What is Tax Evasion

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What is Tax Evasion

In 2023, the GST intelligence unit surprisingly detected tax evasion cases worth a gigantic amount of ₹1.98 lakh crores.

This number clearly shows that tax evasion is not just an offence but also a serious problem that directly impacts the development of a nation. Taxes are the primary source of income for the government. It is the fund that goes into the development projects meant to improve the situation of the country.

But what exactly is tax evasion? Simply put, it is an illegal practice to avoid paying applicable taxes.

On this page, we will discuss everything you need to know about tax evasion and tax avoidance, several methods used to evade tax, tax evasion punishment, and how to avoid this legal offence.

Tax Evasion Meaning - What is Tax Evasion?

A higher tax liability is one of the most common reasons for tax evasion. As per the definition, tax evasion is an illegal act in which a person or a business entity avoids paying their tax liability.

It can involve several ways, such as hiding actual income, providing false income data, failing to report monetary transactions, and more.

Note that tax evasion is a punishable offence that leads to criminal charges and higher penalties that sometimes range from 100% to 300% of the actual tax amount.

The problem of tax evasion not only damages the integrity of the Indian tax system but also imposes an additional burden on the sincere taxpayers of the country.

It is crucial to understand that our government solely relies on taxes to fund public infrastructure and services. Thus, when eligible taxpayers evade taxes, it indirectly prevents the government from investing in developmental projects.

Tax Evasion Examples

Let’s now understand what tax evasion is with an example.

Mr. A has a gross income of ₹80,000 from a side business. At the time of filing his tax return, he declares only ₹30,000 as his gross income. As a result, he only needs to pay taxes on ₹30,000 instead of ₹80,000.

In this way, Mr A has illegally reduced his tax liability by hiding an income worth ₹50,000 from the government.

This is just one common method of tax evasion. Check out the next section for other tax evasion scenarios.

Methods of Tax Evasion

Denial to Pay Tax Dues: It is the most common way in which some people evade taxes. They simply don’t pay the taxes even when they are eligible. In this method, some people stay away from paying taxes to the government before or after the due date.

Financial Statements: Generally, the tax liabilities of individuals and businesses are decided based on their submitted financial statements. By submitting inaccurate or forged statements, some people hide their excess income to reduce their tax liability.

Smuggling: When goods are transported across boards, a tax is levied on the shipper. Some entities move their goods illegally without coming under the radar of the authorities to save on these charges.

Using Fake Documents to Claim Tax Exemption: It is another popular way to evade tax. Some people use false documents, such as a fake health insurance policy or a fake tax-free investment scheme, to claim deductions and exemptions.

Hiding/Not Reporting Income: In some cases, people provide incorrect information about their income. In other words, they report less income than what they have actually earned in the applicable financial year to lower their tax burden.

Bribery: Some taxpayers bribe the tax officers to lower their tax liability or to avoid paying their tax dues at all.

Black Money: Black money refers to the illegal money that is stored in offshore bank accounts such as Swiss bank accounts. The funds in these accounts are not disclosed to the government. Hence, the account owner does not need to pay taxes on this hidden wealth.

Difference Between Tax Evasion and Tax Avoidance

Parameter Tax Evasion  Tax Avoidance 
Definition  Illegal method to avoid taxes.  Legitimate way of reducing tax liability without crossing the bounds of the tax system. 
Legality  Illegal Legal
Penalties  Fines, criminal prosecution, and even imprisonment.  No penalties 
Purpose To avoid paying taxes to the government altogether.  To reduce tax liabilities while adhering to tax regulations. 
Examples Declaring false income Forging financial statements Hiding assets or financial transactions Transferring income to a place with lower taxes, such as taking advantage of tax havens. Claiming tax exemption and deductions.

Tax Evasion Vs Tax Planning - How Tax Planning is Different from Tax Evasion

Tax planning is a critical aspect of overall financial planning. It involves evaluating the current financial situation and estimating future variables to devise an efficient plan. Similar to tax avoidance, it is done to minimise the tax liability while maximising the savings.

Unlike tax evasion, tax planning is completely legal and is highly recommended for taxpayers. Some of the most popular ways to save tax through effective planning involve investing in different tax saving schemes like Sukanya Samriddhi Yojana, NSC, NPS, etc. Moreover, claiming deductions on health insurance plans, opening PPF accounts, etc., are also considered tax-saving options.

Avoid Tax Evasion with Mindful Tax Planning

Learn About Tax Regulations: To abide by the tax regulations, it is critical that you first understand them. The first step towards tax planning is to learn about the tax system and regulations in the country.

Invest in Tax-free Schemes: Various tax-free savings schemes allow you to save taxes on the gains generated from the investment. Some good schemes include the Sukanya Samriddhi Yojana, National Pension Scheme, Employee Provident Fund (EPF), Equity Linked Savings Schemes (ELSS), etc.

Purchase Medical Insurance: Under Section 80D of the IT Act, deductions are available on the premiums paid towards medical insurance plans for self and/or dependents.

Explore Long-term Investments: Instead of opting for short-term investments, go for long-term investment options. This is because the LTCGs are tax-free up to a certain limit.

Check Your Eligibility for Tax Deductions: It is another important step that can help you minimise your tax liability. Consider learning about various exemptions or deductions available that can help you reduce your overall tax liability.

Tax Evasion Punishment - What are the Penalties?

As mentioned earlier, tax evasion can result in serious legal troubles. These include higher fines, higher interest on unpaid taxes, seizure of assets, blacklisting from various tax benefits, legal proceedings, and even several years of imprisonment.

For these reasons, every individual should comply with the tax regulations and avoid tax evasion or any other illegal activity related to paying taxes.


Paying taxes may mean giving away a considerable portion of your income. However, when we look at the broader picture, it fulfils a much greater goal of development of the country.

Those who evade taxes should understand that they are not only stealing from the government but also stealing from every citizen who is paying their taxes and following the tax regulations.

Instead of falling into the tax evasion trap, we can reduce our tax liabilities with the help of effective tax planning. Investing in some of the tax-saving schemes helps lower your tax liability, all while adhering to the tax regulations.

Lower Your Tax Liability with Tata AIG Medical Insurance

The good thing is that there are various ways in which you can reduce your tax burden. One such intelligent way is purchasing a health insurance plan from a reputed insurance partner like Tata AIG.

By purchasing our Mediclaim policy for yourself or your dependents, you can claim up to ₹25,000 on the premium amount. Further, by purchasing health insurance for parents, you can claim additional tax deductions worth ₹25,000 for those below 60 years of age and up to ₹50,000 for parents above 60.

Apart from tax benefits, our medical insurance plans provide you with necessary financial cushioning against unforeseen medical emergencies. We offer extensive coverage, affordable premiums, cashless treatment at all hospitals across the country, and many more benefits.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

Related Articles

Is tax evasion prevalent in India?

Is tax evasion prevalent in India?


Yes. Tax evasion is quite prevalent in India. Every year, tax evasion cases worth tens of crores are recorded in the country.

Can tax evasion lead to imprisonment?


Yes. As per the Income Tax Act of 1961, a wilful attempt to evade tax can lead to several consequences, including imprisonment under IT Act sections 276C, 276CC, and 277.

What is the best way to avoid tax evasion?


Effective tax planning is undoubtedly the best way to reduce your tax liability and avoid tax evasion. It involves evaluating your financial situation and finding ways to lower your taxes through smart investments, available exemptions/deductions, and so on.