One of the main reasons why people shy away from paying taxes is that taxpayers do not see these taxes being spent on things that benefit them directly.
What you pay as tax deducted at source (TDS) is the share of money that the government takes from you for your betterment. The government is supposed to spend this amount on facilities such as building infrastructure, providing education and most importantly on national security. However, many might feel that the money they pay as tax is not utilized properly.
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So, is there a way to spend money on your betterment and yet save tax?
Yes, there is a way to do so. Some call it tax evasion but others call it planning. Just as the law requires you to pay tax, it gives you opportunities to save it as well. And one need not break rules to take advantage of it. With some careful planning, you may not have to pay a single paisa as tax. All it takes is investing in the right areas, such as buying a house, getting your family insured, educating your children and planning for your retirement.
How much can be saved?
This depends on what your salary is and how smartly you manage it. These are the two elements which determine your tax outgo. So how do you know if you’re paying more taxes than you are supposed to? It’s simple: Just calculate your tax ratio. Tax ratio is the percentage of your salary that you pay as tax. To put it differently, tax ratio is the tax paid by you divided by your gross salary.
For example, if your gross salary is Rs 5 lakh, and an amount of Rs 50,000 got deducted from it as TDS, your tax ratio is 10%.
The catch here is that the ratio may differ for people in the same salary bracket. While your tax ratio may be 10%, another person earning the same salary may have a tax ratio of 0%.
Reasons why you could be paying more tax
Ignoring HRA exemption: Hari and Nari live with their parents. Both work in the same office. They also get the same salary. However, Hari pays more income tax than Nari. Why is that?
It’s because Hari pays household expenses to his parents on a monthly basis and Nari simply makes this payment as rent to his parents, who (being older) fall in a lower income-tax slab. This way, Nari claims house rent allowance (HRA) exemption and outsmarts Hari in terms of tax planning.
Tip: Claim your HRA exemption to save tax.
Not claiming medical insurance premium deduction: Hari and Nari earn the same salary. Nari not only gets a health security cover for himself, but also ends up saving more money than Hari. How?
It’s simple. All Nari does is he buys himself a healthcare policy. This way, he lets his insurer bear the medical expenses and claims the premium paid for the policy as deduction.
Tip: Get your medical expenses covered by taking the benefit of a medical insurance premium deduction and save tax too.
Failing to capitalize on home loan tax benefits: Hari and Nari came to the city, dreaming to make it big one day. Hari tries to save every rupee of his salary, hoping that someday he’ll be able to buy his dream home. However, property prices in the metro keep him from owning one. Nari on the other hand makes his dream come true. How? After making a decent amount of money, he takes a loan and buys a house in his hometown. But that’s not all. He also gets a regular rental income out of it and claims home loan tax benefits. This way, Nari pays less tax than Hari.
Tip: Capitalize on home loan benefits to save lax.
Selling capital assets for short-term needs: Hari and Nari get their kids admitted to a school. However, huge sums were demanded as donations, which neither of them had planned for. Hari calls his broker and sells most of the shares that he had bought recently. Hence, he incurs a loss on this deal and has to pay tax for selling the shares before one year. Nari, on the other hand, realized that the requirement was just one time. Therefore, he takes a loan instead of selling his assets. And in the coming months, he easily repays the loan with no additional tax to pay.
Tip: Save tax by applying for a loan instead of selling your assets.
Not reporting income from other sources: Hari makes the mistake of not reporting his income from bank interest. He assumes that there’s no need to declare his income since the bank had already deducted TDS on it.
However, Hari falls in the 20% income-tax slab and the bank had deducted TDS at 10%. The income-tax department discovers this on scrutiny and sends him a notice. Hari is slapped with a penalty of 300% of the tax evaded.
On the other hand, Nari makes it a point to report his income from all sources, including bank interest, dividends and prize winnings while filing his tax returns.
Tip: Never skip any sort of income earned from other sources while filing your income-tax return.
Graphics By Yogesh Kumar/Mint
Edited excerpts from a report by Taxspanner.com. Comment at email@example.com