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10 simple tips to lower your tax bill
July, 23rd 2008
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. However, you cant do much to avoid that. Simply because taxes are said to be as inevitable in life as death. Still, there are ways to reduce the burden of taxes, particularly if planned judiciously and well ahead of time. Here are some tips 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 Section 80C and if any investment is made under the former section, the qualifying amount under Section 80C stands reduced to that extent. Medical insurance 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, dependent 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, the limit now has been enhanced to Rs 20,000. One condition being that the premium should be paid through a cheque. 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. Cash gifts Cash gifts received from specified relatives are exempt from income tax, and there is no upper limit also. Similarly, cash gifts of any amount and from anyone received during your child birth, marriage or any other specified event are totally tax-free. However, if you receive a cash gift of more than Rs 50,000 from a friend, you are required to pay tax on the excess amount exceeding Rs 50,000. Charity You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act. The rate of deduction is either 50 or 100 per cent, depending on the choice of fund. There is no restriction on the amount of charity. However, donations must be made only to specified trusts. Also, only donations of up to 10 per cent of your total income qualify for such a deduction. Money transfer If you invest in your wifes or childs (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. 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, advises Sonu Iyer, Partner - Tax, Ernst & Young. However, you are required to mention the amount of gain in your I-T return under the head capital gains and claim exemption.
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