Don’t Overpay Your Taxes, Be Informed

With 31^st March is just around the corner, most of us would have by now started this year's tax planning.After all, there arefew more demoralizing things than watching your hard-earned income get slashed by taxes. While some hire chartered accountants, others pore through tax laws, or ask friends to find out how to save tax. The core objective remains the same in taking informed decisions, leveraging the tax breaks and capitalizingon whatever tax laws have on offer for us. Here are some smart strategies/deductions beyond conventional measures to reduce the tax outgo:

Invests in parent’s name

While you are wondering to save your taxes outside, the most effective tax saving tool could be in your house in the foam of your old parents or children’s. They can bring down your tax liability in various ways, provided they are in a lower tax bracket or already retired. Exploiting the loophole of Sec 56 of Income Tax Act, relating to tax on gifts, one can broad base itsincome by transferring money to them which can then be invested in their name. Also provision relating to clubbing of income would not be applicable here as family members (except spouse) who are major (above 18 years of age) can freely be given any amount of money as a gift without the donor coming into the clubbing net.

Thus if MR xsells his house property worth Rs 50 lakhs. Of this, you gift Rs 24 lakh each to your senior citizen parents. Your money gifted to father and mother is tax-free in the hand of parents as per Sec 56 of Income Tax Act Your gifted money that is Rs 24 lakh, is invested by your parents into fixed deposit earning 10% interest per year. The parents being senior citizens, they will earn interest rate higher than earned by you from the fixed deposit. Each of your parents will earn interest income of Rs 2.4 lakh per year from fixed deposit investment of Rs 24 lakh. The earning for each parent is tax-free as this income amount is within the tax-free limit of Rs 2.4 lakh not-taxable income for senior citizen. Using the above strategy you have made interest income of Rs 4.8 lakh from fixed deposit of Rs 48 lakh tax-free. Otherwise you would have paid 30% tax on interest income of Rs 4.8 lakh. They don’t even need to file any return. However it is worth noting that it’s not the whole Rs 50 lakhs, but the returns (interest) on it that can be made tax-free.

Set off long term loss against parents income

You can also minimize losses in share market and save capital gain tax through parents. If you have attracted long term capital losses, the same cannot be adjusted with your long term gains or short term gains for an individual. but old parents can help reduce your money as senior citizens are allowed to offset long term capital gain against other assets such as property, debt funds etc. Beside, enjoys the privilege to carry forward unadjusted loss for up to 8 successive financial years.

Be informed about you higher exemption

Everyone waits for that time of the year when they receive that lump sum called bonus from their employer. A bonus is generally paid at the end of the financial year (31st March) and is fully taxable on receipt basis for the year in which you receive it. But one can certainly use the favorable tax slabs, which you know in advance before the year closes out. An individual can get his/her employer to make the bonus payment in the subsequent year, thereby also pushing the tax liability to the subsequent year in which you are entitled for higher exemption thereby lower tax burden.

Mr. X, a salaried employee earns a fixed Rs 20,000per month and is to receive Rs 50,000 performance based bonus for the year 2010-11 from his employer. As per the current slabs rates his total outgo for the year would be Rs 13,000 (10% on 1,30, 000) assuming no savings for X. However, after the budget 2011-12 he know he is entitled to higher exemption limit of Rs 1,80,000 for the year 2011-12, he get his employer to make bonus payment in April, 2011. This way he will pay only Rs 11,000 as taxes and utilizing his higher exemption limit advantages.

Form trusts for children

Spouses can get additional exemptions by creating a trust u/Sec 164 of the Income Tax Act. A private trust can be created for an unborn son or daughter, or for the future spouse of an existing son or daughter, by allocating funds to the trust through transfer of property, rent of which shall be income of the trust. Such a trust would be liable to assessment as a separate taxpayer under the category of artificial juridical person.Mr. X creates a trust for his 2 minor childrens by allocating those cash worth Rs 1, 50, 000. Any interest income derived by investing this money would be taxable in hands of trust which would enjoy a separate exemption of Rs 160,000.

