Tax Avoidance

Discover how to legally minimise your tax bill.
Tax Avoidance
3 min
23-March-2024

Taxes are a necessary part of a functioning society. However, finding legal ways to minimise your tax burden is a smart and responsible practice. Unlike tax evasion, which is illegal, tax avoidance uses legal strategies to lower your tax bill. This guide explores tax avoidance in India, providing ways to save on taxes while staying within the law.

Fundamental difference between tax evasion and tax avoidance

Tax evasion: Tax evasion is not just wrong, it is illegal. It involves deliberately hiding income, providing false information to lower your tax bill. Tax evasion might have serious consequences, such as hefty fines, possible imprisonment, and damage to your reputation.

Let us understand this with an example.

A salaried software developer earns Rs. 8,00,000 annually from his primary job. He also undertakes freelance projects on the side, earning Rs. 2,00,000. Some clients propose cash payments at a slightly reduced rate, and the developer agrees. However, he has never reported this additional income and pays taxes only on Rs. 8,00,000. This practice is known as tax evasion, which in this instance, entailed the intentional hiding of income.

Tax avoidance: Unlike tax evasion, which is illegal tax avoidance is legal and involves strategically using deductions, exemptions, investments, and business structures to minimise your taxes. For example:

A salaried individual with an annual income of Rs. 10,00,000 contributes Rs. 1,50,000 to their PPF and Rs. 50,000 to their NPS. They claim deductions under Section 80C and 80CCD(1B) of the Income Tax Act. And now they will pay tax on Rs. 8,00,000 instead of the original Rs. 10,00,000.

This is a perfect example of legal tax avoidance. Governments frequently incentivise such behaviors by providing tax-favored savings opportunities and deductions designed to support long-term investment and retirement preparation.

Common tax avoidance strategies in India

1. Using deductions

  • Section 80C: It offers deductions of up to Rs. 1.5 lakh p.a. for investments in avenues like:
    • Public Provident Fund (PPF)
    • Life Insurance Premiums
    • Equity Linked Savings Schemes (ELSS)
    • Employee Provident Fund (EPF)
  • Section 80D: Medical insurance premiums for yourself, your family, and your parents qualify for deductions under this section.
  • Section 80CCD(1B): Additional contributions you make towards the National Pension System (NPS) are eligible for deduction.
  • Home loan interest: You can claim a deduction for the interest paid on your home loan under Section 24(b)
  • Section 80G: Deductions on donations made to specified charitable trust or institution and certain approved funds.

2. Structuring your salary

Here are a few key allowances to consider:

  • House rent allowance (HRA): If you are a salaried employee living in rented accommodation, you may be eligible for a partial or full tax exemption under Section 10(13A) of the Income Tax Act
  • Leave travel allowance (LTA): LTA offers exemptions for travel expenses incurred on domestic trips while on leave or after retirement.
  • Update: You cannot claim the leave travel allowance (LTA) tax exemption if you opt for the new tax regime.
  • Other allowances: Provisions like transport allowance, food coupons, and certain special allowances might enjoy certain tax benefits under Indian tax laws.

3. Business-specific tax avoidance strategies

  • Depreciation: Claiming depreciation on assets over their useful life is a legitimate way to reduce taxable profits.
  • Research and development (R&D): Businesses that invest in qualified R&D activities may avail of weighted deductions or other tax benefits.
  • Strategic business structuring: Different business structures (sole proprietorship, partnership, or company) come with different tax implications. To optimise your taxes, strategically choose the most favorable structure for your business.
  • Special economic zones (SEZs): Companies operating within SEZs may be eligible for tax holidays, exemptions, or special tax rates.

Tip: Apart from investing in tax-saving options, you can consider investing in fixed deposits to diversify your portfolio. FDs offer a reliable source of income with guaranteed returns, as they are not subject to market fluctuations. Bajaj Finance, India's leading NBFC, provides competitive interest rates on their FD, up to 8.85% p.a. for senior citizens and up to 8.60% p.a. for customers below the age of 60. Keep in mind that the interest earned on FDs is taxable as per your income tax slab.

Conclusion

In this complex tax system, it is wise to explore legal ways to minimise your tax burden. Responsible tax planning isn't just about saving money –it is about being a good citizen. Paying your fair share ensures a healthy, thriving, and sustainable society.

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.