Here a few tax saving alternatives which can be used by individuals in order to optimize their taxes and enjoy greater disposable income.
In the ever-evolving landscape of taxation, staying financially secure requires strategic planning. As we approach the new fiscal year beginning with April 2024, individuals and businesses are seeking ways to save money on income tax while ensuring a firm financial footing. Taxpayers are left with only 1 quarter before the beginning of a new financial year to appropriately plan their investments and expenditures and, thus, reduce their income tax liability.
This article aims to provide valuable insights and practical tips to enable you to navigate the tax terrain and optimize your financial position by way of highlighting certain rational and legitimate strategies which can be factored into by the individual taxpayers to reduce their tax liability and enjoy a larger share of residual income.
Considering the existing provisions of the Income Tax Act, 1961 (‘IT Act’), the following schemes / alternatives can be used by taxpayers, either individually or in combination, to shrink the burden of tax.
Section 80C of the IT Act provides with ample of investment related deduction options for individual taxpayers, which includes premium for life insurance, contribution in Public Provident Fund (PPF) and National Savings Certificate (NSC), investment in Equity Linked Savings Scheme (ELSS), etc.
Apart from investment-linked deductions, section 80C also offers a bunch of expenditure related deductions such as principal repayment of housing loan, tuition fees for the purpose of full-time education of specified family members, etc. Taxpayers can claim a deduction of upto Rs 1.5 lakh per annum u/s 80C of the IT Act.
The Ministry of Finance vide section 80CCD(1B) has provided an additional relief to individual taxpayers on contributions made towards National Pension System (NPS) as notified by the Central Government.
However, the quantum of contribution eligible for deduction under this section is restricted to Rs 50,000 which would be over and above the threshold limit of Rs 1.5 lakh as aforementioned u/s 80C of the IT Act. Availing such benefit may result in reduction of tax liability of taxpayers falling within the 30% tax bracket of upto Rs 15,000 per annum.
Individuals can secure their own health as well as the health of their family by way of taking a mediclaim policy. As per the provisions of section 80D of the IT Act, a maximum upto Rs 25,000 can be claimed as deduction from tax. An individual taxpayer may also claim such deduction with respect to premium paid for his/her spouse, parents and children dependent on them. An additional deduction upto Rs 25,000 could be claimed if the medical insurance policy is taken on the life of a senior citizen.
If there is no mediclaim premium paid for a senior citizen (person aged 60 years or more), tax deduction upto Rs 50,000 may be claimed for medical expenditure incurred on such persons.
Taxpayers can analyse the benefits of the alternative tax regimes (i.e. the default new regime or the old regime) depending on the nature of their income and choose the tax regime that best suits their investment strategies. Individual taxpayers who does not generate any business income can every year select the most appropriate and tax efficient regime (concessional or old) while filing their tax returns.
However, individuals with business income can switch between both the regimes only once in their life and thus must properly forecast and evaluate future cashflows before opting for another tax regime.
Until Finance Act 2023, section 87A of the IT Act has been a boon only for resident individual taxpayers who opted for old tax regime and whose total taxable income does not exceed Rs 5,00,000 in a particular tax year, as the section allows a rebate of an amount equal to the tax liability on the total income or Rs 12,500, whichever is lower.
However, as per the amendment made via Finance Act 2023, the benefit of rebate u/s 87A has been extended to resident individuals paying tax under concessional tax regime as well with effect from financial year 2023-24. As per the said amendment, resident individuals with taxable income upto Rs 7,00,000 would be eligible to avail a maximum benefit of Rs. 25,000 as tax relief, under the concessional income tax regime.
Thus, resident individuals with total income upto the limits prescribed above would effectively not be required to pay any income tax.
Income Tax Authorities had introduced 2 self-declaration forms for assessees whose total income does not exceed the basic exemption limit in order to give them some relief from unnecessary blocking of funds in the form of tax deducted at source (‘TDS’). The said forms are as under:
vi.1) Form 15G – applicable to an individual taxpayers aged less than 60 years
vi.2) Form 15H – applicable to resident senior citizens aged 60 years or more
With the help of these Forms, individuals can request persons, who deduct tax at source such as banks and other financial institutions for not withholding tax on certain specified income accrued to them.
The prevailing Income Tax rules does not provide for any specific time limit for submission of Form 15G or Form 15H. Usually, eligible individuals and taxpayers submit the said form at the beginning of the financial year. However, taxpayers can submit it during the financial year as well though the same may result in unnecessary blocking of funds.
As per the provisions of section 112A of the IT Act, capital gains exceeding the threshold limit of Rs 1,00,000 on transfer of the following long term capital assets, shall be chargeable to tax at a rate of 10% (plus applicable surcharge and cess):
vii.1) Equity shares in a company; or
vii.2) Unit of an equity-oriented fund; or
vii.3) Unit of a business trust (where STT is paid)
As per the aforesaid provisions, no long-term capital gains tax will be levied if the amount of gain does not exceed Rs 1,00,000. Thus, an individual who possess long-term capital assets as prescribed above can book their long-term capital gains upto Rs 1,00,000 so as to exhaust the limit under this section which is applicable for each financial year.
LTC can be claimed as exemption as per the provisions of section 10(5) of the IT Act by an employee for expenses incurred for self and family (spouse, children, dependent parents and dependent siblings) in respect of travelling anywhere within India.
As per the said section, exemption can be claimed twice in a block of 4 calendar years (current block in 2022-2025). The quantum of the exemption would depend upon various factors such as the actual expenditure incurred, mode of transport for the journey, etc. as different permissible limits of exemption are prescribed for journey via different modes of transport. If an employee has not availed the benefit of LTC in the last couple of years, it is advisable to plan and avail the same this year and reduce the tax liability.
Stated above are a few tax saving alternatives which can be used by individuals in order to optimize their taxes and enjoy greater disposable income. Apart from those stated above, there are several other legitimate ways to save and reduce the total tax liability but it is highly recommended to take opinion from tax consultants before actually implementing the strategy.
Source: https://www.financialexpress.com/money/income-tax-how-to-save-money-on-income-tax-to-be-on-a-firm-footing-in-2024-3364251/
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