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Published on:

July 11, 2024

Shaaransh Sharma

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Difference Between Tax Planning and Tax Evasion

Understanding the difference between tax planning and tax evasion is super important. These two terms might seem similar at first glance, but they actually represent very different actions with distinct legal consequences. Tax planning is all about the steps you can take to minimize your tax liability while staying within the boundaries of the law. On the flip side, tax evasion involves deliberate deceit and is illegal. So, while tax planning keeps you on the right side of the law, tax evasion is a definite no-go.

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What is Tax Planning?

The lawful way is to analyze and arrange the financial situation so that less of it falls under the "taxable income." There is no law against reducing tax liabilities this way, and, in the normal course of things, a lot of advisers and taxpayers could benefit from understanding the law and doing tax planning. When we don't properly plan and utilize the tax law in this way, we tend to wind up with more tax burden than our fellow citizens, and not even the Internal Revenue Service generally wants to be seen as a citizen hurter.

Tax Planning in India

In India, tax planning can be performed by individuals, businesses, and organizations. The Income Tax Act, of 1961, provides numerous avenues for tax planning. Here are some common methods:

1. Investments in Tax-Saving Instruments

Many financial instruments, like National Savings Certificates, Equity-Linked Savings Schemes, and fixed deposits (kept for a minimum of five years), qualify for tax savings. The Public Provident Fund, as well, is counted in this category, making it an attractive investment.

2. Utilizing Section 80C

Under Section 80C, a taxpayer gets the opportunity to claim a deduction for particular investments and expenses up to ₹1.5 lakh in a year. Life insurance premiums, tuition fees, and home loan principal repayments are some examples.

3. Health Insurance Premiums

Premia paid on health insurance policies for oneself, spouse, children, and parents are eligible for deductions from income up to ₹50,000 per year under Section 80D (₹25,000 for policies held in parents' names, who may be senior citizens).

4. Home Loans

When you take out a mortgage to buy or build a house, you pay a lot of interest on it. This interest can be claimed as a deduction from your income, which can save you a lot of money. You can save from up to ₹2 lakh in taxes each year for the interest on a self-occupied property under Section 80C of the Income Tax laws.

5. HRA and LTA

The exemptions provided under House Rent Allowance (HRA) and Leave Travel Allowance (LTA) can be sought by salaried employees (within the specified limits).

Tax Planning Examples

Ravi, an employee, puts ₹100,000 in ELSS funds. This is a Section 80C tax deduction that lowers his taxable earnings by ₹100,000. Seema, meanwhile, has taken a mortgage on her house. She deducts ₹200,000 in loan interest under Section 24(b) and ₹150,000 in principal repayment under Section 80C.

What do you mean by tax evasion?

Manipulation of information to avoid tax liability is underhanded, plain and simple. And despite the bad rap that it has, it enjoys a good deal of popularity as the go-to option for keeping the money that taxpayers or their representatives figure shouldn't be paid in taxes. Not only does it seem unsavory, but let's also call it what it is: illegal.

Tax Evasion Examples

Underreporting Income

Some business operators underreport the amount of sales they make. They hope to slide just a little past the eyes of the tax authorities so that they will pay less in taxes.

Inflating Deductions

Some individuals claim that they incurred more expenses and paid more money out in cash than they did. They inflate these deductions and take the position, very optimistically, that they're just getting money back that they wouldn't have had to pay in the first place if the deduction were allowed.

Cash Transactions

Professionals in all sorts of fields sometimes take payment in cash and don't report it.

Offshore Accounts

Certain corporations and individuals hide money in accounts in countries outside India, where they don't have to pay Indians. taxes.

Tax Evasion vs. Tax Planning

When it comes down to it, the main contrast between tax planning and tax evasion emerges from their respect for the law and their sense of ethics. Tax planning is a completely aboveboard effort to minimize tax bills. Taxpayers are allowed to make omissions and exaggerations provided they stay within the court-sanctioned fences. However, carrying out illegal practices, like the ones we mentioned above to avoid paying taxes is called tax evasion.

Difference Between Tax Planning and Tax Evasion

1. Tax planning completely legal and even recommended by tax authorities. However, evading taxes is illegal and can lead to legal problems.

2. Tax planning means using strategies like deductions and investments to reduce the amount of money you are obligated to pay in taxes.

However, evading taxes is the act of simply not paying them by lying or inaaccurately reporting their income.

