Difference Between Tax Planning and Tax Avoidance (with Comparison Chart)

An assessee can reduce his/her tax liability, by legitimate means, in two ways – tax planning and tax avoidance. The tax planning is described as the arrangement of financial activities in a way that the assessee can avail maximum tax benefit by making best possible use of all the legal benefits, i..e deductions, exemptions etc.

On the other hand, the tax avoidance is a technique of refraining from tax liability, through just and fair means, but intends to defeat the fundamental motive of the legislature. The dividing line amidst the two concepts is thin and blur.

The difference between tax planning and tax avoidance primarily depends on the difference in benefits that are availed to minimise tax burden. So, take a look at this article which might help you understand the two terms in detail.

Comparison Chart

Basis for Comparison	Tax Planning	Tax Avoidance
Meaning	Tax planning refers to the planning of a person's financial affairs, in a way that assessee gets full benefit of all permissible deductions and exemptions as per law.	Tax avoidance is the practise of purposefully adjusting one's financial affairs, to prevent the payment of tax.
Nature	Legal and moral	Legal but immoral
What is it?	It is the savings of tax.	It is the dodging of tax.
Motive	Bonafide	Malafide
Objective	To lessen tax liability, by applying the provisions and moral of law.	To lessen tax liability, by applying the provisions of law only.
Permissible by law	Yes	No
Legal implication	Uses the advantages of tax law.	Uses the shortcomings of tax law.
Benefits	Emerge in the long run.	Occurs in short run.

Definition of Tax Planning

By the term ‘tax planing’ we mean the arrangement of one’s financial affairs in such a way that utmost tax benefits can be availed. This can be done by applying the majority of advantageous provisions which are permissible by law and entitles the assessee to obtain the benefit of the deductions, exemptions, credits, concessions, rebates and reliefs so that the incidence of tax on the assessee would be minimum.

Tax planning is an art of logically planning one’s financial affairs, in such a manner that benefit of all eligible provisions of the taxation law can be availed effectively so as to reduce or defer tax liability. As tax planning follows an honest approach, by conforming to those provisions which fall within the framework of the taxation law.

Definition of Tax Avoidance

Tax avoidance implies any arrangement of financial activities, though done within the legal framework, overpowers the basic intention of the law. It involves taking benefit of the shortcomings in the statute, by deliberately parking the financial affairs in a way that it neither violates the tax law nor it attracts more tax.

Tax avoidance includes cases, wherein the assessee seemingly mislead the law, without making an offence. And to do so, the tax payer uses any scheme or arrangement, which reduces, defers and even completely prevents the payment of tax. This may also be done by shifting of tax liability to another person, so as to minimise the incidence of tax.

Key Differences Between Tax Planning and Tax Avoidance

The difference between tax planning and tax avoidance can be drawn clearly on the following grounds:

Tax planning refers to a mechanism through which one can intelligently plan his/her financial affairs in such a manner that all the eligible deductions, exemptions and allowances, as per law, can be enjoyed. Tax avoidance is an act of intentionally structuring one’s financial affairs, in such a way that his tax liability is minimum or even nil.
While tax planning is both legal and moral, tax avoidance is legally correct, but it is an immoral act.
Tax planning is basically savings of tax. Conversely, tax avoidance is hedging of tax.
Tax avoidance is accomplished with a malafide motive. On the flip side, tax planning has the element of bonafide motive.
Tax planning aims at reducing tax liability, by practising the script and moral of law. As against this, tax avoidance aims at minimising tax liability, by practising the script of law only.
Tax planning is permissible by law, as it involves adhering to the provisions of tax. In contrast, tax avoidance is not permissible by law as it attempts to take advantage of the defects in the law.
Tax planning uses the advantages, provided by the law to the assessee. Unlike tax avoidance, which uses the loop holes of the law.
The benefits of tax planning can be seen in the long run. On the contrary, the benefits of tax avoidance are for short term only.

Conclusion

Both tax planning and tax avoidance require full and up to date knowledge of the tax laws. Formerly, tax avoidance is considered legitimate, but with the passage of time tax avoidance is as evil as tax evasion, and even attracts penality when discovered. On the other hand, tax planning is completely legal because it does not involve taking any advantage of the loopholes in the law, and so it is permissible.