Honey, I shrunk your income tax!
With expenses riding a steep ladder each year, taxpayers are on the lookout to reduce taxes. There are many such options to slash taxes, which aren’t just pocket savers, but dead-on legally too. Read more to know how minute tweaks and tricks can help you give the tax axe a big push.
Have you always been questioning your colleagues – earning nearly as much as you do – on how they are able to manage eating out each weekend and expensive foreign holidays. You on the other hand, are hardly are able to manage buttering your bread and save hardly anything even with a six-digit monthly salary?
The answers you are looking for aren’t hidden in their salary slips as much as they are in their salary structure document and income tax returns. Yes, tax savings is the key to beat the inflation heat and get yourself a little more room to keep your family happy.
In fact, efficient planning can help you step down from the 20-30% tax bracket to the 10% one.
Start assessing the tax optimization windows right from the point where you earn them. Two of the major sources are earnings and investments. Channelizing funds for expenses such as cars and home loans, the right way too can bring down your tax bill. Let us gauge simple ways to reduce taxes at each of these levels.
Rejig Salary structure
If your salary structure statement is bulky under the heads of basic and special allowance, you should seek an appointment with your HR Department and request a few changes. When companies are looking to reduce attrition rates, a mere change in salary structure shouldn’t be too difficult to net within the overall boundaries set.
If you are given a medical allowance, then you should request for a medical reimbursement facility instead. This is because medical reimbursements paid against bills are tax free upto Rs 15,000 annually, while a medical allowance is taxable.
Similarly, house rent allowance (HRA) can be claimed under Section 80GGif you are paying rent for your premises. The limits applicable for HRA are the least of – 25% of the adjusted total income(gross total income minus long term and short term capital gains and deductions u/s 80G to 80U except 80GG), Rs 2,000 per month or excess of rent paid over 10% of total income. Upon receiving the HRA, the tax deduction limits applicable on them are different. You can claim the least of the actual HRA received, rent paid less 10% of your salary or 40% of basic salary (for non-metro)/ 50% (for metro) of your basic salary.
Other allowances that can be weaved into your salary structure and earn you tax brownies include transportation allowance (exempt upto Rs.1600 per month starting April 2015), helper allowance, research allowance, uniform allowance, newspaper and periodicals, which are exempt when bills of actual expenditure are provided.
One more head under salary structure can be altered by requesting for food coupons. These coupons are an easy shift for the company too and tax free in your hands. A cherry on the food coupon topping is that your family won’t complain about not taking them out for weekend dinners as you can offer these at several restaurants and even the supermarkets.
Post-pone variable income
If you are being rewarded a hefty bonus, which would be handed over in the month of March, assess the provisions announced under the Budget, which is typically announced before the end of the financial year. You can then request your employer to hand over the bonus amount in the new financial year (April 1 onward) if the new thresholds or tax bracket limits would be beneficial as compared to the existing limits.
Those who are retiring too can request to receive the superannuation benefits in instalments, which would help you avoid sudden shift in a higher tax bracket due to on bulk payment.
You can ask your employer to allocate a certain portion of special allowance to New Pension Scheme. This way you will save for the silver years and gain a tax benefit, which is over and above the limit of Rs 1.5 lakh that can be saved under Section 80 C basket. Up to 10% of the salary invested in NPS by your employer can be claimed for deduction under Section 80 CCD(2).
Wondering why we want you to invest more under NPS when your employer contribution is already helping you? This is because you can gain a tax benefit of Rs 10,000 more by investing Rs 50,000 from your pockets into NPS and claiming this under the new section 80 CCD(1b). However, these savings would be strictly for your retirement as you aren’t allowed to redeem funds, except emergencies, until you turn 60 years.
Though FDs are the easiest investments to make, they reduce your interest earnings by hefty taxes. Instead, debt-mutual fund gains for a three-year horizon and equity mutual funds and stocks held beyond one-year are tax-efficient instruments, which should be considered. Under debt mutual funds, one can even claim inflation benefit, thereby reducing the actual gain to nearly zero and eliminating tax altogether.
Pruning taxes and driving in luxury both come with ease if you opt for car on lease. So, instead of servicing a car loan from your in-hand income, ask your employer for a leased car. The tax you pay on this perk is meagre as compared to the tax you pay in the higher tax brackets. While opting for this benefit one should opt for a car which is upto 1.6 cubic litre capacity, else the value of the perk would shoot up.
If your spouse too is an income earner and you are looking to buy a house, then your option to bag a bountiful of tax savings are the home-loan deductions. You should look at co-owning the property and then opt for being home loan co-borrowers. Same can be opted for between two brothers or father and son. Not many home financiers are comfortable with a brother and sister being co-borrowers. The joint home loans double the tax benefit for the family such that you can jointly claim Rs.3 lakh for principal repayment under Section 80 C, while Rs.4 lakh on interest payment for home loan under the loss from house property (individually Rs.1.5 lakh for principal and Rs.2 lakh on interest payment).
However, one should note that the benefit would be split based on the ownership ratio in the property.