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How To Save More Tax

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How To Save More Tax
Vishav - 06 October 2020

It is that time of the year when most salaried individuals are filing their income tax returns. If planned carefully, one can substantially reduce the tax outgo with exemptions and deductions, allowed within the framework of Income Tax Act.

Salaried taxpayers constantly struggle between income and tax savings. While most people know about the deductions of upto Rs 1.5 lakh under Section 80C of the Income Tax Act, there are various other ways to save you tax. According to Prashant Joshi, Co-Founder and Partner, Financial Research and Advisory Services, Fintrust Advisors, understanding one’s taxable income is a pre-requisite, as allowances and deductions for salaried and self-employed individuals are different. One should know there are tax-saving expenses and tax-saving investment instruments and both help in optimising and maximising tax saving, he says.

Tax saving expenses like insurance premiums, children’s tuition fees, EPF contribution and home loan repayment let you avail tax benefits under Section 80C. Expenses on health insurance premium paid for yourself, spouse, children and dependent parents under Section 80D allow one to go beyond the Rs 1.5 lakh limit set under Sec 80C.

“Though Section 80C does offer a major tax-saving deduction, there are other sections that one can explore like 80D, 80E (repayment of an education loan), 80EE (interest payment of the home loan for first-time buyers), 80DD (for a dependant who is differently-abled), and 80GG (rent paid for accommodation), among others. One should consult a tax-planner for better understanding of these sections and their application to save the tax outgo,” Joshi advises.

Rajeev Srivastava, Chief Business Officer at Reliance Securities feels that among some lesser used deductions include stamp duty and registration fees on purchase of a house, funding medical expenses of parents not covered by health insurance, interest payment on loan taken from parents for a house purchase and donation to charitable institutions.

“Under the widely-used Section 80C, the tax benefit on stamp duty and registration fee on house purchase is not that common when it comes to its usage. This benefit can come in handy, particularly for those who have taken a home loan towards the financial year-end as the principal component is lower in the initial years. Maximum permissible deduction is Rs. 1.5 lakh. This deduction can only be claimed in the financial year of purchase,” he says.

Parents aged above 60 years are commonly in need of recurring medicines or hospitalisation. If one finances these medical expenses, one is allowed tax breaks akin to paying health insurance premium up to a maximum of Rs 50,000 in a financial year.

“Under Section 24B, deduction is allowed on home loan interest paid even if the loan is taken from parents. A deduction up to a maximum of Rs 2 lakh per financial year is allowed. This is particularly useful if parents are under lower tax brackets and an interest certificate is produced claiming payment of interest,” Srivastava explains.

When it comes to tax saving investments, there is a plethora of options. There are market-linked investments like Equity Linked Saving Schemes (ELSS), National Pension System (NPS) and there are fixed income tax-saving avenues like Public Provident Fund (PPF), Voluntary Provident Fund (VPF), Senior Citizens’ Savings Scheme (SCSS), Post Office Time Deposit Account, National Savings Certificates (NSC), Sukanya Samriddhi Yojana (SSY) and tax-saving Fixed Deposits (FD). 

According to Joshi, the choice between these two categories should be guided by one’s risk appetite, ability to handle volatility, liquidity requirements and time horizon available for specific goals. “One should look at the tax-treatment of the investment options and post-tax returns to evaluate the actual benefits offered by the investment avenue,” he says.

Interest income earned from FDs are taxed at an individual’s applicable slab. “For an individual with a 30 per cent tax bracket, an FD with a five-year lock-in having a 6 per cent interest rate, will give post tax returns of nearly 4.2 per cent. While this is good to preserve capital, but post adjusting for inflation, it will not lead to wealth creation over long term,” he argues.

However, capital gains from ELSS get the same treatment in income tax calculation as rest of the equity instruments. Short-Term Capital Gains (STCG) attract a tax of 15 per cent, while Long-Term Capital gains (LTCG) are only taxable at 10 per cent, if the gains exceed Rs 1 lakh during the financial year. 

According to Rajesh Gupta, Co-Founder and Director, BUSY Accounting Software, tax authorities allow corporates to structure a tax efficient salary for employees and help save through allowances as part of the income. There are numerous tax deductibles permissible under the Income Tax Act including Employees Provident Fund (EPF), Leave Travel Allowance (LTA), House Rent Allowance (HRA) and children’s education allowance, among others.

Many corporates give food allowance to employees. These non-transferable coupons are tax exempt to the extent of Rs 50 per meal. For the whole year, one can claim a deduction of over Rs 25,000 (assuming a five day working week). Similarly, one can claim deductions on phone bill reimbursements. One can negotiate to have a part of the salary structure in the form of these components to save tax.

“Also, one of the most effective ways to ensure a higher amount of salary in hand at the last date of the month is to declare your investments promptly to the employer at the beginning of the financial year, so that the employer can consider these investments before arriving at your tax liability and the tax deductible every month,” advises Gupta.

One must remember that tax-saving should not be a goal in itself. No matter how incidental tax-saving may be to one’s finances, the broader financial plan should be aligned to one’s risk profile and financial goals. Make informed decisions and optimise the tax outgo.

Salary Components Reduce Tax Burden

  • Employees’ Provident Fund
  • Leave Travel Allowance
  • House Rent Allowance
  • Food Allowance
  • Car Maintenance Allowance
  • Children Education Allowance
  • Phone Bill Reimbursement
  • Uniform Allowance
  • Gift Voucher upto Rs 5,000 a year

Some Less Used Tax Deductions

  • Stamp duty and registration fees on purchase of a house
  • Funding medical expenses of parents
  • Interest payment on home loan taken from parents
  • Health insurance premium
  • Donation to charitable institutions
  • Repayment of education loan
  • Interest on loan for purchasing electric vehicle
  • Interest from savings account upto Rs 10,000

vishav@outlookindia.com

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