Best Ways to Reduce Your Tax

Taxes are mandatory contributions imposed on individuals and corporations by the local, regional or national government. They are the prime source of all finance government activities, such as public works, services like schools, medicare, etc. When not managed well, they haunt us, but there are several ways via which we can reduce our tax credits.
Let’s learn about them here and the ways through which you can apply them to your benefit.

Get organised

It is the first step in the process, and one shouldn’t skip it. It means dealing with taxes throughout the year. It may sound simple, but many fill their taxes in a month. Therefore, you should prepare a folder for all tax-related documents and fill them in the whole year. The sole purpose of this is to save your time and energy as you will have all records in one place. Further, you can keep copies of your return for at least three years.

Donate Money to Charity or Relief Funds

According to section 80G of the Income Tax Act, you can get a lot of tax deductions on donating to qualifying charitable organisations during the fiscal year when you file your income tax return. But the point to remember is that only specific entities are eligible for this and are notified by the Income Tax Department for this purpose. A unique feature of the involved section is that there is no cap on the donation that is tax deducted when filing an ITR for a specific number of charities.
Moreover, according to the section GGA, there will be deductions in donations to promote scientific research and rural development. Here, 100% of the money donated will be considered for deduction.

Deductions for Medical and Education Expenses

Medical Expenses According to section 80D of the Income Tax Act 1961, you can claim deductions against premiums paid for the health insurance policies of your and your family members, including spouse, dependent children, and dependent parents, in the corresponding financial year.
One can claim a deduction under this section up to Rs 25,000 per annum. Further, one can claim for additional deduction on payment of parents' insurance to the extent of Rs 25,000 if the parents' age is below 60 years or Rs 50,000 if the age of the parents is above 60 years. One can claim a maximum of Rs 1,00,000 of deduction under this section.
But what will happen if you don’t. Then, you can claim deductions up to Rs. 5,000 for the expenses utilised for preventive health check-ups. Further, if you are a senior citizen or have aged parents, you will still get deductions up to Rs. 50,000, given that the senior citizen is not covered by health insurance.
Despite this, buying health insurance for your family is highly suggested. This method decreases taxable income to a considerable extent.
One can also receive money from a life insurance policy on maturity or on receiving the claim amount. Also, contributing to a retirement account to get tax breaks is a straightforward idea. There are many types of retirement savings. Many policies covered under section 80 DDB correspond to the health insurance. One is under section 80 D when medical insurance premium of self or children will do the work, and the other is under section 80DD when you can decrease your tax credit. The next comes under Section 80DDB, which allows saving tax through the treatment of specified diseases. They allow your deductions on your income and thus decrease taxable income.

Education Expenses

It’s well-known that children's education expenses take a significant part of parents’ income, and one can maximise the benefits associated with the costs. According to article 80C, parents can claim a tax deduction of up to Rs. 1.5 lakhs for the tuition fee paid for their children’s education. However, this rule applies to up to 2 children per taxpayer (meaning up to 4 children for a couple). The children are enrolled in registered institutions such as pre-schools, nurseries, schools, and colleges.
Moreover, according to section 80 E of the IT Act, people can claim a tax credit deduction if taking an educational loan. But this has a downside in that the deduction is only for the interest on the loan and not the principal amount. In addition, there is no upper limit on the amount of interest paid on an educational loan that can be deducted as an expense. Finally, note that only the individual taxpayers can claim deductions, not the HUF.
According to section 10(14) of the 1961 Income Tax Act, special allowances are given to salaried individuals to cover the educational and hostel expenses.
These include the Children’s Educational Allowance and the Hostel Expenditure Allowance. The former involves an allowance of INR 100 per month per child for up to two children studying in an educational institution.
Whereas the latter involves an allowance of INR 300 per month for up to two children staying in hostels. Note that the allowance is for the fiscal year one has paid the corresponding fees.

Hold on to investments longer

As suggested, it means to aim for all your investment gains to be long-term ones. It means that you should hold the asset for a minimum of 1 year before selling it. Even when one keeps it for 11 months, it is suggested to have it for a considerably long time.
So, in case you were thinking about selling a stock after a few months, reconsider your decision as it may save you some money in the longer run. This method helps reduce tax, despite being simple.

Hold on to investments longer

As per article 24, the interest one pays on home loans also can be deducted to save on taxes. You can save huge amounts if you use home loans for claiming deductions. It is one of the best ways to reduce tax because it gives several deductions. Firstly, it provides deductions up to Rs. 1.5 lakhs on home loan principal repayment under section 80C, and up to Rs. 2 lakhs on the interest repaid under Section 24B. In addition, you have the option to pre-pay the principal and earn exemptions up to Rs. 1.5 lakhs, avoiding the need to buy more tax-savers. You may also be eligible for further tax deductions of Rs. 50,000 under section 80EE or Rs. 1.5 lakhs under section 80EEA on your loan interest repayment, depending on the property you’ve bought, the amount you’re borrowing, and the year of loan sanction.

