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What Is Tax Evasion, Tax Avoidance And Tax Planning?


While dealing with financial terms many time you might heard some unknown terms of which meaning you might not know or you are not fully aware of it. You might have heard term like Tax Evasion, Tax Planning and tax Avoidance. Today I am going to tell you meaning of these. So lets start

Tax Evasion

When any individual make false claims to reduces his total income or by not providing any information regarding his total income then its called Tax Evasion. By doing so his tax liability is reduced which will result that he has to pay less tax.

Tax Evasion is an illegal act and its also an immoral, anti-social and anti-national act. To deal with such kind of activities, Direct Tax Laws has made strict provisions which will results in heavy penalties or even tax evaders can be put behind the bars.

How can an person reduces his taxable income :-

  • By not recording sale made by him,
  • Claiming bad debts or losses which never occurred,
  • Making personal expenses as business expenses,
  • Claiming false donation made under different sections like u/s 80G,
  • By not showing capital gain,
  • By not showing income from benami transaction,
  • By showing excessive salary paid,

tax planning


Tax Avoidance

Tax avoidance means reducing your tax liability without breaking any law. In this an individual look for loopholes in the law and make most of those loopholes to reduce the tax liability.

In simple word you can say that Tax Avoidance is a legal means to reduce your tax liability by taking advantage of lack of provision in the law and it will result in less tax paid by you. By using Tax Avoidance you satisfy all provisions of law but in same time you reduce your tax liability too.

In tax avoidance no penalties or such things is imposed on you as you are not breaking any law you just using loopholes in laws. However now legislature has added an provision in Direct Tax laws to check tax avoidance.

Tax Planning

Tax planning is a way by which you arrange your financial affairs in such a way that without breaking up any law you take full advantage of all Exemptions, Deductions, Rebate and Reliefs allowed by law so that your tax liability will be reduced.

Actually Government provide deductions, exemptions, reliefs or rebate for the benefits of economy and society. Like if you made donation to Scientific research [u/s 8GGA] then its good for Society and economy too.

Objective of Tax planning :-

  • Claim Deductions under sections 80C to 80U,
  • It will reduce your tax liability and you have to pay less tax,
  • Minimize the war between Tax Payer and Tax Administrator, Tax payer wants to pay less tax and Tax Administrator wants to extract most of the tax, by using Tax Planning this war is minimized as tax payer is using all legal ways to reduce tax liability,
  • Makes Investment :- By tax planning, an Tax payer will invest his money in some good funds which will result in productive returns for tax payer and transfer money to government for investment too.
  • Helps in growth of economy,
  • Makes society grow,
  • Money saved by you will result in investment which will result in employment generation.

Importance Of Tax planning :-

For Tax payer :-

Tax payer has to pay less tax by using tax planning because he is using all available exemptions, deductions,reliefs, and rebates. All is done within the boundaries of Law.

For Government :-

To use deduction or exemptions you have to invest money in some scheme which results that you money is transferred back to government and then they can use it to develop the country.

For Society :-

If government invest or start any new project or even tax payer invest his saved money so he will generate employment, Government can invest in better projects which develops society.


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