Tax Planning :- is an arrangement in such a way that assessee takes advantage of all tax exemptions, deductions, concessions, rebates, allowances and other reliefs or benefits permitted under the Act without violating the legal provisions so that the burden of taxation on the assessee is reduced to the minimum.
Tax Evasion :- it refers to the reduction of tax liability by illegal or fraudulent means.
In this case, taxpayer tries to reduce tax liability and pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities.
An assessee guilty of tax evasion is punishable under the relevant laws with fines and penalties ranging from 100% to 300% of tax evaded.
Examples–
• Misrepresentation or suppression of facts.
• Fail to record investments in accounting records. Recording of any false entry in books of account.
• Don’t have record of any receipt in books of account.
• Failure to report any international transaction.
- omission of material facts in assessments.
- using fake documents to claim deductions/exemptions.
Tax Avoidance :- by using variety of methods or technically satisfying the requirement of law, to eliminate or reduce tax burden.
Examples–
- Transfer money to their parents who are not earning up to Rs. 2.5 lakhs, if they are below 60 years of age, up to Rs. 3 lakhs in case the parents are above 60 years of age, and up to Rs. 5 lakhs in case the parents are above 80 years of age.
- Taking loans from relatives and friends since gift tax does not apply on the same and the loan may be paid back with a nominal interest rate.