By Paying Rent

A salaried person living in rented accommodation can decrease tax by paying rent to the landlord. So, if you are one, then you can receive a house rent allowance (HRA) for the rent paid as per provisions stated in Section 10 (13A) of the Income Tax Act. In cases when employees receive no HRA, they can claim a deduction as per Section 80GG of the IT Act for the rent paid corresponding to their accommodation for their residence up to Rs. 5000 per month, given some conditions. It is one of the common ways to decrease tax credits.

Be mindful of the time of selling stocks

Generally, funds distribute income to shareholders near the end of the year. At that time, the value of stocks falls by the distribution amount due to the distribution of the importance of stocks to shareholders. This scenario is not a big deal for those who have owed the stocks for a long time. Still, ones who have bought them just before the distribution, will be taxed on the distribution that covers the fund’s past year, even if one has owned only a tiny portion of that year’s stocks.
The aid to this situation is asking the fund company about when the stock distribution is happening and aiming accordingly.

Start a Business

A business can be a source of additional income. However, it provides tax deductions also.
It reduces the total tax obligation when used in daily business—for instance, health insurance premiums for self-employed individuals under particular requirements.
Multiple benefits are given to the startups by the Income Tax Department, comprising Tax Holiday Scheme to the Startups and Small Business, as mentioned in section 80 IAC of the Income Tax Act, Angel Tax benefits as per section 52(2), Tax exemption to the individual on the long -term capital gain in equity shares of Eligible Startups as per section 54 GB. But these are under some conditions such as being incorporated as a private limited company or registered as a partnership firm or a limited liability partnership, turnover of less than INR 100 Crores in any of the previous fiscal years, under ten years from its date of incorporation and working towards the improvement of existing products, services and processes and should have existing products, services possessing the capacity to create employment and thus wealth. In addition, it should not be reconstruction or formed by splitting up an existing business.

Invest in Municipal Bonds

It means lending money to a state or local governmental entity for a fixed number of interest payments over a predetermined period. After the bond reaches its maturity date, the total initially invested amount is repaid to the buyer.
These bonds' corresponding and considerable feature is their exemption from federal taxes and perhaps exemption at the state and local level also, depending on your residence.
A noteworthy fact is the lower default rates of municipal bonds than corporate bond counterparts.
However, municipals typically pay lower interest rates. But, their tax-equivalent yield makes them attractive to some investors. So, the higher your tax bracket, the higher your tax-equivalent yield. Thus, reduces tax significantly.

Provisions by the government of India

The government of India offers many provisions to invest Rs. 1,50,000 according to section 80C of the Income Tax Act. Therefore, investing in tax-saving options under 80C will save your money on income tax and step you up for a secure future. These options include Public Provident Fund, National Pension Scheme, National Savings Certificate and Equity Linked Savings Scheme, Sukanya Samriddhi Account, etc.
Example: Under a scheme as per section 80CG, named Rajiv Gandhi Equity Saving Scheme, only the people investing for the first time in history in the stocks or mutual funds are eligible to reduce tax. It is only applicable when the taxpayer has an annual income of INR 12,00,000. Note that whoever has already done pay won’t get this tax deduction.

Underrated points to take care

Use the correct filing status because it is often seen as a minor issue, but filing with the wrong status proves costly.
Also, keep up with changes in the tax code. Undoubtedly, our tax code is complex and changes a little or considerably from year to year. So, to keep yourself in sync with these changes and keep your taxes to a minimum, employ a tax pro who can assist you in following the latest rules and saving your taxes.
The correct way to find a tax pro is to look for genuine recommendations or search for one on an authentic website.

Will tax software really help you ?

A tax software is of great use if your tax situation is pretty straightforward. It can get your tax return done in a comparably less time than when you haven’t used it.
It is common in cases when you and maybe your spouse primarily have just salary income, no self-employment income, business income, or complicated investments. It automates many calculations and will evoke you for information to maximize deductions and credits.

The bottom line

Tax is a certainty, but we can absolutely save our taxes using the ways mentioned earlier. We learned how to decrease your income by staying organised, taking life insurance, paying rent, starting a startup, taking a home loan, and investing in a municipal bond. Moreover, getting help from a tax expert and using tax software for simple and straightforward work is helpful. Using a correct filing status is also required. People should also use the provisions by the government of India to direct it to their advantage.
“Tax avoidance is legal, but tax evasion is criminal.”

You may also like