Financial Planning vs Tax planning: Understanding the Difference

9-July-2021 |

Good financial planning leads to money savings. Similarly, good tax planning allows us to invest appropriately in tax saving schemes to save money and use it judiciously in our budgets. But most people do not understand the difference between the two. Understanding their significance and having a proper plan will lead to a well thought out a savings plan.

What is financial planning?

Making a budget that ensures that after catering to the essentials, money is saved and invested in financial instruments and funds to generate future revenue. Budgeting and allocating funds are the essential functions of financial planning.

What are the advantages of financial planning?

Investing, saving and insurance premium payments are also part of a proper financial plan. Saving is the first component as it ensures the money is tucked away for emergencies. But since most people succumb to their indulgences and spend extra, they end up draining their savings account. Hence, a good insurance and savings plan must be put in place. This essentially means that most of the saved money will be paid as a premium towards the insurance coverage. Insurance policy further mitigates the fears of the uncertainty of the future.

If one wants to get better returns on their savings, they can do so through investing. An individual has many avenues where they can put their money. They buy shares, debentures, gold, commodities and even various income insurance policies. The magic of compounding can be experienced only through investing.

What is tax planning?

You must be wondering how tax planning is any different from financial planning. Well, tax planning ensures that most of what you earn stays in your pocket. Without proper tax planning, one might end up paying more tax than necessary.

What is the Importance of tax planning?

You should know that the returns that you make from your investments are taxed. Proper tax planning includes being aware of the tax slabs and the various avenues where you can invest to save taxes. For example, you can avail of a deduction of up to ₹1,50,000 by paying premiums on your insurance and contributing towards the NPS and other provident fund schemes. Under Section 80D, you can get a deduction for the premiums you pay for the medical insurance of yourself and your family.

Similarly, when you invest in the share market, you are not charged any tax, but you are charged a minimum of 20% on the gains you make when you withdraw the money from the share market and put it into your account. But this can be sidestepped if one chooses to invest in government bonds and other government schemes. Additionally, one can use Unit Linked Insurance Plans (ULIPs) for equity investments to ensure tax-free investing and added life cover. Therefore, it is crucial that you are aware of the changes in the tax laws of our country.  


Are tax planning and financial planning similar?

No, tax planning and financial planning are not similar. But one cannot be done without the other. Due to our annual budgets, the tax laws are changed on a regular basis. So, if you are not aware of the changes, you might lose money through improper financial planning.

Importance of tax planning while setting financial planning goals.

  • Investment planning

    As discussed earlier, by learning about the tax laws, you can find avenues where you can invest your money without paying significant taxes. If you are a business owner, things become even easier as you can account for business expenses and save a lot of tax.


  • Saving money through gifts

    Yes, you read that right. You can save on tax liability via gifting. You can avail of a tax deduction of up to ₹50,000 if you are giving cash as a gift to your relatives (subject to fulfilment of conditions). Now you would not have to worry about getting something expensive for your spouse, provided you made provisions in your financial plans.


  • Planning for an early retirement

    Most of the young people are investing a chunk of their pay-checks in high rewarding avenues. This is done with the sole motive of early retirement. You do not have to wait till you are in your late 50s to think about retirement. If you have good insurance and a savings plan, you can start thinking about retirement as early as in your 40s. You can then pursue other things that bring you happiness.

Importance of an insurance policy in tax and financial planning.
  • Financial Planning:

    Having a good insurance policy is essential for financial planning. This is mainly because insurance protects you against unforeseen financial mishaps. It is prudent to have more than one insurance or a single policy that provides wider coverage. If something were to happen to the policyholder, then they will not have to worry about the financial future of their family. The reimbursement from the insurance policy will take care of the repayment of the loan, children’s education, their marriages, and other essential expenses.

    Nowadays, you are also getting a policy that can act as both an insurance and savings plan. These insurance policies usually guarantee1 the return of the premiums after the maturity period.


  • Tax planning:

    As mentioned earlier, you can get deductions by paying your premiums on time. This makes the insurance policy a tax-saving tool. Similarly, while the lump sum money is reimbursed to the policyholder after the maturity or expiry of the insurance policy, the money is not taxed. But if the lump sum amount crosses a certain threshold, then the individual might have to pay a nominal amount for tax.(Subject to conditions in section 10(10D) of Income Tax Act.)

Tata AIA Life Insurance ULIPs

Unit Linked Insurance Plans from Tata AIA Life Insurance ensure that the policyholders get the return on their investment that is comparable to the returns from the market. As per the tax* laws, the individual will also get tax* benefits and deductions. It also allows you to choose your own investments. Not only that, but the Tata AIA claim ratio and the reliability of the Tata Brand in India make insurance and savings plans from Tata AIA Life highly beneficial.

Final Words

You should know, you are not expected to be a know-it-all when it comes to tax* and financial planning. You can always hire a financial advisor who will guide you on how to make the best plan that ensures a comfortable future.

You can get in touch with our insurance advisors to understand more about our life insurance plans for your financial and tax* planning.


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