Its that time of the year again when people accelerate the pace of savings and investment, and also start looking for ways to lower their tax bill.
After all, theres nothing more demoralizing than watching your income get slashed by taxes. After all, its your hard-earned money, and you wont like it go for whatever cause that may be.
Nothing much, however, can be done to keep the taxman at bay. Simply because taxes are said to be as inevitable in life as death.
Still, there are ways to save taxes, particularly if planned judiciously and well ahead of time.
Here are some tips to reduce your tax burden:
Smart ways to lower your tax bill
Deductions under Section 80C
Of the sections that offer you tax breaks, Section 80C tends to be most popular since you can get an exemption of up to Rs 1 lakh on contributions to a wide range of investments.
These include Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), unit linked insurance plans (Ulips), school fees, and home loan principal repayment.
Pension plan deductions
One significant point to note is that pension plan deductions under Section 80CCC are also available within the overall limit of Rs 1 lakh under Section 80C and if any investment is made under the former section, the qualifying amount under Section 80C stands reduced to that extent.
You can also look beyond Section 80C to reduce your tax liability. For instance, if you have taken a medical insurance plan for yourself, your spouse, parents and dependent children, you can under Section 80D claim deduction up to Rs 15,000 for the premium paid.
For senior citizen tax payers of age 65 years or more, the limit now has been enhanced to Rs 20,000. One good news is that the condition of dependency of parents has now been removed from this financial year. Thus, even if your parents are not dependent on you, you can claim the deduction after paying the premium for their health plan.
However, the premium for health plans should always be paid through a cheque. That is, tax benefit is not allowed if the premium is paid in cash.
Medical treatment of dependent
Expenses on the medical treatment of a dependent who is a person with a disability also qualify for tax benefits under Section 80DD. In this case, deductions up to Rs 50,000 can be claimed.
A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, certification by a medical authority is mandatory.
Medical treatment of specified ailments
Deductions of expenses on medical treatment of specified ailments (such as AIDS, cancer and neurological diseases) can be claimed under Section 80DDB.
The maximum amount of deduction allowed from gross total income is restricted to Rs 40,000 (which goes up to Rs 60,000 if the age of the person treated is 65 years or more) on condition that no medical reimbursement is received from any insurance company or employer for this amount.
In order to claim this deduction, however, you will have to submit Form 10-1 from a specialist doctor working in a government hospital in India, confirming the treatment of the disease.
Interest component of home loan
You can claim a deduction for the interest paid on a housing loan, even on loans taken for repair, renewal or reconstruction of an existing property.
The interest component of home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakh a year in case of self-occupied house.
One condition being that your house must have been financed by a housing loan taken after April 1, 1999.
It is also essential that the acquisition or the construction of the property is completed within three years from the end of the financial year in which the loan is taken.
For donations made to specified trusts or institutions, you can get a tax relief under Section 80G of the Income Tax Act. The rate of deduction, however, is either 50 or 100 per cent, depending on the choice of trust.
There is no restriction on the amount of charity. However, donations must be made to registered institutions only. Also, only donations of up to 10 per cent of your total income qualify for such a deduction.
Gifts received from specified relatives are exempt from income tax, and there is no upper limit also. Similarly, gifts of any amount and from anyone received during your marriage are totally tax-free.
In case of gifts received on birthday, however, the ones received by your wife's relatives would not have any limit, but from non-relatives, the limit would stand at Rs 50,000 a year.
Normally also, if you receive a cash gift or gifts by cheque or bank draft of more than Rs 50,000 from a non-relative, you are required to pay tax on the excess amount exceeding Rs 50,000.
Long-term capital gains
If you invest in stocks, you should sell them only after a period of 12 months to avail nil/ lower tax rate on long-term capital gains. However, you are required to mention the amount of gain in your I-T return under the head 'capital gains' and claim exemption.
If you invest in your wife's or child's (who is below 18) name, the income generated from such investments will be clubbed with your income and taxed accordingly.
However, if you transfer money to a child who is over 18 years of age and invest in his name, then the income generated from such investment will not be clubbed with your income.
Instead, that will be clubbed with the income of your child and taxed accordingly.