Difference between tax planning and tax avoidance

Legal jargon, for a layperson, can be quite confusing. This is why we have lawyers and tax experts to help us simplify matters related to the law and taxes. However, when it comes to saving tax, there are a couple of terms that everyone should know about, such as ‘tax planning’ and ‘tax avoidance’. Many people use these terms interchangeably despite there being a big difference between the two terms.

In this article, let’s find out the difference between the two terms and why one of them is better than the other.

Tax planning

Tax planning is the process of analysing your financial activities in a way that allows you to seek the maximum tax benefit possible under legal provisions provided under the Income Tax Act. This Act offers various options (Section 80C, 80D, 80E) that include tax exemptions and deductions under multiple categories. An efficient tax planner makes use of all the different concessions to his benefit. This is an honest approach to applying the taxation law to lessen your tax liability.

Tax avoidance

Tax avoidance is the practice of adjusting your financial affairs in such a manner that you avoid paying tax to the government. Here, one makes use of shortcomings and loopholes in the law unfairly for personal benefit. When you indulge in tax avoidance, you don’t violate the tax law but you override the intent of the law. It is not as severe as tax evasion but can be equally bad. For example, many companies channel their funds through offshore branches to avoid paying tax in their home country.

Here is a basic comparison of tax planning and tax avoidance on the basis of different factors. This will help you understand the importance and benefits of tax planning:

  • Nature: On a fundamental level, both tax planning and tax avoidance are two techniques of minimising your tax liability. Both methods are legal but that’s where the similarities end.
  • Legality: Yes, tax avoidance can be legal. However, while tax planning is the moral thing to do, tax avoidance is unethical.
  • Objective: The objective of tax planning is to decrease your tax liability by using the existing provisions of the law. On the other hand, the aim of tax avoidance is to dodge your tax payments by taking advantage of loopholes in the law.
  • Benefits: The benefits of tax planning generally emerge in the long term. For example, the government has introduced tax benefits on various investment avenues like mutual funds and provident funds. This encourages people to invest money for the long term and reap the benefits. But the benefits of tax avoidance are generally in the short term. If the government addresses the loopholes and amends the tax law, you may no longer benefit from them legally.

Summing up

In the long term, tax planning is a better alternative to tax avoidance. It is a good idea to identify the various provisions available and make the most of them. To do that, however, you need to begin your tax planning early on in the year. You may not want to wait for approaching deadlines where you might make some hasty, incorrect decisions. The best part about tax planning is that there are many options within the legal framework to maximise your benefits.

So, opt for the legal and moral route when it comes to saving tax. Here, HDFC Bank can come to your aid as it offers a plethora of tax-saving instruments. Click here to know more.

Under Section 80C of the Income Tax Act, 1961 you can save tax by investing in Tax saving FD. Calculate using FD calculator.

* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.