As a salaried individual, you can't avoid taxes. If you are earning, you are liable to pay the applicable taxes, and the quantum of tax you need to pay depends on the tax bracket you fall in and your age. As your income grows, so does your tax liability, and lesser you have to save and invest. At the same time, investments are also important to financially safeguard your future. So it is essential to balance both.
As taxes tend to eat up a considerable part of your salary, it is important to be well versed with the combination of investments that help manage your tax outgo while you maximise the returns. Certain provisions and ways, if executed well, can greatly reduce your tax burden. And the best part is that you are not violating any tax laws while doing so. In short, properly utilising the available financial provisions for tax-saving is a good idea. As we are in the initial part of the financial year, there is no better time to implement your tax moves to maximise your returns on investments.
Here are the five smart tax moves that can help you do so.
(1) Know In Detail About IT Section 80C and Eligible Investments
First and foremost, have a clear understanding of Section 80C of the Income Tax Act. This section allows you to get a tax rebate on an annual investment of up to Rs 1.5 lakh. One should endeavour to exhaust this available limit by planning tax-saving investments in avenues like PPF, NPS, and tax-saving mutual funds. This reduces your taxable income and, thus, the tax burden. At the same time, the invested fund, which otherwise would have added up to your taxable income, would generate returns instead of lying idle in your bank account.
(2) Invest In The Name Of Your Parents Or Grandparents
If your parents are above 65 years old and in the low-income tax bracket, you may choose to invest in their names to earn tax-free interest. It is worth noting that adults above 60 years are entitled to have a base exemption of Rs. 3 lakh. Moreover, if you have your grandparents above 80 years, the exemption is higher at Rs. 5 lakh. You may invest in their names also to save on taxes and increase your returns.
(3) Invest In Your Children’s Names
Investing in your children’s names once they turn 18 can also help you maximize your returns. All investments in the name of a minor child attracts clubbing provisions under the Income Tax Act and any tax liability is borne by the parents till the child turns 18 years. However, post 18 years of age, the child will be treated as a separate entity for all tax purposes and investments. You will not be liable to pay taxes on any money you may give to your children as a gift for investments.
(4) Invest In Spouse’s Name
Gifting money to a spouse for personal expenses is not taxable. You can use this provision to invest the gifted money in several tax-saving instruments and thus maximize the overall returns and save on taxes.
(5) Book Regular Profits From Equity-Oriented Instruments
Since gains from equity instruments — stocks and equity mutual funds — are subject to short-term as well as long-term tax, it is wise not to book any gains within a year. Else, the capital gains attract a 15% short-term gain tax. Capital gains booked after a year attract no taxes if the overall gains are till Rs 1 lakh. However, if the booked gain is more than Rs 1 lakh, you will be liable to pay 10% long-term capital gains tax on the gains over and above Rs 1 lakh. Thus, from the perspective of reducing taxes, one may book gains up to Rs 1 lakh after a year. The same can then be reinvested, either simultaneously or later, when markets offer you good opportunities.
You can also book profits from ELSS after the 3-year lock-in period is over. The tax exemptions that ELSS offers are valid only in the financial year they are bought. So you may want to consider periodically redeeming such investments only to reinvest in your name or your kids, spouse, or parents’ names. However, from the long-term wealth generation perspective, such regular profit bookings may not be prudent as you may lose out on the compounding effect. So make an informed choice between tax savings and returns.
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Few things in life are as constant as taxes. If you have an income, it is a given that you will need to pay taxes on it, directly or indirectly. However, with a little smart manoeuvring, it is possible to optimise tax savings. What is important is to remember that investments are made to secure your future and realise your goals and not to save taxes. Do not attempt to save on taxes at the cost of your investments, and you will be just fine.