Tips & Tricks on Income Tax Deduction/Reduction

1.    Tax Exemption For Spouse

1.         If you gift money to your wife, there is no tax implication. However, if this money is invested, the taxman will club the earning with your income for the year according to Section 60. The clubbing happens only at the first level of income. If this money is reinvested and earns an income, it will be treated as your wife’s, not yours. So the income from the reinvested income does not attract the clubbing provision. So gift money to your wife and then get her to invest in any of the several tax free investment options. The earning will be clubbed with your income, but since these investment options are tax free, it won’t push up your tax liability.

2.         There’s another way to escape clubbing. Instead of gifting, give her a loan to buy property. Rental income from the property will be treated as her income as long as she pays you a nominal interest on the loan.

Note:  

Wife can receive gift from any relative other than her husband, father in law and her mother in law. Similarly, adopt the concept of gifting your major children. It is lawful to grant interest free loans to adult children from your own funds.

2.    Tax Exemption for Minor

1.         In some cases, a minor child may have a personal income, such as a cash prize in a competition or payments for events. Mostly it’s the parent who invests this earning on behalf of the child. If a parent invests in a minor child’s name, the income is clubbed with the parent who earns more. But there is a yearly exemption of Rs 1,500 per child for the income earned by such investments.

2.         There’s another method to get tax deduction for minor. If you want to have good income and wealth in the name of the minor child and do not like clubbing of the income, creating a “Specific Beneficiary Trust” in the name of the minor as enunciated by Supreme Court of India so that the income with special terms and conditions mentioned in the Trust Deed is not clubbed with parents. Similarly starting a PPF account and life insurance policies especially in the name minor.

3.    Section 80C Tax Deduction

1.         Section 80C is ideal for salaried individuals. It allows maximum deduction of Rs 1,50,000 per annum. For getting 80C deduction you need only to invest or contribute in any of the following schemes:

a.         Public Provident Fund (PPF) or Employee Provident Funds (EPF)

b.         Pension Plans

c.         National Saving Certificate (offering interest of 8.6 % to 8.9 % a year)

d.         Accrued interest on National Saving Certificate

e.         Life Insurance Premium

f.          Tuition fees paid for children’s education (maximum 2 children)

g.         Principal component of home loan repayment

h.         Equity Linked Savings Schemes (ELSS) or Mutual Funds

i.          5 year fixed deposits with banks and Post Office

j.          Post Office SB

k.         Infrastructure Bonds

1.         Deferred Annuity.

m.        Approved Super Annuation Fund

n.         Investments under Sukanya Samriddhi Scheme (Even interest is exempt.)

Note:

We discourage buying insurance policies, shares and mutual funds as a tax saving tool. In case of tuition fee and insurance, you need receipt or bill to get deduction. In case of Mutual funds and stock market investment you require statement as a proof. For fixed deposit and National Savings Scheme confirmation slip or receipt that obtained at the time of subscription is enough. For public provident fund you don’t require any proof as it is already with your HR or taxman.

4.    Tax Reduction on Fixed Deposit

This method is not applicable for person who has only salary income as you HR or taxman already know your income. Income from other sources can be made tax free by fixed deposit. It is not so simple.

For example, if you get Rs. 500,000. Now you can reduce tax paid by fixed deposit. For this you need to split the total money in terms of Rs. 50,000 and deposit in individual dates. Please never put entire money in a single day. Split it and deposit in separate dates.

5.    Stamp Duty and Registration Fee Deduction

You can claim Deduction in respect of Stamp Duty and Registration Charges paid for acquiring the House. The Deduction is allowable in the year of House purchase provided the House is in your Possession.

6.    Set Off Capital Losses against Gains

Most of times, people do not show their losses in Tax Return and miss out on opportunity of setting them against Capital Gains. So, if you have made a Profit of Rs. 5 Lakhs on real estate property and Rs. 1 lakh Loss on Stock Holdings than the Long Term Capital  Gains after indexation will be Rs. 80,000 ( 20% tax)  instead of Rs. 1 Lakh.

7.    Medical Insurance Tax Deduction

An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of up to Rs 25,000 (if senior citizen then Rs 30,000) p.a. or towards preventive health checkup (max Rs. 5000) under section 80D.

