- Tax laws offer enough opportunities to legitimately reduce tax liability.
- There are ways to reduce tax liability through the legitimate use of the tax rules available.
- So those in their 50s can invest up to Rs 50,000 under 80CCD (1b) in NPS after exhausting the full Rs 1.5 lakh limit under Section 80C.
New Delhi: In an attempt to increase tax collection, the government has been putting tax-free investment options under the tax net in recent years, leaving investors with a minimal choice for tax-deferred EEE schemes (exempt, exempt, exempt) at all levels – at the time of investment, annual return and maturity benefits.
In 2018, for example, the tax exemption for long-term capital gains from stocks and equity-based funds was abolished. In 2020, dividends from stocks and mutual funds were made taxable. That year (in 2021) the government made interest earned on pension fund contributions in excess of Rs 2.5 lakh in one year taxable. Even Ulips with premiums above Rs 2.5 lakh in a year will now lose the benefits of Section 10 (10D).
Given that the tax burden on individual taxpayers is increasing every year, they can take steps to minimize their tax expenditures. According to tax experts, tax laws offer sufficient opportunities to legitimately reduce tax liability. It is worth noting here that we are not proposing tax evasion, but rather ways of reducing tax liability through legitimate use of the tax rules available. Here are five such suggestions:
Take advantage of the latest rule changes in the NPS
Recently there has been a change in the payout rules of the NPS system that makes the retirement system attractive to new investors, especially those over the age of 50. Under the new rules, if the NPS corpus is less than Rs 5 lakh at the due time, the subscriber can withdraw the entire amount without purchasing an annuity.
It is worth noting here that many investors have stayed away from NPS due to the obligation to retire from 40% of the corpus, as they want to lose access to their pension corpus.
But now with the rule change, you can use NPS to save taxes in three different sections. First, NPS investments of up to Rs 1.5 lakh in a year are deductible under Section 80C. If one has already exhausted the limit of Rs 1.5 lakh under Section 80C, he can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1b). Finally, under Section 80CCD (2), an investment of up to 10% of Base Salary in the NPS by the subscriber’s employer can be deducted as a deduction.
So those in their 50s can invest up to Rs 50,000 under 80CCD (1b) in NPS after exhausting the full Rs 1.5 lakh limit under Section 80C. If the person retires at 60, their entire NPS corpus would not have grown to more than Rs 5 lakh, so the amount can be withdrawn without opting for an annuity.
Taxes on HRA can be saved
Most employees receive a housing allowance (HRA) as part of their pay structure. HRA can be up to 50% of an employee’s base salary and represents nearly 25% of an employee’s gross wage. This amount becomes partially taxable if the person lives in a rented apartment. If the person does not pay rent, this amount becomes fully taxable.
It has been observed that many young taxpayers living with their parents do not apply for an exemption from the HRA and pay higher taxes. Tax experts say taxes on HRA can be avoided in certain cases.
If your parents own the property you live in, you can pay your parents the rent and apply for an exemption from the HRA. However, the rent received from the parents is taxable.
But according to the provisions of the Income Tax Act, if the annual rent exceeds Rs 1 lakh per year, one must provide PAN details of the landlord while applying for exemption from HRA. If the landlord does not have a PAN, he must submit a corresponding declaration.
Tax experts say this scheme will be beneficial for your parents, even if they fall into the 30% tax bracket, as they can claim 30% of the standard deduction from rental income. So if your parent receives a monthly rent of Rs 20,000 (Rs 2.40 lakh per year), after taking into account the 30% standard deduction, they will only be taxed at Rs 14,000 (Rs 1.68,000 annually).
This agreement can also be made with a sibling or another relative. Please note that you cannot pay rent to your spouse or minor child and you cannot apply for an HRA exemption.
According to tax experts, proof of such transactions (rent payment) should be kept by transferring the rental amount monthly to the owner’s bank account or by paying by check. Even if a taxpayer does not receive an HRA from his employer, he can apply for an exemption from rent payment of up to 5,000 rupees in accordance with Section 80GG.
Use the exemption for seniors
If a taxpayer makes an investment on behalf of his or her spouse or minor child under the provisions of the Income Tax Act, the return on that investment will be added to the taxpayer’s income. However, there is no reduction in income when you invest on behalf of your parents or grandparents. It is worth noting here that interest rates that seniors earn up to Rs 50,000 a year are tax free and enjoy a basic allowance of Rs 3 lakh. For very older citizens over 80, the basic exemption limit is even higher at Rs 5 lakh.
So if your parents or grandparents don’t have any further income, you can invest a fixed-term deposit on their behalf to enjoy tax-free interest income.
The best option in this case is senior savings, which currently offers 7.4% interest. It should be mentioned here that banks offer senior citizens higher interest rates on fixed-term deposits.
Invest in the housewife’s name
According to the provisions of the Income Tax Act. A taxpayer can give money to his wife. But if your wife invests this money and earns an income from that amount, that income is added to the person’s income and taxed according to their tax table. This is done in accordance with the provisions of Section 60 in order to avoid tax evasion.
However, tax experts say that money given to the housewife for her personal expenses does not fall within the scope of the clubbing provision. “There is no fixed amount or percentage prescribed by the tax law, but it is safe to assume that someone with an income of 1 lakh rupees a month will give their wife 10,000-15,000 rupees for their personal expenses,” ET quotes Wealth as said Chhaya Kothari, founder of Mumbai-based CK Financial Advisory.
If your wife invests out of her personal money, the income will not be combined with the husband’s income. However, some tax professionals are not convinced. “Money for personal expenses remains a gray area and should not be placed on unreasonable limits,” the publication is quoted as saying, said Gunjan Kapoor, a Delhi-based auditor.
Kapoor says there are better ways to get around the clubbing rule. Clubbing only takes place on the first income level. When the income is reinvested, the income from that reinvested money is treated like that of the wife and is not combined with the husband’s income.
Let’s see what happens when the woman invests the money given in tax-privileged options like stocks and equity funds. The husband is not taxed for long term capital gains of up to Rs1 lakh in a year. This amount is then treated as the wife’s income and can be reinvested without fear of clubbing.
Invest on behalf of an adult child
Just like parents, your adult children can help you save on taxes. If your children are over 18 years of age, they will be treated as an independent natural person for tax purposes. Your adult child will receive the same exemptions that you enjoy along with other tax deductions. The income from the investment made on their behalf is therefore not combined with the income of the parents.
Once your child turns 18, you can open a PPF account on their behalf and invest up to Rs 1.5 lakh in their PPF account in a year for another source of tax-free interest income.