Tax Evasion and Tax Avoidance are the two methods to minimize payment of taxes by taxpayers. The two words can sound confusing at times. Let us understand the two in simple terms and see how they are different in process.
What is Tax Evasion?
Tax Evasion is an illegal way to minimize tax liability by deliberately deceiving the authorities. Evaders try to trick the government by illegal practices such as making false statements, hiding relevant documents, not maintaining complete records of the transactions etc.
Some of the ways used for tax evasion are:
- Earning significant income from side business or freelance work and not reporting about it.
- Claiming personal expenses and travels as business expenses.
- Participating in Black market to avoid import taxes.
- Submitting fraudulent tax returns.
These are some of the ways used to deceive tax authorities to evade paying taxes which is also punishable by law.
What is Tax Avoidance?
Tax Avoidance on the other hand refers to the use of legal strategies within the tax laws to reduce the taxable amount for an individual or business. It involves taking advantage of deductions, tax-advantaged accounts like PPF or NPS, credits and exemptions all within the boundaries of the law.
Some of the tax avoidance strategies are:
- Contribution towards financial products like PPF or ELSS mutual funds can lower taxable income under Section 80C.
- Claim deductions for interest on home loan, medical insurance, tuition fee etc.
- Contribution to approved charitable trusts or political donation.
Although tax avoidance is legal, it is not highly advisable as it involves taking unfair advantage of the shortcomings in the tax rules.
The basic differences between tax evasion and tax deduction can be summed up as:
| Criteria | Tax Evasion | Tax Avoidance |
| Definition | Using illegal and unlawful methods to reduce tax liability | Using legal strategies within the law to minimize tax liability |
| Legality | It is illegal and objectionable and is punishable by law | It is legal and within the boundaries of tax laws |
| Methods | Claiming false deductions, hiding actual income, misinterpreting statements, not filing tax returns | Taking advantage of deductions, credits and exemptions under various sections of the Income tax law. |
| Consequences | Punishment, fines, imprisonment etc. | No negative consequences if done correctly however in some cases might also attract scrutiny. |
Many users use the two terms interchangeably but they are worlds apart in their meaning and treatment. It is always better to know what is legal and what is not in the world of taxation. There is a fine line between the two and it is advisable to walk on the right side to avoid any negative consequences.
Which is the best way to save taxes?
With knowledge, careful planning and taking full advantage of legal tax saving opportunities will help to pay less tax in the long run. So, finding legitimate techniques to reduce the tax burden is a more practical and smart choice.
Conclusion
Every taxpayer in India should pay taxes as it is the main source of funds for the government. You can take help from a financial advisor to understand the tax saving techniques and plan accordingly. Always remember that tax evasion is a punishable offence. When attempting to evade tax lawfully, make sure you don’t cross the line from tax avoidance to evasion.