Difference between Tax Planning, Tax Avoidance & Tax Evasion!

India is a developing economy and to become the superpower what we are touted to become our government needs to continuously fund various activities and a major part these funds comes in the form of tax collections. Hence, the government under its power through Constitution levies the taxes  in mainly two forms i.e. Direct Tax and Indirect Tax. In this book, we are going to understand Income Tax, a part of direct tax and how it impacts the lives of a salaried person.

As we all know, Income Tax has never been a pleasing term for any Taxpayer, after all who wants to share a pie from his hard earned income with anyone? So, though not all but may citizens are reluctant to pay taxes and always keep finding ways to avoid it. While doing that, they may end up opting for ways which can lead to following unlawful or illegal ways of savings taxes. We can divide these tax saving activities to reduce tax liability in to three different terms i.e. Tax Planning, Tax Avoidance and Tax Evasion. Let us understand the difference between these three terms:- 

Though the purpose of doing any of these exercise is to reduce taxes and quite often these terms are used as synonym but all the three terms are different and should not be used in context to one another. There is always a great confusion in deciding what can be termed as tax planning, avoidance or evasion, so let us demystify the same as follows:-
 
Tax Planning

In a very simple term, tax planning is an art to reduce your tax outgo by making sure that all the applicable provisions of our income tax act as designed to reduce your tax liability has been availed of. Tax planning ensures the optimal minimization of the tax liability within the law frame and it also takes care of your short and long term financial planning. Hence it is a continuous process as followed with a detailed analysis of your current financial position and future financial goals with a blend of Tax saving perspective. There are many tax provisions like section 80C, 80D or claiming the benefits of HRA, LTA claims etc. It is highly advisable to do your tax planning so that you can save every penny possible as allowed within the framework of our law.
 
Tax avoidance

Tax avoidance is an exercise undertaken by the taxpayers to use the loopholes of our tax laws for reducing his or her tax liability. Though the entire exercise is always within the framework of our law and is legal but it kills the very basic purpose & spirit behind making any law. There is hardly any difference between tax planning and tax avoidance except the fact that tax avoidance is not what our government expect us to do follow and they keep plugging the loopholes from time to time and every taxpayer is advised to refrain from doing this. 
 
Tax Evasion

Tax Evasion happens, when any person tries to reduce his taxes either by increasing the amount of available deductions, benefits or exemptions or decreasing their income by under reporting. It is completely illegal and anti-national act. To deal with such activities, Income Tax Law have made strict provisions imposing heavy penalties or even put the tax evaders behind the bars.
 
How to avoid this dilemma of doing your tax planning, the legal way?

As stated above, always resort to saving your taxes by doing the tax planning and in order to do that, you need to be aware of the various Exemptions, Deductions, Rebates and Reliefs as provided under income tax act. To make the most of it, you need to arrange your financial transactions and affairs in such a manner that without overruling any of the provisions of our law, you still maximise various benefits.

Rishabh Parakh is a Chartered Accountant and the Chief Gardener & Founder Director of Money Plant Consulting, a leading Tax & Investment Planning Advisory Service Provider. He also runs a personal finance blog called “Mango Investor” aka AAM Niveshak at www.mangoinvestor.com.