Tax Planning

Tax Planning means devising strategies all the year round so as to minimize the liability of tax
that one owes to the government. The Planning of Tax is done by a person so that he pays less
money to the government as tax and as a result saves more money for himself. Planning Tax
reduces the burden of tax on a person and also helps him to make savings by investing in various
schemes. There are certain considerations while Tax Planning for the family such as for
investments selecting the correct member's fund, seeing that concessions are available on the
investments that have been made initially and also on the returns, the liability of tax on such
earnings, the tax that is applicable on the sums that are received at the time of maturity, the needs
of capital generation of every member, and even the investor's age.

Tax Planning in India can be done under various sections of the Income Tax Act such as
Section 80D, Section 80C, and Section 24(b). In India, Tax Planning can also be done by
investing in various government securities and mutual funds. The various methods of Tax
Planning are:

• Owning the house

• By investing on a business premises
• By making investments that are exempted from tax
• By investing in investments that enjoy treatment of concessional tax
• By buying a residential house in joint ownership

Owning the house is a method that can be used for tax planning for this will result in the fall of
the person's money that he can invest and this will lessen his future liability of tax and also his
future income. Another method of Planning Tax is by investing on a business premises. This
investment must be made in the name of a person who is not the owner of the business and then
the owner can take the office on rent. The tax that the person pays on the rent that he is earning is
lesser than what the business owner would have had to pay.

Another way of Tax Planning is by making investments in such schemes that are exempt from
tax. Such investments can be made even in the name of a minor, as a result of which the parents
do not have to pay tax even after clubbing. A person can go for Planning Tax by investing in
investments that enjoy treatment of concessional tax. Such investments get tax concessions and
are taxed at 10% as a result of which a person investing in such investments is able to save
money by paying less tax. Another method of Tax Planning is by buying a residential house in
joint ownership. By doing so, the share of each co- owner's income that he gets from the property
gets included in his sum total income when he is filing his returns. When the person takes loan
then he is able to save tax on the deductions of interest. Tax Planning is important for it helps
people to save their money by paying less tax to the government.
Tax Avoidance
Tax Avoidance means the tax regime's legal use for one's own personal advantage so as to
lessen the tax amount that is payable to the government by ways that are legal. The Avoidance of
Tax is usually done by the people who desire to keep their money with themselves and not give it
to the government.

Avoidance Tax includes situations when people eliminate or reduce tax by following a
transaction or many transactions that are legal. The income tax department provides many
provisions through which the people can go for Tax Avoidance such as refunds, credits, benefits,
and many other kinds of entitlements. The various methods of Tax Avoidance are:

• Legal entities
• Country of residence
• Double taxation

Legal entities are a method that people follow when they want to go for Tax Avoidance. Under
this method of Avoidance Tax, people legally defer paying personal taxes by creating a legal
separate entity to which they donate their property. The legal separate entity that is set up is often
a foundation, company, or trust. The properties are transferred to the trust or company, as a result
of which the income that is earned belongs to this entity and not by the owner. Usually, people
are taxed personally on earnings and property that they own and thus by transferring property to
a legal separate entity, individuals can avoid personal taxation although certain taxes such as
corporate taxes are still applicable. In order to go for Tax Avoidance, the foundation, company,
or trust can also avoid corporate taxes if the entity is set up in a jurisdiction that considered
offshore.

Country of residence is another method that people adopt when they go for Avoidance of Tax.
Under this method of Tax Avoidance, the company or person changes the tax residence to a
place that is a tax haven in order to lower the amount of taxes that they pay. Under this method,
the person may also become a regular traveler so that taxation can be avoided. Double taxation
means that many countries charge taxes on the income that has been earned inside that country
without taking into consideration, the resident country of the firm or person. So that people do
not have to pay double taxes, once in the country where the income has been earned and then
again in the resident country, many countries have gone for bilateral treaties of double taxation
with other countries. This helps tax-payers as they are able to avoid paying double taxes.

Tax Avoidance reduces the revenue of the government and also brings into disrepute, the tax
system. Ideally, Avoidance of Tax should not be encouraged and the government should also
take measures in order to prevent it.
Tax Evasion
Tax Evasion entails the efforts that are made by trusts, individuals, firms, and various other
entities to avoid paying taxes by illegal and unfair means. The Evasion of Tax usually takes
place when taxpayers deliberately hide their incomes from the tax authorities in order to reduce
their liability of tax.

