One of the main reasons why people shy away from paying taxes is that taxpayers do not see these taxes being spent on things that benefit them directly.So, is there a way to spend money on your betterment and yet save tax?
Yes, there is a way to do so. Some call it tax evasion but others call it planning. Just as the law requires you to pay tax, it gives you opportunities to save it as well.
How much can be saved?
This depends on what your salary is and how smartly you manage it. These are the two elements which determine your tax outgo. So how do you know if you’re paying more taxes than you are supposed to? It’s simple: Just calculate your tax ratio. Tax ratio is the percentage of your salary that you pay as tax.
Reasons why you could be paying more tax
Ignoring HRA exemption: Hari and Nari live with their parents. Both work in the same office. They also get the same salary. However, Hari pays more income tax than Nari. It’s because Hari pays household expenses to his parents on a monthly basis and Nari simply makes this payment as rent to his parents, who (being older) fall in a lower income-tax slab.
Tip: Claim your HRA exemption to save tax.
Not claiming deduction on mediclaim premium: Hari and Nari earn the same salary. Nari not only gets a health security cover for himself, but also ends up saving more money than Hari. How? It’s simple. All Nari does is he buys himself a healthcare policy.
Tip: Get your medical expenses covered by taking the benefit of a medical insurance premium deduction and save tax.
Failing to capitalise on home loan tax benefits: Hari tries to save every rupee of his salary, however, property prices in the metro keep him from owning one. Nari, on the other hand, after making a decent amount of money, takes a loan and buys a house in his hometown. He also gets a regular rental income out of it and claims home loan tax benefits.
Tip:Capitalise on home loan benefits to save tax.
Selling capital assets for short-term needs: Hari and Nari get their kids admitted to a school. However, huge sums were demanded as donations. Hari calls his broker and sells most of the shares that he had bought recently. Hence, he incurs a loss on this deal and has to pay tax for selling the shares before one year. Nari, on the other hand, realised that the requirement was just one time. Therefore, he takes a loan instead of selling his assets.
Tip: Save tax by applying for a loan instead of selling your assets.
Not reporting income from other sources: Hari makes the mistake of not reporting his income from bank interest. He assumes that there's no need to declare his income since the bank had already deducted TDS on it. However, Hari falls in the 20% income-tax slab and the bank had deducted TDS at 10%. Hari is slapped with a penalty of 300% of the tax evaded.
Tip: Never skip any sort of income earned from other sources while filing your income-tax return.
(Edited excerpts from a report by Taxspanner.com)