Everyone wants to reduce tax outgo. However, Tax reduction should be done within the ambit of law & that is termed as tax planning in common language. Income tax laws provide ample opportunities for smart persons to utilise and lower their tax liabilities. These aren’t methods of tax evasion rather there are tax planning tools to reduce tax liability by intelligent use of the provisions of the tax laws. In this article we are trying to explore seven strategies that can help you to save tax without violating the law.
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1) Paying rent to parents
Individuals who live with their parents can also claim HRA deduction by paying rent to parents. It is advisable to pay rent via Cheque or online transfer to parents. However, make sure that your parents own this property, and you are not the owner or co-owner of that property. Besides this, you must enter into a rent agreement with your parents and get receipts for rent paid every month. Please note that rent paid by you is taxable for your parents under the head Income from House Property & they are entitled to claim the deduction of property Tax & standard deduction of 30% on rental Income.
Author’s Remark: Paying rent to parents is acceptable practice subject to fulfillment of certain conditions. If you are paying rent more than Rs. 1 lakh a year one has to furnish the PAN no, of the landlord/owner. Similarly, you can pay rent to your spouse & claim the HRA deductions however, in that case the matter may go into litigation so take your CA’s or tax consultant’s advice before doing that.
2) Invest in NPS
NPS is special kind of Investment that can be used to save tax in three ways. First, NPS investments are eligible for deduction under Section 80C. Secondly if one has already exhausted the Rs 1.5 lakh ceiling under Section 80C one can claim an additional deduction of up to Rs 50,000 under Section 80CCD(1b). Lastly, up to 10% of the basic salary put in the NPS by the employer can be claimed as deduction under Section 80CCD (2). This amount of contribution up-to 10% of basic in NPS by the company on behalf of employee is exempt from Tax.
Author’s Remark: The employees can plan the tax via investment in NPS. This 10% of Basic is allowable as deduction even if private company contribute on behalf of their employees. The only thing is that the entire amount put in NPS is not freely withdrawable, however the plus point is apart from exemption at the time of investment the amount withdrawn at the time of retirement is exempt to the extent of 60% and balance will be taxed at the normal rate.
3) Tax Harvesting
Tax harvesting is one of the most effective ways to bring down the tax liability in equity investing. This strategy usually investors use at the end of the financial year to bring down the capital gain tax liability. Book long-term capital gains by selling some stocks or a part of mutual fund holdings to the extent of Rs. 1 lakh and then reinvest the proceeds immediately. This process can be repeated every year to take advantage of the ₹1 lakh exemption in case of LTCG. Similarly, this technique can be used in case of loss. If you have unrealised loss & realised capital gain, book loss in equity/mutual fund to adjust against realised LTCG/STCG and buy again the same share to keep the portfolio as it is.
Author’s Remark: One must understand the cost involved in it i.e. brokerage & delivery cost of buying & selling securities.
4) Invest in wife’s name
Money given to the wife for her personal expenses is not treated under the clubbing provision U/s 64 of the income Tax Act, i.e. if the wife invests out of this personal money, the income will not get clubbed with that of the husband. One more thing clubbing happens only at the first level of income. If the earnings are reinvested, the income from that will be treated as that of the wife only. For example, if the wife invests the gifted money in tax-advantaged options such as stocks and equity funds, the husband will not be taxed for long-term capital gains of up to Rs 1 lakh in a year and that amount will then be treated as the income of the wife.
Author’s Remark: Investment in Spouse name is beneficial only when the spouse is falling under lower Income Tax bracket.
5) Investment through HUF
HUF is separate taxable entity in the eyes of law and taxed separately. HUF taxed slab wise as individual and almost all the tax benefits an individual has under the Income Tax Act is available to HUF. As HUS is separately assessed, so individual can plan investment via HUF to avail the benefit of basic exemption limit, chapter VI deductions, benefit of long-term capital gain exemption up to Rs. 1 lakh etc etc.
Author’s Remark: Please note salary income or professional fee can’t be taken in the name of HUF. However, one needs to understand the rights of Coparcener & member and their future implication before entering financial transaction in the name of HUF.
6) Utilise exemption for senior citizens
If your parent is a senior citizen and does not fall under the higher tax bracket, you can invest in their name to earn tax-free interest. Adults above 60 enjoy a basic exemption of Rs 3 lakh. Very senior citizens (above 80) enjoy higher basic exemption limit at Rs 5 lakh. Senior Citizens’ Saving Scheme offers higher interest rate compared to other deposits (present Interest rate 7.4%) and the Pradhan Mantri Vaya Vandana Yojana are safe bets. Banks also offer higher rates on fixed deposits to senior citizens. One can also get senior citizens to invest in stocks and mutual funds so that every person can individually benefit from the Rs 1 lakh exemption per year for LTCG. If the total income is below the basic exemption limit, even STCG from stocks and mutual funds will not attract any tax.
Author’s Remark: One needs to be extra cautious while utilising this option, as there may be risk of litigation with siblings. Nomination can be done to avoid the litigation but be careful about family dispute.
7) Invest in name of adult child
Income earned by adult children is not subject to clubbing under section 64. The adult child enjoys separate basic limit exemption and other tax deductions that you do. An 18-year-old can also invest in stocks and mutual funds on his own. You can open a demat account and stocks trading account in his/her name. Up to Rs 1 lakh of LTCG will be tax free in a year and STCG till the basic exemption of Rs 2.5 lakh a year. You can separately invest up to Rs 1.5 lakh a year in child’s name under chapter VI.
Author’s Remark: Gifting money to an adult child and investing in his name is tax-efficient but may be risky so be very careful. A gift is irrevocable and once given, there is no looking back. In your attempt to save 20-30% tax, you could lose 100% of the principal if the child is financially irresponsible.
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Disclaimer: The above article is prepared for understanding & study purpose. We recommend you consult your CA or tax consultant before taking any decision & author will not be responsible for any lose due to decision take based on above article.
You can reach Author at ca.rahuldwivedi@gmail.com or 9004485377.
Author Bio
PARENT OR GRAN PARENT CAN INVEST IN HDFC Childrens Gift Fund DIVERSIFIED INCOME FOR THE FUTURE OF THEIR GRAND CHILD FOR THE BETTERMENT OF HIS OR HER FUTURE
The taxation is the most complicated thing to understand. Author has simplified this to understand and has well explained how tax can be saved and also be in compliance at the same time. Great efforts.