Tax Evasion vs. Tax Avoidance

Understand difference between tax evasion and tax avoidance.
Tax evasion vs avoidance
3 min
23-March-2024

Paying taxes is rarely anyone's favorite thing, but it is a way we all contribute to our communities and fund essential services. However, there is a critical difference between finding legal ways to lower your tax bill and outright cheating the system. Let us understand what tax evasion is and how it differs from tax avoidance and discover strategies to save on taxes within the law.

What is tax evasion?

Tax evasion is essentially cheating the system when it comes to paying taxes. Evaders try to trick the government, so they do not have to pay the money they owe. This could involve hiding income, creating fake expenses, or parking their money overseas.

Examples of tax evasion

  1. A person earns significant income from freelance work or a small business on the side but does not report any income of it on their tax return.
  2. A business owner claims lavish meals, excessive travel, or personal purchases as business expenses to reduce their taxable income.
  3. An individual hides money in a secret offshore bank account to evade taxes.
  4. Participating in the black market, whether smuggling goods to avoid import taxes or getting paid in cash to dodge income reporting.

What is tax avoidance?

Tax avoidance refers to the use of legal strategies within the existing tax laws to reduce the amount of tax an individual or business owes. It involves taking advantage of deductions, credits, and exemptions to reduce tax liability without breaking any rules. Unlike tax evasion, which is illegal, tax avoidance operates within the boundaries of the law.

Examples of tax avoidance

  • Contributing to certain financial products like PPF or investments in ELSS mutual funds, can lower your taxable income under Section 80C.
  • Claim deductions for eligible costs like interest on home loan, medical insurance premiums, tuition fees, etc.
  • Contributions to approved charitable trust or institution offer tax deductions. Some political donations may also qualify for tax benefits.

Difference between tax evasion and tax avoidance

Criteria Tax evasion Tax avoidance
Definition Illegally hiding or misrepresenting income to reduce tax liability. Using legal strategies within tax regulations to minimise tax liability.
Legality Illegal, as it violates tax laws. Legal, as it operates within the bounds of tax laws.
Methods Reporting less income, claiming false deductions, hiding assets offshore, not filing tax returns. Taking advantage of legal deductions, credits, exemptions.
Consequences Hefty fines, imprisonment, asset seizure, reputational damage. Generally, no negative consequences if done correctly, though aggressive schemes might face scrutiny.


What are the ways to save taxes?

There's no single way to save taxes that works for everyone. The most effective approach depends on your financial situation, income sources, and overall objectives. However, here is a breakdown of common strategies and factors to consider for optimal tax planning:

Common tax saving methods in India

  • Deductions: Thoroughly explore all deductions you are eligible for under various sections of the Income Tax Act (1961). Popular options include:
    • Section 80C: PPF contributions, life insurance premiums, tuition fees, etc.
    • Section 80D: Medical insurance premiums
    • Home loan interest payments
    • Charitable donations (to eligible trust or institution)
  • Structure your salary: Work with your HR, to explore, if certain components of your salary can be restructured to take advantage of allowances and reduce taxable income (e.g., house rent allowance or leave travel allowance).
  • Business-specific strategies: Beyond standard tax avoidance techniques, businesses have additional ways to reduce their tax burden. These include deductions for business expenses, deduction on depreciation of assets and tax benefits for investing in research and development.

Key factors to consider

  • Your income level: Some tax-saving schemes have upper limits on the investment amount or income level that qualifies.
  • Risk tolerance: Different tax-saving investments carry different degrees of risk. It is important to choose options that match your individual risk tolerance.
  • Financial goals: Are you focusing on retirement savings, child's education, or short-term tax reductions? Select strategies that fit your broader plans.

Fixed deposits (FDs) provide a secure way to earn interest on your savings. Though the interest is taxable, the stability, predictability, and attractive returns make FDs a smart choice. Bajaj Finance FD offer competitive rates up to 8.85% p.a. and are trusted by over 5 lakh customers.

Conclusion

Taxes are complex, and staying on the right side of the law requires both knowledge and careful planning. Whether you are an individual or a business owner, taking full advantage of legal tax savings opportunities is smart way to minimise your tax liability.

Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.