TIPS TO MINIMIZE YOUR TAX LIABILITIES
In case of salaried tax payers, often there is an additional tax liability that is known
only while filing the IT return. In case of salaried individuals, the most common
reasons are as below:
1. Fixed Deposits (FD) Interest income
2. Income received on the rented property
3. Job change in between the year
The Banks deduct tax at source (TDS) @ 10% on FD interest they pay so if one is in a
higher bracket, then there is a differential tax to be paid. Normally tenants don’t
deduct any tax while paying the rent and hence this income hits at the marginal
tax bracket and results in a substantial tax liability.
Similarly, when one changes the job in between the year, the new company may
not have been informed of salary earning from previous company. So the new
company starts calculating tax on the salary they pay the employee right from
zero and thus the tax free limit and lower brackets of tax gets double counted.
Sometimes employees mistakenly claim tax benefits (e.g. Section 80 C) from both
the companies. When senior level professionals change job, their income may
exceed Rs. 1 Crore in a year and a surcharge of 10% is applicable which none of
companies included. One may have encashed retirement benefits like
Superannuation or one may have withdrawn from Provident Fund.
All such discrepancies come out when the income is aggregated for Return filing.
The TDS paid by Bank or Employers is reflected in the Form 26 AS, integrated to
one’s account on IT Website. The IT provisions require one to pay interest and
penalty on the overdue tax. The final figure of tax liability often results in disbelief
and emotional reactions as 1/3 of one’s hard earned money is going for taxes.
On the other hand, it is noticed that one does not claim all the tax benefits
available. As an example, Leave Travelling Allowance is most often neglected.
Many employers allow Sodexho Food Coupons but not opted by everyone.
Mediclaim Premium for personal health cover may be paid in the last quarter of
the year and hence not part of the Form 16 and may be missed out in the final IT
return. Employer’s contribution to NPS under section 80 CCD(2) is exempt from tax
up to 10% of one’s basic salary. This is relatively lesser known tax saving
component. Budget 2015 has proposed additional Rs. 50,000 exemption for
Employee Contribution in NPS.
Some of this could be due to lack of awareness or paucity of time in this busy life
but then there is a cost attached in terms of the higher tax liability. Below tips can
help the employees to save on taxes:
HRA+ Home Loan: If an individual’s hometown is in a different city and if one buys
a house in his or her own hometown on home loan then can claim both the HRA
for the rented residence in the city of work as well as loss arising from interest
payment on house property in hometown.
Multiple Home Loans: When you have multiple home loans, then from the 2nd
home onwards there is no cap on the loss arising from interest that you pay on the
home loans. Essentially this means that you will be able to buy another house at
the tax adjusted cost of ~7% if you are in the highest tax bracket.
Rent to Parents: If one is staying in a house owned by one’s parents, then one can
pay rent to them and claim HRA. They will need to declare the rent received as
income but if they are not in the highest tax bracket then at the family level, tax is
saved. One must follow the documentation & actually pay the rent to parents.
Rental to SIP: One way to optimize the rental returns is to invest the monthly rental
income in to Equity MF SIPs. This should only be done when one does not have a
dependency on the rental income and when one has a long term horizon for the
investments. Over a period of time, the yearly payment of taxes on the rental
income can be managed from the Equity MF pool.
Fixed Deposits to Debt Mutual Funds: A good way to save tax is to consider moving
the corpus from Fixed Deposits (FD) to Debt MFs. One does not need to pay tax on
a yearly basis with Growth option in Debt MF. If one can hold the investment for > 3
years, then with the long term indexation benefit, the tax liability will be far lesser
than the FD. If one still wishes to keep money only in FD, then the interest income
can be optimized by opting for monthly income into Equity MF SIP.
Tax saving allowances: Finally, one should maximize usage of all tax saving
components allowed by the Employer. One should also keep in mind the
perquisite value being added by the employer against the tax benefit actually
enjoyed. One should not wait for the last month to make investments.
It is often observed that one has extreme focus on the tax on the original earnings.
Tax is also levied on the returns of the investment and / or when the investment is
redeemed. One should save tax on the returns and at maturity as well.
