SAVE TAX BEYOND THE COMMON DEDUCTIONS

SAVE TAX BEYOND THE COMMON DEDUCTIONS 

Tax planning is an important aspect of financial planning. We list down some ways
to ensure that you utilize the tax deductions well thus reducing your tax burden in a
legal manner.

Planning for your taxes is an integral part of financial planning. In India, it is noticed
that a majority of the salaried class use the most popular Sec 80C deductions and
a few other provisions to reduce their tax outflow. Please click here to read on
popular tax deductions which will help you reduce tax outflow. However, tax
planning generally stops with these few sections of the Income Tax Act for most
people. But did you know that there are many other legitimate ways of saving tax
under the Income Tax Act?

Set up a Hindu Undivided Family (HUF) Trust: A HUF Trust is considered to be a
separate entity for the purposes of taxation. A HUF Trust enjoys the same tax
exemptions and tax slabs as a resident individual. Hence, you can gain a
significant tax advantage by creating a HUF Trust. Please click here to understand
more on this.

Parents' investments: If your parents are above 65 years, they enjoy a higher
basic exemption limit compared to you. When investments are made in your
parents' name and if your parents have a low income or nil income, better tax-
adjusted returns can be enjoyed by your family.

Minor child’s income: A minor child’s income is clubbed with the parent’s
income. If you have invested anywhere in your minor child’s name and this
investment generates an income, you can claim up to Rs. 1500 per minor child
as a deduction on this income.

Rent paid to parents: If you stay in a property which is registered in your
parents’ name, don’t think you will miss out on HRA benefit. You can still claim
HRA benefit by paying rent to your parents. However, your parents will be
taxed for the rental income they earn. Thus, this is most beneficial if your
parents are in the lower income tax bracket. Also, in this case, it is advisable to
make an agreement with your parents, get this agreement registered and
keep a record of the cheque payments you make to your parents towards
rent.

Shares sold to parents to offset gains: A long term capital loss on shares can be
set-off against gains if you choose to make an off-market sale (without going
through the exchange). As finding buyers for off-market transactions can be
difficult, you can sell these shares to your parents to get the set-off benefit.
However, shares should be sold at the market price and cheque payment
should be made for purchase.

Reduce your long term capital gains tax on property: If you sell your house after
3 years of purchasing it, you will be subject to long term capital gains tax. This
can be exempt if you invest the capital gain you get in another house (within 2
years) or use it to construct another house (within 3 years). However, the new
house purchased or constructed should not be transferred by you within a
period of 3 years from the date of purchase or construction, as the case may
be.

Structure your salary package, if possible: Some employees are given the
option to choose their salary components. A substantial amount of tax can be
saved by opting for tax-friendly components like food coupons, HRA (if you are
staying in a rented accommodation), medical expenses reimbursement,
transport allowance and Leave Travel Allowance.

Invest in tax-efficient mutual funds: When you invest in mutual funds, look at tax
efficient funds, as they can increase your post-tax return. If you prefer equity
mutual funds for a short term, it is better to invest in a dividend scheme rather
than growth scheme, as dividend is tax free, and the short term capital gain is
lower due to a downward adjustment in NAV. On the other hand, if you prefer
debt funds, a short term investor with a high tax bracket should opt for a
dividend scheme, as the dividend distribution tax of 13.52% works out to be
lower than the short term capital gains of a growth scheme, which is as per tax
bracket.

Tax benefits from an under-construction house: Under Sec 24 of the Income Tax
Act, you are not eligible to claim interest paid on home loan during the period
the property is under-construction. However, the interest paid during the pre-
construction period can be claimed as a deduction in 5 equal instalments from
the year the construction is complete.

Owning a house in another city: You can claim tax benefits of both home loan
(under Sec 80C and Sec 24 of the Income Tax Act) and HRA benefits at the
same time, if you stay in a rented house, but own a property in another city.


A Summary of various tax-saving methods: 

Set up a HUF Trust	HUF Trust enjoys the same tax exemption and tax slabs as a resident individual
Parents’ investments	Better tax-adjusted returns can be enjoyed if parents have a low income or nil income.
Minor child’s income	Clubbed with your income; exempt up to Rs 1500 per minor child.
Rent paid to parents	Eligible for HRA benefit
Shares sold to parents	Long term capital loss can be adjusted if sale is off-market, made at current market price and payment made by cheque.
Structure your salary	Opt for food coupons. HRA (if you are staying in a rented accommodation), medical expenses reimbursement, transport allowance and Leave Travel Allowance.
Invest in tax efficient mutual funds	Invest in dividend schemes as Dividend Distribution Tax is lower than Short Term Capital Gains
Long Term Capital Gains on sale of property	Exempt if you purchase/construct a house within the required timeframe
Interest paid during pre-construction property	Claimed in 5 equal annual installments
Home Loan and HRA benefits	Can be claimed if you stay in a rented house but own a property in another city

The above methods are legitimate ways of reducing your tax outflow and results in 

Tax Saving and not Tax Evasion. We advise you to consult a qualified Chartered 

Accountant to help you make use of the above provisions and also for 

compliance purpose. 

Happy Investing

Source:Gettingyourich.com