Means and ways to save tax
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It is often observed in case of salaried tax payers that there is a tax liability that one needs to pay and this is known only while filing the IT return. In case of salaried individuals, the most common reasons are as below:
- Fixed Deposits (FD) Interest income
- Income received on the rented property
- 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 between the two companies 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 One may have encashed retirement benefits like Superannuation or one may have withdrawn from Provident Fund.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 IT 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 almost one third 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.
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 can he or she 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, one can save the taxes. One must follow the proper documentation and 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 in Fixed Deposits component is to consider moving the corpus from Fixed Deposits 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 Fixed Deposits. If one still wishes to keep money only in Fixed Deposits, then again the interest income can be optimized by opting for monthly income into Equity MF SIP for long term investments.
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 make tax saving investments in such a way that tax is saved on the returns and at maturity as well.
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