7 Easy Tax Planning tips
1. Paying rent to parents
Individuals who live with their parents can also claim HRA deduction by paying rent to parents. It is advisable to pay rent via Cheque or online transfer to parents. However, make sure that your parents own this property, and you are not the owner or co-owner of that property. Besides this, you must enter into a rent agreement with your parents and get receipts for rent paid every month. Please note that rent paid by you is taxable for your parents under the head Income from House Property & they are entitled to claim the deduction of property Tax & standard deduction of 30% on rental Income.
2. Invest in NPS
NPS is special kind of Investment that can be used to save tax in three ways. First, NPS investments are eligible for deduction under Section 80C. Secondly if one has already exhausted the Rs 1.5 lakh ceiling under Section 80C one can claim an additional deduction of up to Rs 50,000 under Section 80CCD(1b). Lastly, up to 10% of the basic salary put in the NPS by the employer can be claimed as deduction under Section 80CCD (2). This amount of contribution up-to 10% of basic in NPS by the company on behalf of employee is exempt from Tax.
3. Tax Harvesting
Tax harvesting is one of the most effective ways to bring down the tax liability in equity investing. This strategy usually investors use at the end of the financial year to bring down the capital gain tax liability. Book long-term capital gains by selling some stocks or a part of mutual fund holdings to the extent of Rs. 1 lakh and then reinvest the proceeds immediately. This process can be repeated every year to take advantage of the ₹1 lakh exemption in case of LTCG. Similarly, this technique can be used in case of loss. If you have unrealised loss & realised capital gain, book loss in equity/mutual fund to adjust against realised LTCG/STCG and buy again the same share to keep the portfolio as it is.
4. Invest in wife's name
Money given to the wife for her personal expenses is not treated under the clubbing provision U/s 64 of the income Tax Act, i.e., if the wife invests out of this personal money, the income will not get clubbed with that of the husband. One more thing clubbing happens only at the first level of income. If the earnings are reinvested, the income from that will be treated as that of the wife only. For example, if the wife invests the gifted money in tax-advantaged options such as stocks and equity funds, the husband will not be taxed for long-term capital gains of up to Rs 1 lakh in a year and that amount will then be treated as the income of the wife.
5. Investment through HUF
HUF is separate taxable entity in the eyes of law and taxed separately. HUF taxed slab wise as individual and almost all the tax benefits an individual has under the Income Tax Act is available to HUF. As HUF is separately assessed, so individual can plan investment via HUF to avail the benefit of basic exemption limit, chapter VI deductions, benefit of long-term capital gain exemption up to Rs. 1 lakh etc
6. Utilise exemption for senior citizens
If your parent is a senior citizen and does not fall under the higher tax bracket, you can invest in their name to earn tax-free interest. Adults above 60 enjoy a basic exemption of Rs 3 lakh. Very senior citizens (above 80) enjoy higher basic exemption limit at Rs 5 lakh. Senior Citizen's Saving Scheme offers higher interest rate compared to other deposits (present Interest rate 7.4%) and the Pradhan Mantri Vaya Vandana Yojana are safe bets. Banks also offer higher rates on fixed deposits to senior citizens. One can also get senior citizens to invest in stocks and mutual funds so that every person can individually benefit from the Rs 1 lakh exemption per year for LTCG. If the total income is below the basic exemption limit, even STCG from stocks and mutual funds will not attract any tax.
7. Invest in name of adult child
Income earned by adult children is not subject to clubbing under section 64. The adult child enjoys separate basic limit exemption and other tax deductions that you do. An 18-year-old can also invest in stocks and mutual funds on his own. You can open a demat account and stocks trading account in his/her name. Up to Rs 1 lakh of LTCG will be tax free in a year and STCG till the basic exemption of Rs 2.5 lakh a year. You can separately invest up to Rs 1.5 lakh a year in child's name under chapter VI.