In case of salaried tax payers, often there is an additional tax liability that is known
only while filing the IT return. In case of salaried individuals, the most common
reasons are as below:
1. Fixed Deposits (FD) Interest income
2. Income received on the rented property
3. Job change in between the year
The Banks deduct tax at source (TDS) @ 10% on FD interest they pay so if one is in a
higher bracket, then there is a differential tax to be paid. Normally tenants don’t
deduct any tax while paying the rent and hence this income hits at the marginal
tax bracket and results in a substantial tax liability.
Similarly, when one changes the job in between the year, the new company may
not have been informed of salary earning from previous company. So the new
company starts calculating tax on the salary they pay the employee right from
zero and thus the tax free limit and lower brackets of tax gets double counted.
Sometimes employees mistakenly claim tax benefits (e.g. Section 80 C) from both
the companies. When senior level professionals change job, their income may
exceed Rs. 1 Crore in a year and a surcharge of 10% is applicable which none of
companies included. One may have encashed retirement benefits like
Superannuation or one may have withdrawn from Provident Fund.
All such discrepancies come out when the income is aggregated for Return filing.
The TDS paid by Bank or Employers is reflected in the Form 26 AS, integrated to
one’s account on IT Website. The IT provisions require one to pay interest and
penalty on the overdue tax. The final figure of tax liability often results in disbelief
and emotional reactions as 1/3 of one’s hard earned money is going for taxes.
On the other hand, it is noticed that one does not claim all the tax benefits
available. As an example, Leave Travelling Allowance is most often neglected.
Many employers allow Sodexho Food Coupons but not opted by everyone.
Mediclaim Premium for personal health cover may be paid in the last quarter of
the year and hence not part of the Form 16 and may be missed out in the final IT
return. Employer’s contribution to NPS under section 80 CCD(2) is exempt from tax
up to 10% of one’s basic salary. This is relatively lesser known tax saving
component. Budget 2015 has proposed additional Rs. 50,000 exemption for
Employee Contribution in NPS.
Some of this could be due to lack of awareness or paucity of time in this busy life
but then there is a cost attached in terms of the higher tax liability. Below tips can
help the employees to save on taxes:
HRA+ Home Loan: If an individual’s hometown is in a different city and if one buys
a house in his or her own hometown on home loan then can claim both the HRA
for the rented residence in the city of work as well as loss arising from interest
payment on house property in hometown.
Multiple Home Loans: When you have multiple home loans, then from the 2nd
home onwards there is no cap on the loss arising from interest that you pay on the
home loans. Essentially this means that you will be able to buy another house at
the tax adjusted cost of ~7% if you are in the highest tax bracket.
Rent to Parents: If one is staying in a house owned by one’s parents, then one can
pay rent to them and claim HRA. They will need to declare the rent received as
income but if they are not in the highest tax bracket then at the family level, tax is
saved. One must follow the documentation & actually pay the rent to parents.
Rental to SIP: One way to optimize the rental returns is to invest the monthly rental
income in to Equity MF SIPs. This should only be done when one does not have a
dependency on the rental income and when one has a long term horizon for the
investments. Over a period of time, the yearly payment of taxes on the rental
income can be managed from the Equity MF pool.
Fixed Deposits to Debt Mutual Funds: A good way to save tax is to consider moving
the corpus from Fixed Deposits (FD) to Debt MFs. One does not need to pay tax on
a yearly basis with Growth option in Debt MF. If one can hold the investment for > 3
years, then with the long term indexation benefit, the tax liability will be far lesser
than the FD. If one still wishes to keep money only in FD, then the interest income
can be optimized by opting for monthly income into Equity MF SIP.
Tax saving allowances: Finally, one should maximize usage of all tax saving
components allowed by the Employer. One should also keep in mind the
perquisite value being added by the employer against the tax benefit actually
enjoyed. One should not wait for the last month to make investments.
It is often observed that one has extreme focus on the tax on the original earnings.
Tax is also levied on the returns of the investment and / or when the investment is
redeemed. One should save tax on the returns and at maturity as well.
Happy Investing
Source:Gettingyourich.com
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