Last-minute Income Tax (IT) planning can be a confusing and cumbersome task just because it was not planned well ahead in time.
But with knowledge on your side, you can address several aspects of your smart tax planning and use some really creative and unusual ways to your benefit.
The Income Tax Act differentiates between tax evasion and smart tax planning and provides many opportunities and ways to reduce your tax liability. In addition to the common investments and expenses that allow you to claim deductions and rebates u/s 80, you have many more unconventional and best ways to save tax
Note: Below is various ways that people use to reduce tax liability but consult Your CA Before Taking Any Action.
Smart Tax Planning is Not Tax Evasion
This is possibly the most comprehensive list of such unusual ways to save income tax in FY 2020-21.
1. Route your Investments through Parents.
If your parents are senior citizens, then they enjoy special treatment from the taxman in form of tax breaks and extended limits. If their post-retirement income is in a lower tax slab than yours, then you can make investments in their names and treat it as a gift to them.
There will be no tax on the gift that you make to them, and any future income arising out of such an investment will be theirs to claim. You can make such investments in senior citizen’s fixed deposits schemes, post office schemes, senior citizen’s savings schemes, and even equity mutual funds.
As you all live together, their increased tax-free income will add to your family’s financial well-being and bring stability to your finances.
2. Contribute more to National Pension Scheme.
The annual contribution to the National Pension Scheme u/s 80C has a limit of Rs. 1.5-lakhs. But you can tell your employer that you are opting to invest an additional sum of Rs. 50,000 in the NPS (Tier-I) and this will be tax-free u/s 80CCD (1B).
3. In 2021, buy home appliances using the LTA cash voucher scheme.
The Leave Travel Allowance or LTA is paid to employees by their employers to undertake trips within India with their families. If provided, LTA can be claimed as a tax exemption only two times in a block of four years. Usually, you claim this exemption by submitting proof of travel (tickets and hotel receipts) for the trip undertaken.
As almost the whole of 2020-21 was a washout year for any kind of travel due to the COVID-19 outbreak, the Finance Minister, Mrs. Nirmala Sitharaman, announced the LTA cash voucher scheme in December 2020.
The scheme intends to help boost the demand for certain products as well as to help employees save tax using the LTA. The taxpayer or their family can spend a specified amount on certain goods and claim an exemption without going on any trips. There are some conditions for that:
- The ‘specified expenditure’ should be on payment for goods or services attracting12% or more GST.
- Such a purchase/payment must have been made on or after October 12th, 2020, and on or before March 31st, 2021.
- The exemption cannot exceed Rs 36,000 per person in the family or one-third of the ‘specified expenditure’, whichever is less.
- The payment for such ‘specified expenditure must have been made via electronic payment system and a ‘GST tax invoice’ must be submitted to the employer.
Under this scheme, you can buy high-end mobile phones, laptops, and appliances like air conditioners and TVs. This way you can buy white goods worth Rs. 1.44-lakhs and still save tax on that amount. The maximum benefit available for a family of four persons is Rs. 1.44-lakhs (36000*4).
4. Pay for parent’s health and health insurance.
Section 80D of the IT Act allows you to claim a deduction of up to Rs.25,000 for payment of the health insurance premium for yourself and your family. If you pay the medical insurance premium for your parent’s too, then you can claim an additional tax deduction u/s 80D.
The benefit available is dependent on parents’ age as follows:
- Under 60 years: Rs. 25,000 on health insurance + Rs. 5,000 on preventive health check-up = Rs. 30,000
- Between 60 and 80 years: Rs. 50,000 on health insurance + Rs. 5,000 on preventive health check-up = Rs. 55,000
- Over 80 years: Rs. 50,000 on health insurance + Rs. 7,000 on preventive health check-up = Rs. 57,000
U/s 80DDB, you can avail up to Rs. 40,000 or Rs. 1-lakh as a deduction for medical expenses incurred on treatment of ‘dependent’ parents. The limits are applicable for parents under 60-years of age or above it, respectively.
5. Donate to social causes.
Section 80G of the IT Act allows you to make donations to specified charities or organizations, social or religious, to fulfill your social duties. By donating to such charities, you can avail from a fifty to one-hundred percent tax exemption for the donated amount.
