Difference Between Tax Planning and Tax Management

Many of us, feel that tax-related strategies are only for big businesses or the super-rich. But, as women managing households, careers, and financial independence, understanding tax planning in wealth management is a powerful tool for wealth creation. Let’s break down the difference between tax planning and tax management in a way that’s simple, practical, and relevant for us all.

What is Tax Planning?

Tax planning is the process of structuring  your financial affairs to reduce your tax liabilities in the future. It’s a forward-thinking strategy that focuses on lowering your tax burden legally and efficiently. Consider  it as a roadmap that helps you save money while ensuring you stay compliant with tax laws.

In India, you currently have the option to choose between the old and new tax regimes, and understanding the differences is key to effective tax planning.

Old Tax Regime:

Under the old tax regime, you can claim deductions and exemptions such as:

• A standard deduction of ₹50,000.
• HRA (House Rent Allowance).
• LTA (Leave Travel Allowance).
• Deductions under Sections 80C (for investments), 80D (for medical insurance premiums), and others.

These deductions allow you to reduce your taxable income significantly. However, this regime has higher tax rates compared to the new regime.

New Tax Regime:

The new tax regime simplifies the tax filing process with lower tax rates, but it removes the majority of exemptions and deductions (over 70 of them, including HRA, LTA, and 80C). However, there are a few benefits, such as:

• A standard deduction of ₹75,000(increased from ₹50,000). 
• Deductions on home loan interest for the let-out property.
• Employer’s contribution to NPS (National Pension Scheme).

The new regime is more suited for individuals who don’t have many deductions or exemptions.

Choosing Between the Old vs New Tax Regime for FY 2024-25*

Choosing between the old and new tax regimes can be simplified based on your total deductions. For example:

• When total deductions are ₹1.5 lakh or less: The new tax regime is typically more beneficial due to lower tax rates.
• When total deductions exceed ₹3.75 lakh: The old tax regime is likely better, as the higher deductions will significantly reduce your taxable income.

However, one should calculate tax under both regimes and then decide which would benefit them and align with their financial goal.

Remember, the new tax regime will be the default option from FY 2023-24, however, the old tax regime can be opted if required.

What is Tax Management?

Tax management, on the other hand, is all about obedience. It is a reactive strategy because it focuses on handling taxes after the income is earned. It involves actions like filing tax returns, ensuring compliance with tax laws, and paying the correct amount of tax on time. 

In other words, it deals with managing taxes based on what has already happened financially, rather than planning ahead to minimize tax liability.

Example:

If you fail to file your ITR by July 31, you could face penalties of up to ₹10,000, depending on the delay. Proper tax management ensures you avoid such unnecessary costs.

Difference Between Tax Planning and Tax Management

Aspect	Tax Planning	Tax Management
Objective	Reduce tax liability legally.	Ensure compliance with tax laws.
Focus	Proactive: Choosing investments, regimes, etc.	Reactive: Meeting deadlines, filing returns.
Timing	Involves planning actions before or during the year.	Involves actions taken after the financial year to settle obligations.

A Case Study: Priya’s Simple Tax Journey

Priya, a 35-year-old working mom earning ₹10,00,000 annually, decided to take charge of her taxes. With the help of Lxme’s tools, she carefully compared the old and new tax regimes. Priya discovered that the new regime’s lower tax rates were more suitable for her financial situation.

Her total deductions were ₹2.4 lakhs(1.5 lakhs-80C, 25000-80D,15000-80G and 50000-80CCD), so the new tax regime was the smarter choice.

Tax payable under the old regime: ₹56,680
Tax payable under the new regime: ₹44,200

By opting for the new regime and filing her returns on time, Priya saved ₹12,000 in taxes and avoided a ₹5,000 penalty for late filing. This decision made Priya feel more confident and stress-free, showing how easy tax planning and management can be when approached strategically.

Conclusion

For a woman trying for financial independence, both tax planning and tax management are essential. Tax planning in wealth management helps you grow your money, while tax management ensures you’re not losing money to fines or late payments. Together, they create a balanced approach to handling taxes.

At Lxme, we’re here to support women on their financial journeys. Explore our tools and resources to simplify your taxes and grow your wealth.

Got questions or tips about managing taxes? Share them in the comments below and let’s empower each other!

Also, check out empowering and strong female entrepreneurs in India 

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