Legal but Unethical Tax Saving Techniques in India for FY 2024-25
Introduction
Brief Overview of Tax Planning in India
Tax planning involves strategically managing your finances to minimize tax liability using various legal deductions, exemptions, and benefits. It’s all about making smart financial decisions to maximize your post-tax income while staying within the legal framework.
Difference Between Legal Tax Saving and Unethical Practices
Legal tax saving strategies adhere strictly to the law, involving honest reporting of income and expenses. Unethical practices, however, exploit loopholes and misrepresent information to reduce tax liability without technically breaking the law.
Importance of Understanding the Implications of Unethical Tax Strategies
Unethical tax practices can lead to legal trouble, financial risks, and damage to your reputation. Understanding these implications helps you make informed and ethical financial decisions.
1. Paying Rent to Your Parents
Use of Parent’s Property
When you use your parents’ flat or building for your business, you can claim rent expenses. Many taxpayers show annual rent paid as less than ₹180,000 to avoid TDS (Tax Deducted at Source). This is useful if your parents are in a lower tax bracket than you.
EXAMPLE
Suppose you’re an entrepreneur using your parents’ apartment as your office. You pay them ₹15,000 per month, totaling ₹180,000 annually. By doing this, you avoid TDS, reducing your tax liability. Meanwhile, your retired parents, with no other significant income, fall into a lower tax bracket and pay minimal taxes on the rent they receive.
2. Showing Loan Taken and Claiming Interest
Loan Misreporting
Proprietors often show loans taken from relatives in small amounts on their balance sheets. They show multiple small loans to avoid scrutiny. Since cash payments over ₹20,000 are disallowed for businesses, they plan to avoid TDS. Small assessees rarely face cross-examination.
Example
Imagine you’re a small business owner showing multiple loans from relatives, each below ₹20,000, on your balance sheet. You claim interest deductions on these loans, reducing your taxable income. By fragmenting the loans into smaller amounts, you avoid TDS and scrutiny from tax authorities.
3. Fudging Petty Expenses
Inflating Minor Costs
Small businesses often inflate petty expenses like water, refreshments, travel, and conveyance costs. They might report ₹5,000 as water expenses when only ₹500 was actually spent. IT officials find it hard to scrutinize these expenses due to easily fabricated bills.
Example
If you run a café and report ₹10,000 as monthly refreshment expenses when the actual cost is only ₹2,000, you reduce your business’s taxable income, thereby lowering your overall tax liability by inflating these costs.
4. Travelling and Daily Allowance
Travel Expense Manipulation
Employees often raise high invoices for travel and daily allowances even when actual expenses are low or when they stay with relatives. This practice is common in private organizations.
Example
Suppose you travel out of town for a business trip and stay with a relative. You submit inflated hotel and meal invoices, claiming ₹10,000 for expenses when you actually spent only ₹2,000. The excess amount reimbursed is tax-free, reducing your taxable salary.
5. Receiving Gift on the Occasion of Marriage
Bonus as Wedding Gift
Employees often ask employers to give them large bonuses as gifts on the occasion of their marriage, since gifts received on marriage are tax-exempt.
Example
If you’re due for a ₹1,00,000 bonus, you might ask your employer to gift this amount as a wedding gift. Since gifts received on marriage are tax-exempt, you avoid paying tax on this bonus amount.
6. Hiring Parents as Advisers
Family Employment
Professionals often hire their parents as advisers, paying them salaries or fees for services rendered. This allows them to claim these payments as business expenses, reducing their taxable income.
Example
As a consultant, you might hire your retired father as an adviser, paying him ₹50,000 annually. You claim the payment as a business expense, reducing your taxable income. Since your father has minimal other income, he falls into a lower tax bracket and pays less tax on the received amount.
Conclusion
Engaging in these unethical tax practices can lead to severe consequences, including legal trouble and financial penalties. It’s essential to stick to ethical tax planning methods, maintaining transparency and integrity in your financial reporting. Ethical tax planning ensures you comply with the law and contributes to the fair functioning of the tax system, supporting public services and national development.