There are certain funds that the government had set up that can help you get 100% exemption such as PM National Relief Fund, National Defence Fund, PM CARES Fund (set up especially for COVID-19 efforts), and funds especially set up for a declared national disaster. You can find a complete list of charities under “Exempted Institutions” on the Income Tax department website.
6. Contribute to political parties.
When individuals donate to specified political parties approved by the Election Commission of India, they can claim from 50% to 100% tax deductions on such donations. These donations can be direct to a political party (registered u/s 29A of the Representation of the People Act, 1951) or indirect to a registered electoral trust.
The deductions are available u/s 80GGC if the payments are made through cheques, net banking, or UPI. Any donations made in cash or in-kind do not qualify for tax deductions. You can claim the entire amount donated to a political party as a deduction from your taxable income. But there is an upper limit on the amount of the donations – up to 10% of their gross earnings in the year.
7. Pay rent to parents and claim HRA.
Living in a joint family with parents can help you save taxes! You must pay them the rent that will be added to their income and will make you eligible to claim the deduction for HRA. You can contribute towards the financial independence of your parents by ensuring a steady source of income for them.
The owners of the house, your parents, can charge up to 30% of the rent as house-property maintenance expense and only the remaining 70% will be added to their income. If your parents co-own the property, then they can split the rent on paper, and save more tax.
8. Book profit and reinvest your gains.
The new rules for long-term capital gains tax (LTCG) kick in if your profits are over and above Rs. 1-lakh in that year on sale/redemption/maturity of such long-term assets. The smart move is to annually book profits in smaller amounts and reinvest the same in fresh investments to save LTCG tax.
You can also fulfill any shortfall you may face for making fresh investments in tax-saving instruments. Such smart withdrawals can help you save tax on two fronts – avoid paying LTCG tax on future LTGCs, and new investments in tax-saving instruments to avail more deductions.
Also, read – 10% LTCG on equity so bad?
You can also reinvest in the same instrument or stock to ‘up’ your cost of acquisition and avoid future LTCG tax incidence. For e.g., the current market value of an investment in stocks, originally done with Rs. 3-lakhs is more than Rs. 3.8-lakhs owing to the market rally since May 2020. You can sell the entire investment and re-purchase it, ‘upping’ your acquisition costs to Rs. 3.8-lakhs. This way, you’ll pay only a small STT and brokerage, but will save on 10% LTCG Tax applicable if the gains were to exceed Rs. 1-lakh.
You can follow the same strategy every year, to continue to ‘up’ your acquisition costs, but remember that the stocks must be in your portfolio for more than 1-year (365-days) to qualify as a long-term asset.
9. Set-off capital losses.
When a capital asset is sold at a loss, such losses can be set off against capital gains made in subsequent years. The capital loss will depend on the actual cost of acquisition, or indexed price, or the fair market value, and will the cost for any additions, enhancements, renovations, construction, registration, etc. done.
The cost price is dependent on the nature of the asset – property, bullion/jewelry, financial assets, etc. The nature of the asses also determines the long-term and short-term duration, indexation benefit, and whether the costs of additions/improvements are admissible or not.
One general rule is that most short-term capital losses can be offset against short-term and long-term capital gains in the same or the subsequent years, but long-term capital losses can be offset against only long-term capital gains. You must also remember that setting off of capital losses is permissible only against capital gains, not any other income head. The carry-forward of such capital losses is permissible up to 8-assessment years, so always show your capital losses in the ITR!
10. Reduce tax as a HUF.
The traditional joint-family structure of the Hindu society resulted in a unique tax personality in the Indian Income Tax Act – the Hindu Undivided Family, represented by its Karta. If you have multiple sources of income, in addition to your salary, then showing your other incomes as earnings of the HUF will reduce your tax liability substantially.
HUF is treated as an independent financial entity – for Hindu, Sikh, Jain, and Buddhist followers – and can act on behalf of all the family members in it. Family members can show their additional personal incomes as gifts to the HUF so that they don’t have to pay any tax on subsequent income from investments made from such gifts.
11. Gift or loan money to your major children.
If you have extra income or capital gains, and you invest them, then any income from such investments will be added to your income and will be taxed at the usual rates. But if your children have attained adulthood, then you can gift or loan (interest-free, of course) it to them for making such investments.
When your kids will make investments from this, and earn interest, dividends, or capital gains, they will come under the lower tax bracket than you, and therefore, as a family, you can save a substantial tax amount.
Please share if you follow any other Smart Tax Planning Strategy.