Tax Planning V/S Tax Avoidance V/S Tax Evasion
Though the words - Tax Planning, Tax Avoidance and Tax Evasion - sound connected, yet there is significant difference in the three.
Tax Planning is the way to reduce the tax liability by availing the exemptions and deductions mentioned explicitly in the Income Tax Act and Rules. Planning one's income and expenses so as to get the benefit of various exemptions and deductions is called Tax Planning. Investments in PPF, NSC, LICI, etc are eligible for deductions. Tax Payers are advised to make full use of the Tax Planning opportunities.
Tax Avoidance is done when the tax payer takes advantage of the loopholes in the tax regime in order to reduce the tax liability. Tax Avoidance is also not illegal.
There is a very thin line of difference between Tax Planning and Tax Avoidance. Where in Tax Planning, a Tax Payer is making use of the opportunities provided explicitly by the Government, in Tax Avoidance the Tax Payer makes use of the loopholes of the Tax Laws. However both the ways of reduction of Tax Burden are cent percent legal.
Tax Evasion involves illegally paying lower taxes than one is supposed to pay. This can be done by understating the income or overstating the expenses. People tend to transact in cash so as to avoid the true maintenance of books of accounts. It may cause heavy penalty and legal actions against the assessee. This practice of Tax Avoidance should be discouraged as it dampens the national economy.