Difference Between Tax Evasion and Tax Avoidance

Common Tax Evasion Tricks

Tax evasion takes place when you trick tax authorities on purpose. Here are the different tricks they use:

• Hiding Income: Not telling about all the money you make, like cash from a side job or interest from investments that you do not report.
• Overstating Deductions: Saying you spent money on things for your job that you did not really spend, or claiming tax breaks for personal stuff you do not qualify for.
• Submitting Fake Tax Forms: Sending in a tax form with wrong information on purpose.

Examples of Tax Evasion

Here are some examples of tax evasion:

• You earn a good amount of money from freelance gigs or a small business you run on the side, but you do not mention any of this income on your tax papers.
• A business owner claims fancy dinners, lots of travel, or personal shopping sprees as business expenses to make it seem like they earned less and pay less tax.
• You hide your money in a secret bank account overseas to avoid paying taxes on it.
• Getting involved in the underground market, like smuggling stuff to skip import taxes or getting paid in cash to avoid reporting your income.

What is Tax Avoidance Meaning

Tax avoidance involves using legal tactics to reduce the amount of tax you owe. Essentially, it means using the tax system in one place to benefit yourself by paying less tax. Tax avoidance is about finding new ways to avoid paying taxes, all the while staying within the limits of the law.

It can involve adjusting financial records so you do not break any tax rules. While tax avoidance is allowed, sometimes it can be seen as a crime, especially in certain situations.

Common Tax Avoidance Tricks

Here are some common tax avoidance tricks to avoid paying as much tax as possible. Here are some of them:

• Maximising Deductions: Claiming all the deductions allowed by law, like medical expenses, donations, and certain investment costs.
• Using Special Accounts: Putting money into retirement funds like the PPF or NPS, which lets you pay less tax.
• Taking Advantage of Tax Credits: Getting credits, like for education expenses, that directly lower your tax bill.

Examples of Tax Avoidance 

Here are some examples of tax avoidance:

• Utilising Section 80C benefits by investing in financial instruments like PPF or ELSS mutual funds to help you lower the amount of tax you need to pay.
• You can show the money you spent as interest on your home loan, buying health insurance, or paying school fees to lower your tax bill.
• Giving money to approved charities or organisations can give you tax breaks. Sometimes, even giving to political causes can help you save on taxes.

Now that you have a fair understanding of the basics, let’s differentiate between tax evasion and tax avoidance in detail.

Difference Between Tax Evasion and Tax Avoidance

The following table gives a comparison of tax evasion vs tax avoidance:

Summing Up Tax Avoidance vs Tax Evasion

Now that you have learned the difference between tax evasion and tax avoidance, it is clear that while both aim to reduce taxes, they operate in distinct ways. Tax evasion involves illegal methods whereas tax avoidance utilises legal tactics within the bounds of the law to lower tax obligations.

By understanding these concepts, you can make informed decisions about your tax planning while staying on the right side of the law.