This document discusses different methods taxpayers can use to reduce their tax liability: tax evasion, tax avoidance, and tax planning. Tax evasion involves illegally hiding income or falsifying records. Tax avoidance aims to reduce taxes through legal but questionable loopholes. In contrast, tax planning makes legitimate use of exemptions, deductions, and other provisions in the tax code to lower tax burden. Proper tax planning is an encouraged way for taxpayers to minimize their liability within the law.

1. Tax Planning

2. INTRODUCTION
There is nothing which hurts more than payment of taxes. One
question that goes through every tax payer’s mind is “how can I
reduce my tax liability?” Reducing tax liability is not always a
bad or illegal exercise.
There are legitimate ways to reduce taxes through proper tax
planning and such methods are always encouraged. But
unfortunately, there is also a tendency to reduce tax through
illegal methods. They are not accepted practice and can invite
problems.

3. There are three methods which are commonly used
by the taxpayers to reduce their tax liabilities-
Tax Evasion,
Tax Avoidance and
Tax Planning

4. Tax Evasion
Dishonest taxpayers try to reduce their taxes by concealing
income, inflation of expenses, falsification of accounts and
willful violation of the provisions of the Income-tax Act. Such
unethical practices often create problems for the tax evaders.
Tax department not only imposes huge penalties but also
initiate prosecution in such cases.

5. Tax Avoidance
Tax avoidance is minimizing the incidence of tax by adjusting the
affairs in such a manner that although it is within the four corners of
the laws, it is done with a purpose to defraud the revenue. It is the
act of dodging without directly breaking the law.
For example if A gives gift to his wife, the income from the
asset gifted will be clubbed in the hand of A. But to avoid this
clubbing provision “A” decides to give gift to B’s wife and B
reciprocates it by giving gift to A’s wife. This is not tax planning but
tax avoidance. Such practices are not acceptable. In the words of
Justice Rangnath Misra of Supreme Court in the case of McDowell &
Co Limited v CTO [1985] 154 TR 148,

6. “tax planning may be legitimate provided it is within the framework of law.
Colorable devices cannot be part of tax planning and it is wrong to
encourage or entertain the belief that it is honorable to avoid payment of tax
by resorting to dubious methods.”
Tax Planning
Tax planning is arrangement of financial activities in such a way that
maximum tax benefits, as provided in the income-tax act are availed
of. It envisages use of certain exemption, deductions, rebates and
reliefs provided in the act.

7. Tax planning V/s Tax
Management
There is always some confusion created by these words and most
often the person who is doing a tax planning thinks that he is
managing the tax and vice versa in some cases. We will have a look
at some of the points which clearly indicate that these are two
different words all together.
The tax planning is a wide term and the tax management comes
under it. Tax planning is done in order to reduce the tax
liability whereas the tax management is paying the taxes in
compliance with the set rules. The tax planning is done for the
future whereas the tax management relates to the past, present and
future.

8. Tax planning is not at all a complex process provided the
assesse knows the tax code. The complete knowledge is
not necessary all he needs to know is the correct tax
slabs and the various deductions allowed.
Today as we are living in a very busy world we tend to
overlook at the tax planning and hurry things when the
due date is fast approaching where as if there is a proper
tax plan then we will be reducing the tax liability.