Evasion Tax takes place when the people report dishonest tax that includes declaring less gains,
profits, or income than what has been actually earned and they even go for overstating
deductions. The Evasion of Tax level depends on certain factors such as fiscal equation which
means that people's tendency to pay less tax declines when the payment due from taxes becomes
obvious. The level of Tax Evasion is also dependent on the tax administration's efficiency and
corruption levels.

The level of Evasion Tax also depends on the chartered accountants and tax lawyers who help
companies, firms, and individuals evade paying taxes. Tax Evasion is a crime in all major
countries and the guilty parties are subjected to imprisonment and fines. The various methods of
Tax Evasion are:

• Smuggling
• Customs duty evasion
• Value added tax evasion
• Illegal income tax evasion

Smuggling is a method of Tax Evasion, following which people export or import foreign goods
through routes that are unauthorized. People resort to smuggling for they want to avoid paying
total customs duties that are chargeable and also when they want to import items that are
contraband. Customs duty evasion is another method of Tax Evasion under which the importers
evade paying customs duty by false declarations of the description of the product and quantity.
The importers in order to evade paying customs duty also resort to under-invoicing.

Another method of Tax Evasion is value added tax evasion under which the producers who
collect from the consumers the value added tax evade paying taxes by showing less sales
amount. Many people earn money by means that are illegal such as theft, gambling, and drug
trafficking and so they do not pay tax on this amount and thus this is another method of Tax
Evasion that is called illegal income tax evasion.

Tax Evasion results in the loss of revenue for the government and so ideally, no one should be
indulging in it and the Indian government must also take steps in order to stop Evasion of Tax by
the people.
Tax Saving
Tax savings imply a reduction in the amount of income tax that a person pays to the
government. The Saving of Tax is done by a person so that he pays less tax to the government, as
a result of which he is able to save money for himself.

Tax Saving in India can be done under various sections of the Income Tax Act such as Section
80C, Section 80D, and Section 88. These laws have been made by the government so that the
people can do Tax Saving by investing in various schemes under these sections. The Section 88
of the Indian Income Tax Act offers a rebate of 20% if the total income is up to Rs. 1.5 lakhs and
a rebate of 15% if the total income is more than Rs. 1.5 lakhs.

The various methods of Tax Saving are:

• Public Provident Fund (PPF)

• Insurance
• National Savings Certificates (NSC)
• Mutual Funds
• Pension Plans

A method of Tax Saving is by investing in Public Provident Fund and it is one of the most
popular methods of Saving Tax. Under the Public Provident Fund scheme a person can make the
maximum investment of Rs. 70,000 per year and the return rate is 8% per year which is tax-free.
The lock-in period for this scheme is 15 years and partial withdrawals are allowed after 7 years.
Another method of Saving Tax is by investing in the various insurance schemes. The maximum
investment that a person can make in an insurance scheme depends on the policy's terms. In
order to get rebate under Section 88, the total amount of premium paid has to be within the
amount of Rs. 70,000. The amount of money that a person gets on maturity is tax-free and thus a
person is able to undertake Tax Saving by investing in an insurance scheme.

National Savings Certificates is another method of Tax Saving which is very popular with the
people. The interest that the people get in this scheme is taxable but a deduction under the
Section 80L can be claimed. The rate of interest that the people get in the National Savings
Certificates is 8% and the lock in period is 6 years. Another method of Tax Saving is by
investing in mutual funds. The lock-in period is 3 years and although the amount of return is not
fixed, the dividends that a person gets are tax free. Pension Plans is another method of Tax
Saving. The funds can be withdrawn only when one attains the age of 50 years and the pension
that is received is taxable fully.

Tax Saving must be done by each and every individual for it helps in reducing the amount of tax
that a person pays to the government. Thus, by saving tax, a person is able to keep more of his
money with himself.
Bond-washing transaction
A bond-washing transaction is a transaction where securities are sold sometime before the due
date of interest and reacquired after the due date is over. This practice is adopted by persons in
the higher income group to avoid tax by transferring the securities to their relatives/friends in the
lower income group just before the due date of payment of interest. In such a case, interest would
be taxable in the hands of the transferee, who is the legal owner of securities.

In order to discourage such practice, section 94(1) provides that where the owner of a security
transfers the security just before the due date of interest and buys back the same immediately
after the due date and interest is received by the transferee, such interest income will be deemed
to be the income of the transferor and would be taxable in his hands.

In order to prevent the practice of sale of securities-cum-interest, section 94(2) provides that if an
assesses who has beneficial interest in securities sells such securities in such a manner that either
no income is received or income received is less than the sum he would have received if such
interest had accrued from day to day, then income from such securities for the whole year would
be deemed to be the income of the assesses