Chances are that if you are one of the salaried millions, you are at this point in time running around trying to put some of your money in tax shelters so that the government doesn’t take all your savings away. Some prefer to use the services of a chartered accountant to save as much tax as they can. Most people think an investment of Rs1 lakh, under section 80C of the I-T Act, is the maximum possible.
However, with individual salaries zooming north and sources of income multiplying like never before, a bit more effort on the part of a taxpayer can reduce the tax burden considerably.
Many of you may have already submitted your tax declaration form—the declaration given to an employer stating all your tax-saving investments for that financial year. You still have time to make your investments by March end and claim your refund later while filing the tax return.
Here are six ways to be tax wise in 2008.
BUY A HOUSE
The best way to save on income tax is to buy a house on a loan. Not only do you get a tax deduction on the interest on the loan but part of the principal is also deductible. Real estate also appreciates in value, so buying a home could be a win-win situation.
“Even if you have the money to buy a house, it is worthwhile to buy a house on loan because you can put your money in a mutual fund and enjoy a tax-free income,” says Subhash Lakhotia, a New Delhi-based tax consultant. “In addition, you would earn by capital appreciation of your property.”
Benefits: Under section 24 of the I-T Act, a taxpayer is eligible for an annual deduction of Rs1.50 lakh on the interest component of the loan, if the accommodation is for the person who has availed of the loan.
In addition, section 80C covers deductions related to the repayment of the principal amount of the home loan, along with other tax-saving instruments such as the Public Provident Fund (PPF), National Saving Certificates (NSCs), equity-linked mutual funds, tax-saving bonds or unit-linked insurance plans (Ulips)—up to an overall limit of Rs1 lakh. In case such property is given on rent, the interest from the income will be tax-free.
So buying a house can save up to Rs75,000 in taxes, if you have not made any other investments under section 80C.
INVEST INCOME FROM LONG-TERM CAPITAL GAINS
Long-term capital gains from the sale of property can be tax-free if reinvested in any other homestead property or permissible securities such as bonds issued by National Highways Authority of India, Rural Electrification Corp. Ltd or other such organizations.
The period of holding of the asset determines whether the gain is short term or longterm. Short-term capital gains arise on transfer of assets such as shares, mutual funds or other listed securities, which are held by the assessee for a period not exceeding 12 months (36 months for other assets). Long-term capital gains ariseif the assessee holds assets such as shares, mutual funds or other listed securities for a period exceeding 12 months (36 months in the case of other assets).
In the case of other assets, including a residential house and landed properties, long-term capital gain is taxed at 20% in addition to surcharge and education cess as applicable, while short-term capital gain attracts the normal tax rates.
Long-term capital gain arising out of transfer of shares, securities and mutual funds is exempt from income tax, provided securities transaction tax has been paid on such transfers. But where such gain is short-term, it would attract tax of 10% in addition to surcharge and education cess.
Benefits: To avoid paying tax on long-term capital gains, section 54 says that one has to buy a residential property within one year before the sale, or within two years after the sale. If a new house is to be constructed, section 54 grants three years’ time from the sale of the property for long-term capital gain to be exempted from tax, subject to fulfilment of certain conditions, says K.H. Viswanathan, executive director of Astute Consulting and Business Services Pvt. Ltd, a Mumbai-based accounting and consulting firm.
ALWAYS COMPARE NET YIELD AFTER TAX
Before signing up for any investment plan, be sure to first calculate the net yield after tax. Sometimes, high interest rates can be a misleading indicator because the income generated at the end of the tenure might not be tax free.
Benefits: Consider this. While income generated form bank deposits (9%) is taxable for investors, it is tax-free for Public Provident Fund investors (8%). Similarly, income from National Savings Certificates is chargeable to tax that can reduce your net yield considerably.
PLAN YOUR SALARY AND PERQUISITES
Many organizations give employees the option to plan staff salary and perquisites. With a little tweaking, the salary structure can reduce the tax burden and enhance take-home pay.
Benefits: Inclusion of tax-free allowances can reduce your tax bill. Some of the partly or fully tax-free allowances include house rent allowance (in case rent is paid), conveyance allowance, which is exempt up to Rs800 per month, leave travel allowance, which is exempted once in two years, medical reimbursement, which is exempt up to Rs15,000 per year. But while structuring your salary, be careful to include only those allowances which are in accordance with your job profile.
EXPLORE OTHER TAX ENTITIES
Experts say you can reduce tax substantially if other members of your family file an I-T return too, because this helps in the segregation of your income.
Benefits: If you already own a house in which you live, you can buy a second house in the names of those family members who do not own homestead property. This is a useful option considering the amount of deduction a home loan can get. Investing in commercial property, however, has no tax advantages.
Gifts to relatives (spouses, brothers or sisters, brothers or sisters of a spouse, brothers or sisters of either of the parents, or direct blood relatives) are tax exempt.
Benefits:In case of gifted assets, the income earned from such gifted assets shall not be taxable in the hands of the donor except in the case of a gift given to a spouse or son’s wife.