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What is Tax Avoidance? Research Team | Posted On Tuesday, May 21,2019, 06:25 PM

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What is Tax Avoidance?



Tax avoidance involves the process of managing finances in a way by which the individual is able to reduce his tax liability. Tax avoidance is a method of exploiting the laws to one’s advantage. Tax avoidance has benefitted a large number of entities starting from small business houses to large business enterprises to help reduce the tax liability. This can be achieved by taking advantage of some existing provisions or by making use of lack of provisions in the laws of the country.

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What is Tax Avoidance?

Tax Avoidance in India

Tax avoidance is a method of using the loopholes existing in the laws in order to save taxes. Tax avoidance is generally used by big business houses and companies who make use of such loopholes, deductions and tax rates in order to reduce the tax burden borne by these companies.

Tax avoidance is done without breaking any laws or rules under the income tax act. The main objective of tax evasion is to save a large amount of money by taking advantage of the loopholes present in the income tax acts. 

Difference between Tax Avoidance and Tax Evasion:

There are some significant differences between tax avoidance and tax evasion. Tax evasion is the practice of avoiding taxes which occurs mainly if the taxpayer shows wrong tax assessment or totally avoids paying taxes. Tax evasion is possible when an individual is running a non-registered business or is selling goods but not providing proper receipts.

Tax avoidance involves the method of carefully examining the laws and exploiting the loopholes in the system. Tax evasion is illegal in India whereas tax avoidance is not an illegal practice. An individual cannot be blamed for avoiding taxes, however if a person willingly evades taxes, he is liable to pay a huge penalty along with interest or is even penalized with a jail term.

SEE ALSO: All You Must Know About Tax Planning

Tax Avoidance Strategies:

Listed below are some of the commonly used tax avoidance strategies:

  • Increase in retirement savings: Retirement savings like PPF or NPS are perfect tax saving instruments. Investments in PPF account enjoy tax benefits under Section 80C of the Income Tax Act. NPS can fetch you an additional tax saving of Rs 50,000 above the regular tax saving limit of Rs 1.5 Lakh a year under Section 80C. This is under Section 80CCD(1B).
  • Showing monetary transactions as loans: You may show any monetary transactions made by you as a loan to your relatives at nominal interest rates. These transactions are tax-free and the income from such investments is tax-free.
  • Tax saving on long-term gains: You can invest gifted money received from relatives in shares and equity mutual funds for a period longer than a year. The long-term gains on equities held for more than a year are exempt from taxes, up to Rs 1 Lakh. Gold, real estate and debt mutual funds enjoy tax benefits on long term capital gains.
  • Education scholarships: Any scholarships received from the government or private trusts for the purpose of funding education are totally tax-free.
  • Donations to charity and political parties:  Donations made towards political parties are fully tax exempt. Similarly, donations made to charitable institutions can be claimed under Section 80G of the Income Tax Act. However, one needs to furnish original receipts in order to claim such deductions.
  • Inherited money through a will: Any individual who has inherited money through a WILL is not liable to pay taxes on the inherited property.
  • Agricultural income: Any income received from farming or agricultural activities done on the agricultural land is fully tax-free in India.

SEE ALSO: How To Reduce Income Tax In India?

Is Tax Avoidance Illegal?

Tax avoidance is not illegal in India. Tax avoidance is generally done by finding loopholes in the legal provisions. So, a person is not breaking any laws. The activities are carried out in compliance with the law. An example of tax avoidance is that the government allows deduction on certain charitable contributions. In case you have paid any amount to a charity then you can claim deductions  while filing  income tax returns for the given financial year, provided the donation enjoys tax benefits.

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