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Simple ways to save Income Tax

 

Simple ways to save Income Tax

Date : 12-5-2015

An income tax is a government levy imposed on individuals or entities (taxpayers) that varies with the income or profits (taxable income) of the taxpayer. Income tax generally is computed as the product of a tax rate times taxable income. The tax rate may increase as taxable income increases. Tax rates may vary by type or characteristics of the taxpayer. There are various exemptions and deductions provided in the Income Tax Act to save tax. One has to plan accordingly to save tax.  For a layman, there are simple ways to save taxes :

1. Buy health insurance: Under Section 80D, a deduction of Rs 15,000 can be claimed for the health insurance premium and preventive healthcare check-up costs for yourself, spouse and your children. A medical insurance is a necessity that helps you save taxes. If you buy it only for yourself, you can save up to Rs 15,000, but if you buy it for the whole family (including your parents, spouse and children  you can save more. If you decide to protect your parents as well, you get an additional deduction of up to Rs 20,000, if they are senior citizens. Otherwise the regular Rs 15,000 limit is also applicable for your parents. Also, this deduction is available irrespective of whether the parents are financially dependent on the taxpayer or not. So, if your wife is an earning member as well, she can use the same strategy and reduce the taxable income of the family by buying her parents a plan as well.

2. Invest in PPF : The full form of PPF is Public Provident Fund Scheme.  It is a scheme of the Central Government, framed under the PPF Act of 1968.PPF  is a government backed, long term small savings scheme, which was initially started by the Government to provide retirement security to self employed individuals and workers in the unorganized sector.   However, at present it is considered as the best tax saving scheme across all sections of the people who needs to invest to save some tax. Deposits upto Rs 1,50,000 p.a. into your PPF account are deductible under Section 80C of Income Tax Act.   Contributions to PPF accounts of even the  spouse and / or children are also eligible for tax deduction. Even the interest earned in the PPF accounts i.e. on the full balance in your PPF account is completely exempt from tax.  In other words, your returns on investment in PPF are tax free.  Above all, the balance in  PPF account cannot be attached to any claim in case of debt or  liability.   Thus the money is yours for life or even after death it is available for your family.  In addition, you can invest in PPF in your name and your whole family o get addition savings in taxes.

3. Invest through your spouse: If you exhausted your 80C limit, then, gift some money to a non-earning spouse and invest that in a tax-free instrument. There is no upper limit to the amount you can give as your spouse is in the list of specified relatives whom you can gift any sum without attracting a gift tax. However, the taxman is not foolish. If you invest the gifted money, the Section 64 of the Income Tax Act, a provision for clubbing income, comes into play. Therefore, the escape route is by investing in a tax-free option such as a PPF or ELSS scheme. Similarly, you can also invest in your parent's name and the best part is the clubbing rule won't be applicable here. Also, there is no gift tax on the money you give to your parents. So make use of their basic tax exemption limit—Rs 2 lakh for up to 60 years, Rs 2.5 lakh for people above 60 and Rs 5 lakh if they are above 80 years of age. In case, they are exceeding the exemption limit, help them save taxes by investing in a tax-free option.
4.  Children can help to save taxes : You must be already claiming a deduction for the education fee of your children. You can also gift your minor child some cash. But if you plan to invest that amount, the income will be clubbed with that of the parent who earns more.  To avoid clubbing of your child's income, you may invest in tax free instruments such as PPF, mutual fund (MF) or ULIP. Open a minor PPF account in the name of your child and it won't be taxable. However, there is a limitation to this option—the contribution to your own PPF account and that of the child cannot exceed the overall limit of Rs 1.5  lakh a year.

5. Payment of  rent to your parents: If you are living with your parents, pay them rent and claim your HRA. However, the house should be registered in their name for you to make this claim. Your parents will be taxed on this. They can claim a flat 30% of the annual rent as deduction is for maintenance expenses such as repairs, insurance, etc., irrespective of the level of actual incurred expenditure.For instance,  you are paying Rs 25,000 a month, i.e, Rs 3 lakh a year, your parents will have to pay tax on only Rs 2.1 lakh. The amount that is over and above the basic Rs 2 lakh exempt limit (Rs 2.5 lakh in case they are above 60 and up to Rs 5 lakh if above 80 years of age), can be invested in their name under tax-free Section 80 C options such as the Senior Citizens Saving Scheme, five year bank fixed deposits or tax saving equity mutual funds. You get a bigger benefit if the house is co-owned by your parents. Then they can split the earning from rent and show separate tax liability.