All taxpayers should know the difference between tax evasion and tax avoidance not only to avoid committing tax fraud unknowingly and ensure legal compliance but also for ethical reasons, failing which can put a person’s credibility at stake.

Tax Evasion:

Tax evasion refers to the deliberate act of not filing taxes, a tax fraud construed as deceiving the tax authorities by not revealing income and paying the correct taxes intentionally. Section 276C of the Income Tax Act deals with tax evasion. The consequences for willfully avoiding taxes are outlined in this section and can include a fine or jail. The penalty is determined based on the amount of tax evaded. It can also lead to legal actions under the Prevention of Money Laundering Act (PMLA), mainly when the person conceals income through unlawful means.

Also Read: How To Get Tax Relief On Rent Payments If You Are Self-Employed?

Concealing Income: Hiding real income,including interest payments, from records will be taken as a deliberate act of tax evasion and will attract penalty and legal action as per the law.

Overestimating or Fraudulent Deductions: Claiming deductions for invalid business or personal expenses and filing taxes with scant or accurate details will be a tax evasion case.

Tax Avoidance:

Tax avoidance involves employing legal methods to reduce tax burdens by leveraging tax laws. Section 80C of the Income Tax Act is a prime example of such a framework, which allows deductions for specific investments, fostering tax-efficient planning. As long as your practices align with the provisions of the Income Tax Act and steer clear of any fraudulent behaviour, tax avoidance is lawful and permissible.

Here are some key aspects of tax planning:

Maximising Deductions: Using every deduction allowed by the Income Tax Act for which you are eligible. Deductions for some investments, charity contributions, and medical bills are a few examples.

Using Tax-Advantaged Accounts: You can deduct contributions from your taxable income by investing for retirement via the Public Provident Fund (PPF) or the National Pension System (NPS).

Tax Credits: Accessing tax credits, such as education credits, might reduce your overall tax liability.

Also Read: What Is Grandfathering Rule In Capital Gains Tax? 

Even though it is legal, tax avoidance can be a problem with moral ramifications. This is the reason why: 

Fairness: Some argue that aggressive tax evasion strategies, particularly by wealthy or large organisations, might jeopardise the system’s fairness. The system encourages equitable contributions from all people to fund public services.

Intent vs Literal Interpretation of the Law: Legal loopholes and technical features of the law are often used for tax avoidance, whether by intentional or literal interpretation of the law. When anything goes against the law’s intended purpose, even though it is legal, it might be considered unethical.

Consequences for Society: Reduced tax income from widespread tax evasion may make it more difficult for the government to fund essential infrastructure and social initiatives.