3. It is generally the goal of taxpayers to plan for their tax liability in such a way as to save money.

4. Tax planning keeps us compliant with the law because, after all, it is our plan for how much we owe in taxes and when we will pay them.

In contrast, tax evasion means finding a way to keep from getting caught, to keep the authorities from realizing we owe taxes, and notifying us (through legal means of letters, notices, etc.) that we must pay.

Consequences of Tax Evasion in India

In the country of India, they take tax evasion very seriously. Our Income Tax Department employs stringent measures and penalties to handle these cases. Here are some of the things that can happen if you get caught:

Penalties

Tax evaders are made to pay severe financial punishments, the amount being some multiple of the tax originally evaded (see 2 below for performance numbers).

Prosecution

Criminal charges are undertaken in many cases of tax evasion, which can lead to fines and, in serious cases, imprisonment from three months to seven years (see 3 for details).

Interest

If you're sentenced to pay a fine in a tax evasion case, after a while, you're also liable to pay interest on that tax evaded amount.

Damaged Reputation

One major consequence of tax evasion is that it can harm an individual's or a company's reputation. And reputation, as we all know, matters enormously.

Relationships and trust are the stuff of life; they're also the stuff of business. When a business or an individual is reputed to be an evader of tax and is seen as not paying their fair share, that's the kind of potential reputational harm that can throw off the world in which we live.

The government’s main goal with the tax collected is development of the nation by funding a variety of programs and service.

What, then, is the purpose of paying taxes? In a word, compliance. When it comes to taxes, the most fundamental duty a taxpayer has is to pay the correct amount of tax on time.

Aspect	Tax Planning	Tax Evasion
Legality	It's totally legal and even encouraged by the government.	It's illegal and can get you in serious trouble.
Intent	The goal is to legally reduce your tax bill.	The goal is to avoid paying taxes, but it's done illegally.
Methods Used	You use investments, deductions, and credits.	It involves lying about your income, inflating deductions, or hiding money.
Government View	The government supports it and provides guidelines.	The government actively looks for and punishes it.
Consequences	You save money on taxes legally and stay compliant.	You risk fines, penalties, interest, jail time, and a ruined reputation.
Ethics	It's ethical and transparent.	It's unethical and deceptive.
Risk	Very low, as long as you follow the rules.	Very high, with major legal and financial risks.
Examples	Investing in Public Provident Fund (PPF) or claiming Section 80C deductions.	Hiding money in offshore accounts or not reporting cash payments.
Reputation Impact	Positive, showing you're financially responsible.	Negative, harming your personal and business relationships.
Compliance Requirement	You follow all tax laws and regulations.	You're breaking tax laws and regulations.

Conclusion

Taxpayers need to know the difference between tax planning and tax evasion.

Tax planning is completely within the law and acknowledged by the Government. It is evaluated not just for its legalness or appearance of legality but also for its economic merit.
Tax planning often requires a taxpayer to make some economic decisions over others to reduce taxes.

Tax evasion, though closely resembling tax planning in a physical sense, tends to push the envelope more and more, potentially toward the employment of illegal practices.

Indian taxpayers should make intelligent decisions when it comes to taxes.

They should know how to make the best use of the provisions of the Income Tax Act for different situations. Indian taxpayers should avoid indulging in any form of tax evasion and instead focus on proper tax planning that ensures they pay no more tax than they need to.

Remember, tax planning is legal; tax evasion isn't. The former is your right. The latter is your liability if you're found out.

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FAQS

Q1. What's the difference between tax planning and tax evasion?

You can legally minimize your taxes using investments and deductions; this practice is called tax planning. Tax evasion, on the other hand, is illegal. It is an act whereby you intentionally choose not to pay taxes that you are required to pay, or you reduce the amount of tax you owe by hiding income from the government or by simply not reporting it.

Q2: How can people in India do tax planning?

Investing in PPF and ELSS is the most common tax planning method for Indians. We can also take advantage of Section 80C, health insurance and home loan interest for tax savings.

Q3. What are common ways people evade taxes?

Tax evaders avoid paying taxes by either lying and claiming more deductions than eligible for, or inaccurately file their returns. The bigger players can also find ways to move money overseas to avoid paying taxes in India.

Q4. What happens if someone gets caught evading taxes in India?

Penalties loom large for those found guilty of tax evasion. Evasion can lead to jail time, a damaged reputation, and personal bankruptcy.

Q5: Why should I understand tax planning?

You can use it to create legal tax reductions, to make sure you adhere to the tax laws, and to help keep you out of trouble as far as evasion is concerned.