How to use income tax rules for smart tax saving: 5 investment strategies
January, 13th 2022
5 Tax hacks you can use
Earning higher returns is not in the hands of investors. However, they can take steps to minimise their tax outgo. Income tax laws provide ample opportunity for smart investors to utilise and lower their tax liabilities. These aren't methods of tax evasion, instead, they help in tax avoidance by intelligent use of the provisions in the tax laws. Given below are five such strategies that can help you save tax without violating the law.
Invest in NPS, but not in annuity
One can save tax in three ways via NPS. First, NPS investments are eligible for deduction under Section 80C. If one has already exhausted the Rs 1.5 lakh ceiling under Section 80C, one can claim an additional deduction of up to Rs 50,000 under Section 80CCD(1b). Lastly, up to 10% of the basic salary put in the NPS can be claimed as deduction under Section 80CCD(2). Those very close to retirement can claim more tax benefits if their company offers the NPS benefit. Under Section 80CCD(2), up to 10% of the basic salary put in the NPS by the company on behalf of the employee is tax free.
Point to note: The entire amount withdrawn will not be tax free. Though there is no reference to this in the tax laws, one can reasonably assume that 60% of the withdrawn amount will be tax free while the balance 40% will be taxed at the normal rate.
HRA can be tax-free if you pay rent to parents
A person living in her parents’ house can pay them rent and claim exemption for the HRA, provided the parent owns the property. Even in the highest 30% bracket, the arrangement makes sense because there is a 30% standard deduction on rental income. One can claim exemption for monthly rent of up to Rs 5,000 under Section 80GG. Of course, the rent received by the parent will be subject to tax.
Point to note: If the rent exceeds Rs 1 lakh a year, one has to furnish the PAN number of the landlord while claiming exemption for HRA. If the landlord does not have a PAN, he must submit a declaration to this effect. The taxpayer must have proof of the transaction. Also, you cannot pay rent to your spouse or minor child and claim HRA exemption.
Invest in homemaker wife’s name
Money given to the homemaker wife for her personal expenses is not treated under the clubbing provision, i.e. if the wife invests out of this personal money, the income will not get clubbed with that of the husband. Experts point out that clubbing happens only at the first level of income. If the earnings are reinvested, the income from that will be treated as that of the wife only. For example, if the wife invests the gifted money in tax-advantaged options such as stocks and equity funds, the husband will not be taxed for long-term capital gains of up to Rs 1 lakh in a year and that amount will then be treated as the income of the wife.
Point to note: There’s no point investing through your spouse if she is also in the same tax bracket as you.
Utilise exemption for senior citizens
There is no clubbing of income in case of parents and grandparents. If any parent is a senior citizen and does not already have investments, you can invest in their name to earn tax-free interest. Adults above 60 enjoy a basic exemption of Rs 3 lakh. Very senior citizens (above 80) enjoy higher basic exemption limit at Rs 5 lakh. Senior Citizens’ Saving Scheme, currently offering 7.4% interest and the Pradhan Mantri Vaya Vandana Yojana are safe bets. Banks also offer higher rates on fixed deposits to senior citizens. Besides these, one can also get senior citizens to invest in stocks and mutual funds so that every person can individually benefit from the Rs 1 lakh exemption per year for LTCG. If the total income is below the basic exemption limit, even STCG from stocks and mutual funds will not attract any tax.
Point to note: These options should be exercised carefully. Make yourself the sole nominee of the investments in your parents’ name to avoid disputes with siblings. In case of grandparents, there might be more legal heirs in the family.