An additional deduction of up to Rs 25,000 p.a. is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 30,000 per year.

Note:

Medical premium bills (Both your and spouse) for the year required for this reduction.

8.    Tax Deduction on Donation

Subject to the stated limits, Donations to specified Funds or Institutions are eligible for tax benefits under Section 80G. There will be 100% exemption on donation to political parties.

Note:

To get deduction on 80G you should retain slip or bill or donation and advised to pay donation using cheque.

9.    Tax Deduction on Education Loans

The entire interest on education loan is eligible for deduction under Section 80E. The loan can be for self, spouse or child.

Note:

Note: Bank statement mentioning the interest component of education loan is required for getting this deduction.

10.  Restructure the Salary for Tax Reduction

Restructuring the salary is a more ‘efficient’ means of claiming tax benefits. The following can form a part of one’s salary structure:

a.         You will get tax deduction up to Rs 50 per meal and Rs.35 for tea and snacks, per working days for food coupons.

b.         Medical expenses which are reimbursed by the employer are exempt up to Rs 15,000 per year.

c.         Individuals living in a rented accommodation should have House Rent Allowance (HRA) as part of their salary.

d.         Transport allowance is exempt up to Rs 1600 per month.

e.         Leave Travel Allowance (LTA) can be claimed twice in a block of four years for domestic travel.

Note:

1.         In case you have been unable to claim the LTA benefit in a particular four year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.

2.         No proof required as the HR already know this details. You need to produce Train, Bus or Air Ticket to claim Reduction on Leave Travel Allowance . For usual Conveyance / Transport Allowance no supporting Bills required.

11.  Tax Deduction on Superannuation Fund

Any contribution made by a company to Superannuation Fund up to Rs.1,00,000 Tax Free in the hands of the employee.

12.  Professional Tax Deduction

Any Professional Tax Deduction from an employee’s salary can be reduced from the annual salary income to arrive at Taxable Salary . So it is 100% Tax Free.

13.  Income Tax Reduction on House Rent

1.         Salaried individuals can claim rent paid by them for residential accommodation. Commonly it an integral part of your salary, if HRA doesn’t form part of their salary. This deduction is available under Section 80GG and is least any of the following:

a.         25% of the total income or,

b.         Rs 5,000 per month or,

c.         Excess of rent paid over 10% of total income

Note :

Above deduction will be denied if the taxpayer or his spouse or child owns a residential accommodation in the location where the taxpayer resides or performs his office duties.

You need 12 months rental receipt from owner to get this tax deduction.
Note: If you are not residing in a rental accommodation due to valid reasons and own a home in your name, then you can claim both exemptions to the full.

14.  Tax Reduction on Bonus

1.         A bonus from your employer is fully taxable in the year in which you receive it. However request your employer for the following:

a.         If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year.

b.         Produce your tax investment details well before, to prevent your employer from deducting tax on bonus before handing it over.

15.  Tax Deduction under Section 80CCD

If the contribution to your NPS account is made by your employer and the deduction is limited to a maximum of 10% of your basic salary. Returns on NPS are tax free, but withdrawal is still taxable. The deduction under sec 80CCD is over and above the deduction available under sec 80C. Max deduction allowed is Rs. 50,000.

16.  Tax Deduction under Section 87A

You can claim the rebate if you meet the following conditions:

1.         You are a RESIDENT INDIVIDUAL; and

2.         Your Total Income less Deductions (under Section 80) is equal to or less than Rs 3.5 lakhs.

3.         The rebate is limited to Rs 2,500. This means that if the total tax payable is lower than Rs 2,500, then that amount will be the rebate under section 87A. This rebate is applied to total tax before adding Education Cess (4%).

17.  Tax Deduction under Section 80TTA

Consider keeping money in the Savings Bank Account specially because the interest income from deposits in Savings Bank Account in Banks, Co-operative Society and a Post Office will be exempted up to Rs. 10,000 as per section 80 TTA.

Note :

This benefit is available to Individuals and Hindu Undivided Families.

18.  Tax Deduction under Section 80U

Deduction upto Rs. 75,000 is allowed in case of Permanent Disability. In case of Permanent Disability exceeding 80%, maximum Deduction allowed is Rs. 1,25,000.

