How to save tax the proper way
Are you familiar with the end of each financial year when the thought of presenting investment proofs to save on taxes gives you jitters? Do terms like HRA, insurance, LTA, and medical claims still puzzle you? Are you worried that even after submitting all your proofs, you might still attract an income tax notice? It might be a better strategy to start saving at the beginning of the financial year and inform your company accordingly.
Common Mistakes That Could Trigger Income Tax Notices
How many times have you heard about someone who diligently submitted all their proofs, filed their returns on time, and still received an income tax notice? Here are some common mistakes that could lead to an income tax notice:
- Account Interest Earned: Are you accounting for the interest earned on fixed deposits, savings accounts, recurring deposits, and infrastructure bonds? Even if banks have deducted TDS (Tax Deducted at Source), you should still account for these earnings. Remember that the tax exemption of up to Rs 10,000 a year under Sec 80TTA applies only to savings accounts.
- Accounting for Income from Previous Jobs: With frequent changes in employers, individuals often forget to account for income earned from previous employments. Your new employer may not consider income from your previous job for TDS (Tax Deducted at Source) purposes. It's wise to inform your new employer about your previous job's income to ensure accurate TDS deductions.
- Filing Tax Returns: Some individuals, like Avinash's mother, mistakenly believe that they don't need to file tax returns, especially if they are senior citizens and non-earning members. However, please note that individuals whose income exceeds the basic tax exemption limit must file their tax returns for the relevant financial year.
Tax Saving Tips You Might Not Be Aware Of
Here are some quick and effective tax-saving tips that you should consider:
- Gift Money to Your Children: You can save on future income tax by gifting money to your children.
- Claim Stamp Duty and Registration Fees: If you've recently purchased property, you can claim stamp duty and registration fees under section 80C.
- Joint Ownership of Property: Buying a house with siblings or parents as joint owners can help you save on taxes. Joint loans can also result in tax deductions from both partners' respective incomes.
- Opt for Education Loans: Taking an education loan can help reduce your tax liability.
- Tax-Free Surrender of Insurance Policy: If you've surrendered an insurance policy and received an amount not exceeding 20% of the sum assured, it's tax-free.
- Long-Term Capital Gains: Hold on to your stocks or mutual funds for at least a year to benefit from tax-free long-term capital gains.
- Tax-Free Gifts: Gifts received from your family and friends are typically tax-free.
According to the 2017 budget, the sale of immovable assets after 2 years will be considered as long-term capital gains, and this amount will be subject to indexation benefits. The base year for indexation has moved to 2001-02 instead of 1980-81, resulting in lower capital gains tax.
Tips for Saving Income Tax Through Planning
Here are some practical tips for tax planning and saving on your hard-earned money:
- Salary Restructuring: You can ask your employer to restructure your salary to differentiate between allowances and expenses, which can provide tax-saving opportunities.
- Leave Travel Allowance and Medical Bills: Take advantage of tax exemptions on medical bills (up to Rs 15,000 per financial year) and tax-free leave travel allowance (available twice in a period of 4 years).
- Investments That Are Tax-Free: Consider investments like five-year fixed deposits and tax-saving investment schemes to reduce your tax liability.
- Charitable Contributions: Donating to temples, NGOs, religious bodies, or scientific institutions via cheque or online transfer can result in 100% tax savings.
- On-Time Tax Payment: Avoid penalties by paying advance tax on time.
- Medical Insurance: You can claim deductions for health insurance premiums for your family and dependent parents over and above the Rs 1.5 lakh limit.
Five Special Financial Tips for High-Income Earners
High-income earners may face higher taxes, but these tips can help save taxes legally:
- Invest in Shares and Mutual Funds for the Long Term:
- Leverage Tax Benefits for Home Loans:
- Utilize Debt Funds for Long-Term Gains:
- Explore Tax Exemptions for NRIs: Consider investing in term deposits under NRE (Rupee deposits) or FCNR (Foreign currency deposits) accounts to earn tax-exempt interest income.
Five Ways to Legally Reduce Your Tax Liability
Many individuals attempt to conceal their income to avoid taxes, but there are legal strategies to reduce your tax liability:
- Plan Ahead:
- Joint Ownership of Assets and Property:
- Long-Term Investments:
- Leverage Loans for Tax Savings:
- Claim All Allowances:
If you have any more questions or need assistance, please don't hesitate to contact us. We are here to help you with your financial planning and investment decisions.
Content Strategist, Dilzer Consultants Pvt Ltd
- Economic Times
- Jago Investor
- Cash Overflow
- Plan Money Tax
- Financial Express
- Date: 10th February 2017