Don’t choose new house as self-occupied:

If you have taken housing loan for a self-occupied property during the year and have more than one house, The Income Tax Law provides you the option of choosing one property as self-occupied (used for the purpose of own residents) while other will be deemed to be let out. Choose the house for which loan is taken as deemed to be let out. This is because as per Sec 24 of IT Act, if anindividual uses the property for self-occupation, he can claim a deduction for the interest amount up to a maximum of Rs 1.5 lakh as deduction for self-occupied property, whereas if the property is rented the entire interest paid is allowed as a deduction, hence lower tax liabilities.

Thus X, a salaried employee, takes a home loan for a new property and pays an interest of Rs 2, 50,000 for 2010-11. X can claim a deduction of Rs 1, 50, 000 if he is occupying the new property for his own residence. However, if he had decided to let out that property, he will be eligible to claim the entire amount (Rs 2, 50,000) as deduction from the rental income.

Claim stamp duty, house registration under 80C

If you are feeling privileged of buying a house in 2010-11, time for more happiness. Many of you wouldn’t be aware of that Income Tax permits you to claim Stamp duty and the registration fees of the documents for the house as deduction under section 80C in the year of purchase of the house. An important point to note here is that you should be in possession of the house if you want to claim these deductions. So in case of under-construction properties, you lose out on claiming this deduction.

Claim Per diems deduction:

Often employees are travelling abroad for official tours. For such employees, Income Tax act allows them Per diem (allowance for daily expenses) which includes out of pocket food expenses, conveyance, traveling expenses and their like. They all are allowable and exempt from tax under Section 10(14)(i) of the Act with Rule 2BB(1)(b) of the Income-Tax Rules, 1962, if the same are actually incurred. Thus If Mr. X is posted abroad and spends $100 on food, travelling etc. on a daily basis. X is entitled to claim per diem allowance he spent.If not claimed earlier, there is still time left for you as they can also be claimed in lump-sum at the end of financial year.

Don’t receive HRA, get deductions for rent paid

Salaried people who pay rent and get a house rent allowance (HRA) can claim exemption of that amount in most cases. But what if you are not salaried? What if you are a businessman paying rent? Or, what if you are salaried but do not get any HRA? Then a relatively unknown Sec 80GG provides you a deduction up to the least of the following:

1.Rent paid less 10% of total income

2.Rs. 2000/- per month

3.25% of total income

•Assesse or his spouse or minor child should not own residential accommodation at the place of employment.

•He should not be in receipt of house rent allowance.

•He should not have self-occupied residential premises in any other place

Avoiding TDS on certain income

Sitting comfortable knowing you don’t fall in tax bracket. Hang on…. knowing your tax exemption limit is not enough. You might be earning incomes on which TDS is deducted even though you are not eligible for paying taxes, e.g. tax on interest income from FD. Avoid those taxes before the financial year closes. See the example below:

Y, a 27-year-old woman, is employed and also has an FD at a bank. The following is her income and taxability situation:

Salary income: Rs. 1.40 lakhs per annum

FD interest Income: Rs. 30,000 per annum

As Radha earns more than Rs. 10,000, she will be liable to a TDS deduction at source. However, she is not entitled to as Y’s total income (salary + interest income) is below the annual exemption of Rs. 1.90 lakhs available to women. Nevertheless, taxes will be deducted from her interest income at the bank where she holds her FD.

In such cases, Y will need to furnish a declaration before 31^st March, using the prescribed form to the bank or entity responsible for deducting tax. This declaration needs to state that no tax deduction is required because the income level does not fall into the taxable slab. The bank on the basis of details furnished will allow TDS to be rolled back within a stipulated time period.

What are these prescribed forms?

Form 15G: Applicable for a resident individual, other than a senior citizen

Form 15H: Applicable for a senior citizen