19.  Tax Deduction under Section 80DD

Section 80DD provides exemption given for disabled dependent towards Medical Treatment/Training/Rehabilitation includes the LIC/Insurance premium paid towards maintenance of such dependent. Maximum deduction allowed is Rs. 75,000/ in case of Normal Disability and Rs. 1.25 Lakh in case of Severe Disability.

20.  Tax Deduction under Section 80DDB

Maximum of Rs. 40,000 (Rs. 1,00,000 for senior citizen) exemption are given for expenditure incurred on specified disease such as cancer / aids. List of diseases getting this privilege as follows:

a.         Dementia

b.         Dystonia Musculorum Deformans

c.         Motor Neuron Disease

d.         Ataxia

e.         Chorea

f.          Hemiballismus

g.         Aphasia

h.         Parkinsons Disease

• Malignant Cancers
• Full Blown Acquired Immuno Deficiency

i.          Syndrome (AIDS)

• Chronic Renal failure
• Hematological disorders

j.          Hemophilia

k.         Thalassaemia

21.  Investments for HUF ( Hindu Undivided Family) for Tax Reduction

Investments made by your Hindu Undivided Family (HUF) can bring rich dividends for you. If you are a Hindu, you should start independent individual tax files for your family so that it helps you in reduces tax payment. The HUF file apart from enjoying the basic income-tax exemption of Rs. 2,50,000 will also continue to enjoy Tax Deduction in terms of Section 80C as well as Deduction on Interest on Housing Loans.

Note:   HUF file can come into existence even if you do not have any children.

22.  Investments in Bonds for Tax Reduction

1.         If your income exceeding Rs. 10 lakhs a year, it is worthwhile for you to invest in Tax Free Bonds. The investment in Tax Free Bonds would be better than Bank Fixed Deposits. Tax Free Bonds by RBI and Government are limited, so grab faster before they vanish.

2.         Another method is to investment in Zero Coupon Bond.

It is preferred for persons who are not interested in regular income. Generally the maturity period of Zero Coupon Bond is 10 years. Because of the benefit of Cost Inflation Index, tax will be virtually NIL on Zero Coupon Bonds

Note: It is also good to gift Zero Coupon Bonds to your minor children aged eight years and above.

23.  Invest in National Pension Scheme (NPS) for Tax Reduction

If you are completing 60 this year, you should immediately open the NPS account. This is mainly because once you have completed 60; you cannot open a new NPS Account. But if you have already have one you can continue contributing to it.

24.  Investment in Gold & Silver for Tax Reduction

1.         It will, however, be good to buy gold coins and investments through Gold ETF.

2.         If you get some huge or small quantum or money apart from salary, which is not known to government. Then you don’t need to pay tax. To escape tax you can either go or buy gold. Gold is one of the best investments because it can be easily convert to money.

25.  Tax Reduction under Section 80CCG

1.         It is applicable only for individuals whose annual income is less than Rs. 10 Lakhs. One can invest a maximum of Rs 50,000 on Rajiv Gandhi Equity Savings Scheme (RGESS) to get a deduction of 50% per annum. The benefit will be available for 3 consecutive years as this investment has 3 years lock-in period.

2.         Government has notified this scheme (RGESS). Mutual funds and ETFs that invest in BSE 100 or CNX 100 stocks or PSUs which are Navratna, Maharatna and Miniratna will qualify under this scheme. These investments can be traded over stock exchange after 1 year of investment. New equity investor has been defined as someone who has opened a Demat account but has not bought any securities till date of notification of this scheme (22 Sep 2012).

26.  Tax Reduction for Home Loan

Individuals intending to buy a house should consider opting for a home loan. Interest payments. A detailed chart is given below.

2.         There’s another to reduce tax payment. it is not uncommon for the interest and principal repayment to exceed the stated limit. To ensure that the tax benefit is optimally utilised, an individual can consider opting for a joint loan with his spouse or parent or sibling. This will ensure that both the co-owners can claim tax deductions in the proportion of their holding in the loan. The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximised.

Note:   Bank statement of housing loan with details of principal and Interest components is required for getting this deduction