contrast, financial planning involves a more holistic approach to managing your wealth. It often covers various aspects such as cash flow management, asset management, insurance, investments, retirement planning, and even tax planning.

Benefits

Apart from increasing your overall tax efficiency, efficient tax planning can also enable you to budget and manage your taxes at the beginning of each fiscal year instead of scrambling to file optimum tax returns at the eleventh hour.

Financial planning helps increase your savings by planning and tracking your expenditures. It can also facilitate an overall better standard of living by helping you utilize your money in the best manner possible. By planning your finances well in advance, you can create an emergency fund to take you through any unforeseen financial obstacles in the future. In this way, financial planning can also help you attain some peace of mind knowing that your finances are secure at all times.

 

Conclusion

In the end, tax planning is indeed important, but it should be in sync with your financial planning efforts as a whole. The best way to achieve your life goals is to manage your finances optimally while remaining tax-efficient at the same time.  

To streamline your financial planning, check out the various financial products for an individual from YES BANK. You can also check out the various tax solutions for your tax planning from YES BANK’s YES Tax Solutions.

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