Defeating the Tax Monster – learn how!!!
We all work hard to earn money but the government takes one third of that money as taxes (highest tax bracket). Most of us wonder, what are some of the legitimate ways of saving taxes?
While business owners have multiple avenues to reduce taxes, the options for salaried individuals are different.
Here are a few broad options by which salaried individuals can
defeat the Tax Monster!!!
Aditya is a young, unmarried media professional. He is well educated and has been working for 4 years now. He complains about his high tax outgo but he does not understand much about taxation rules. He has always filed his IT returns in the last minute with the help of a CA, by just sending across his salary details and information on some investments. There has been no discussion on or thought given to tax planning whatsoever.
He wonders if there are ways in which he can save tax.
One of the most common reasons for paying higher tax is the inability to avail of the deductions, the most important one being Section 80C. The limit under Section 80C has been increased from Rs.1 lakh per annum to Rs.1.5 lakh. Aditya must ensure he not only utilizes the total amount eligible for deduction, but also invests in instruments according to his needs and goals.
Aditya can additionally claim a total deduction of Rs.30,000/- for premium paid onhealth insurance policies for self and parents (Rs.35,000/- in case of senior citizen parents). If Aditya were to move in with his parents, he may be able to save tax by claiming an exemption from HRA. He can enter into a rent agreement and pay a monthly rent to them. Such an arrangement might work to the family’s advantage, especially if the parents are in a lower income bracket.
Aditya could also consider buying a house using borrowed funds in the near future, which, besides being a long term asset, would also make him eligible for significant tax breaks—deduction up to Rs.1.5 lakh for repayment of home loan under the overall limit of Section 80C and an additional deduction of up to Rs.1.5 lakh for interest payment for a self-occupied house. Moreover, if he were to postpone the decision until he gets married and takes a joint loan with his spouse, then each of them can claim both these deductions individually, thus optimising tax savings. There are also deductions that he can avail for donations to charitable causes.
Aditya can also claim the interest paid on education loan as deduction, should there be any such liability. Many others like Aditya may be subject to a high tax outgo due to faulty investment strategies, ignorance about tax rules and tardiness. One need not evade tax. Merely by being aware and applying some thought into tax planning, Aditya might be able to save considerable amounts of tax using legitimate means.
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