Who likes to pay taxes? Almost all assessees try to escape paying tax, through various means. When it comes to tax saving, people use two methods: they are tax avoidance and tax evasion. Both methods are completely different from each other. While tax avoidance is legal, tax evasion is not.
In tax avoidance, people use legal ways to modify their financial situation, and lower the amount of income tax owed. This is usually done by claiming permissible tax deductions.
On the other hand, tax evasion is illegal, where people try to reduce the tax liability, either by under-reporting income or inflating expenses. Tax evasion is an offense and people found evading taxes, could face criminal charges, prosecution and substantial penalties.
Tax avoidance refers to a situation, where taxpayers reduce the amount of tax to be paid to the Government, by making use of tax deductions and exemptions. It is a legal way of reducing the tax burden. This method helps in reducing tax liability, without the breach of any laws.
1. Utilizing HRA benefit
2. Making use of deductions available under Section 80C, 80CCC, 80CCD, 80D, 80DD and so on.
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Tax evasion refers to the illegal act of escaping taxes. It is a crime as people intentionally underpay or hide certain income, to save tax. If the assessee is found evading taxes, the income tax department has all the right to penalize him.
1. Misreporting or underreporting of income
2. Disclosing unreal income or inflating expenses for deductions.
3. Showing personal expenses as business expenses
4. Hiding interest received from foreign accounts
5. Hiding money or such illegal acts
6. Using fake documents to claim tax exemptions
7. Hiding wealth in foreign countries and tax havens
1. In case of tax avoidance, payment of taxes is best avoided by complying with the provisions of the law. In tax evasion, payment of taxes is avoided through illegal means.
2. Tax avoidance is completely legal, whereas Tax Evasion is a criminal offense.
3. Tax avoidance is done by taking advantage of loopholes in the law. On the other hand, tax evasion is undertaken by employing unfair means.
4. The tax avoidance arrangement is done before the occurrence of a tax liability. But in case of tax evasion, the arrangements are made after the occurrence of a tax liability.
5. The outcome of tax avoidance is the postponement of tax. On the other hand, if a person evades tax, strict action will be taken against him.