The income law gives many non-traditional options to save tax. Here are some ways to raise exemption bar.
Have you exhausted the tax saving limit of Rs 1.5 lakh under Section 80C? What about Section 80D which gives you tax exemption on medical insurance and healthcare expenses? Also done? The problem with tax exemption is that many of us easily exhaust the limits of the well-known sections. There is no doubt that these limits may seem small considering the rise in inflation and after salary hikes for many tax payers, especially salaried ones living in big cities. But here’s a look at some unusual and perfectly legal ways to help you save more tax.
SETTING OFF CAPITAL LOSSES
When you sell a capital asset at a price less than its cost of acquisition, you have incurred capital loss. When the selling price is more than the cost of purchase, you make capital gains and accordingly pay taxes on them. The amount of tax is determined by the type of assets, nature of the transaction (long-term or short-term), indexation benefits, and your income tax slab. You can use capital losses to offset some of the eligible capital gains and lessen your tax liability. You can set-off short-term capital los-ses against eligible short as well as long-term capital gains, while long-term capital losses can be set off only against eligible long term capital gains. Remember that capital losses can be set off against capital gains only and not against any other income.
PAYING RENT TO PARENTS
Many taxpayers live with their parents if their place of work is in the same location or city. If you live in a house owned or co-owned by your parents, you can claim House Rent Allowance (HRA) deductions by paying a rent to your parents. The HRA will be deducted from your taxable income. In this case, your parents will have to show this rent as income in their tax returns. The income will be taxed in your parents’ hands as per the applicable slab rate.
DONATION TO INSTITUTIONS FOR NOBLE CAUSES
Many taxpayers donate one day’s salary or part of their income for noble purposes but do not declare these donations in their tax returns. If you gave for a noble cause, you can earn higher tax deductions. The deduction can be 50 per cent to 100 per cent of the amount donated towards qualified charities or organisations. For example, donations to organisations such as the National Defence Fund are eligible for 100 per cent exemption.
TAX SAVING AS HUF
An HUF or Hindu Undivided Family is a legal entity with its own PAN card. Hence forming an HUF can help individuals save taxes. It can legally claim all tax benefits that any individual can claim. The HUF can distribute the income to its members in such a way that the tax liability can be minimised.
INVEST THROUGH YOUR PARENTS
Your senior citizen parents can earn up to Rs 3 lakh in a year without any tax. Consider gifting investments and assets to your parents to save tax. The assets can generate income up to Rs 3 lakh a year without any tax on returns. This means if you can find an investment that generates eight per cent annual retur-ns, you can gift your parents up to Rs 37.5 lakh and let them earn interest or gains up to Rs 3 lakh without having to pay any tax. If you do it in both your parents’ account, you can invest up to Rs 75 lakh in this manner without needing them to pay any tax.
BOOK PROFIT ON EQUITY INSTRUMENTS
If you have invested in equity, your long-term capital gains exceeding `1 lakh in a financial year are subject to tax at a 10.4 per cent rate. So you can periodically book LTCG on equity and reinvest. This strategy will update your investment cost to a higher level. Therefore, the extent of your LTCG tax will come down.
For example, suppose you had invested `2 lakh in a share one year back, and now you sell it for `2.8 lakh and repurchase. Thus, your effective cost of investment would be updated to `2.8 lakh. Again, after one year you sold that stock at `3.5 lakh and repurchase, your cost of investment will increase to `3.5 lakh. This way you can save LTCG tax on equity instruments. Mind the cost of the transaction such as brokerage and fees while using this strategy.
— The writer is CEO, BankBazaar.com