Tuesday 15 November 2011

Seven not-so known ways to cut income tax burden


The phrase 'tax savings' brings to mind life insurance,Public Provident FundNational Savings Certificate, and equity-linked savings scheme, among others, that qualify for tax deduction under Section 80 C of the Income-Tax Act. An individual can claim tax deductions of up to Rs 1 lakh under 80 C.

However, there are other lesser known avenues that offer additional tax breaks to individuals. They are not widely discussed as they involve special situations in life such as having a special dependant, paying rent to parents, owning a house in another city, and so on. Here is a small list you could explore.

Paying rent to your parents 
If you are staying in your parents' house, you can consider paying rent to them. "This can help you saveincome tax if your parents fall in a lower tax bracket. However, note that it is advisable that you enter into an agreement with them and actually make the payment every month, preferably by cheque,"

"If your parents are retired and do not derive any significant taxable income, the amount of rent would be tax free in their hands,"

Take a look at the example to see the tax implications. Let us assume your monthly basic salary is Rs 40,000 and HRA is Rs 16,000. Your monthly rent is also Rs 16,000. In this case, of the total monthly HRA, Rs 12,000 will be tax exempt. Assuming you are in the 20% tax bracket, your annual tax saving would be Rs 29,664.

Please note that you will have to submit copies of rent receipts or rent agreement, depending on what your organisation stipulates. However, avoid claiming tax benefits on rent payments made to the spouse as the arrangement can be characterised as a sham transaction, say experts. 
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Renting and Home loan in two different locations 
Individuals today are constantly on the move for better job prospects. This could result in a person living in a rented place in the city he is working while repaying the loan for a home bought in his native city or any other city.

"In such a scenario, the rent that an individual pays is eligible for HRA exemption. Further, a deduction can be claimed on the interest paid for the housing loan used to purchase the property at the native place/any other city,"

Let us assume your monthly basic salary is Rs 40,000 and HRA is Rs 16,000. Your monthly rent is Rs 16,000 and annual interest payment on your housing loan is Rs 1.45 lakh. In this case, of the total monthly HRA, Rs 12,000 will be tax exempt in your hands. Further, you can claim deduction under section 24(b) of the Income-Tax Act, 1961, on the interest payable on your housing loan.

For claiming HRA exemption, you need to submit copy of the lease agreement or rent receipts. For claiming deduction on housing loan interest, you need to submit a copy of the tax certificate issued by the housing finance company. 

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