We know the importance of timely Tax Planning, and factoring tax efficiency while making investment choices. The whole gambit of taxation is quite huge as it covers the entire scope of income and taxation. Some of the elements are very common, esp. to the salaried class. These should be at the back of our mind while carrying out our tax planning. Including these provisions/avenues in our tax planning can hep us save tax.
Subscribe to NPS-Save More Tax
The National Pension Scheme (NPS) is an important avenue to save additional tax. Subscription up to Rs 50,000/- is permissible for deduction under Sec 80 CCD(1B). This exemption is over and above the Rs 1.5 lakh exempted under Sec 80 C. This translates to a tax saving of Rs 15,000/- for someone in the highest tax bracket. The can consider increasing the subscription, if and when, the govt increases the ceiling of Rs 50,000/- for tax relief.
Public Provident Fund (PPF) for Risk-Free & Tax-Free Income
The details pertaining to PPF have been discussed in “PPF-The Silent Growth Tool”. The General Provident Fund, is available only till the time one is serving. PPF is a great tool for tax free income which you can continue to subscribe even after retirement. Progressively we are left with little/negligible avenues of tax-free returns. The interest rates on PPF have been steadily declining reflecting the trend of all interest-bearing instruments. They will however always remain the best available option for risk free and tax free income at any given time.
Roll Over Capital Gains from Equity
We have discussed earlier about the tax treatment of capital gains from equity. The Long-Term Capital Gains up to Rs 1 Lakh are exempt from tax. The duration of year is counted from the date of purchase. And the tax liability occurs in the year of redemption. Even if you do not need funds, you should redeem LTCG amounting to Rs 1 lakh, and re-invest them. This way one would be able to convert the gains into capital, without paying any tax.
We can try to understand this with an example. If I invested Rs 10 lakh which grew to 11 lakhs in one year, then the LTCG is of Rs 1 lakh. On redeeming and reinvesting, the gains of Rs 1 lakh shall be tax exempt. And the capital invested now will become Rs 11 lakh. If I choose not to redeem it, then the gains might further increase and say, it becomes Rs 12 lakh after two years. The LTCG now is Rs 2 Lakh. In this case, if I redeem now, I will get exemption on LTCG up to Rs 1 Lakh only. The balance of capital gains i.e. Rs 1 lakh will be taxed at 10 %. Basically, one has the option of saving tax on LTCG up to Rs 10,000/- every year, which should be exploited.
Build Portfolio of Spouse
As per the clubbing of income provision in IT Sec 64, any income of spouse or minor child, derived from assets procured from funds provided by you, shall be clubbed with your income for taxation purposes. However, once taxed, this income is subsequently of the spouse. The subsequent earning from this income shall not be clubbed for taxation. Making use of this provision, it makes sense to build a portfolio of non-earning spouse over time. The earning from this portfolio can be clubbed once, but subsequently this income can create a separate corpus free from clubbing provision. The subsequent income from this corpus become taxable in the hands of the spouse. If the spouse is non-earning, then this income will remain either tax-free, or at the much lower tax-slabs.
Transfer Assets to Adult Children
Once the children attain majority, i.e. 18 years, they become independent tax entities. Any income earned from assets transferred to them are taxable to them. In the initial years after 18, till they actually start earning, their tax liability would be very low. That makes them an attractive avenue to save tax. This aspect can be suitably integrated in the financial plan pertaining to education and marriage related financial objectives.
Prefer Debt Funds over FDs to Save Tax
For senior citizens (>60 yrs.) interest on savings account and FDs is exempt up to Rs 50,000/- under Sec 80 TTB. For others, interest received in the savings account only, is exempt up to Rs 10,000 under Sec 80 TTA (Interest on FDs is taxable at marginal rates). If there are idle funds above the threshold levels making the interest income taxable, then it is prudent to deploy them in Debt Funds. The short-term capital gains (3 years) on Debt funds is taxable at marginal rates. But long-term capital gains are taxed at 20% with benefit of taxation. It is therefore far more beneficial as compared to an FD. Those averse to any risk can choose only those schemes which invest in Government Securities.
Sec 54-C : Capital gains Bonds
The long-term capital gains from sale of real property are taxed at 20%. The tax is however exempted if the gains are re-invested in property within two succeeding years or one previous year. However, if one does not want to re-invest in property, then one can save tax on gains up to Rs 50 lakh by investing in Capital Gains Bonds under Sec 54(EC). The amount invested earns interest at the rate of about 5.75 % . This interest is taxed at marginal rates, and the lock in period is five Years. I would however, caution here that the option should be analyzed against the opportunity cost. While one might save on tax, the low interest and high inflation could be less beneficial as compared to the option of paying applicable tax at 20%. This will also give freedom to invest the capital gains amount in better avenues.
Save Tax-Open Savings Accts for Minor Children
It is advisable to open savings accounts of minor children as early as possible. This will go a long way in enhancing their financial awareness. From the tax point of view, though clubbed with your income under clubbing provisions, interest income up to Rs 1500/- received in each minor’s account is exempt from tax.
Transfer Assets to Non-Earning Parents
If the tax slab of parents is lesser, then you can consider transferring some assets to them. Gift to parents is tax-free. And income earned by these assets will be taxable to them at much lower tax rates.
Optimize Home Loan Structure
As per revised regulations, the negative income from house property to set off against interest payment on housing loan has been limited to Rs 2 lakh. You can carry forward the losses for next eight years. But it should be noted that the initial years of loan repayment include the bulk of interest payment. Therefore, if the loan amount is large, the carried forward losses might not get adjusted within the eight years. And the consequent tax rebate would extinguish. Further with each year, the value of rebate received will drop on account of inflation. To the extent possible, try to structure the amount and tenor of housing loan in a manner, that the entire interest payment qualifies for rebate.
Buy Insurance
Under Section 80D, one can get deductions up to Rs 25,000 for parents under the age of 60, and Rs 50,000 if they are above 60. These limits are over and above the 80D limit of Rs 25,000 for health insurance purchased for self, spouse and dependent children.
Conclusion
The avenues and provisions mentioned above are not exhaustive, but some of the most commonly utilizable. Tax saving should also be matched with other aspects like liquidity, risk and returns. Availing maximum possible benefits would be possible only through deliberate planning and timely execution. One also needs to stay abreast of changes in tax provisions so that the plans and actions can be suitably modified.