10 simple tips to lower your tax bill
There’s nothing more demoralizing than watching your income get slashed by taxes. After all, it’s your hard-earned money, and you won’t like it go for whatever cause that may be. However, you can’t do much to avoid that. Simply because taxes are said to be as inevitable in life as death.
Still, there are ways to reduce the burden of taxes, particularly if planned judiciously and well ahead of time. Here are some tips to lower your tax bill:
Of the sections that offer you tax breaks, Section 80C tends to be most popular since you can get an exemption of up to Rs 1 lakh on contributions to a wide range of investments.
These include Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), unit linked insurance plans (Ulips), school fees, and home loan principal repayment.
Pension plan deductions
One significant point to note is that pension plan deductions under Section 80CCC are also available within the overall limit of Section 80C and if any investment is made under the former section, the qualifying amount under Section 80C stands reduced to that extent.
You can also look beyond Section 80C to reduce your tax liability. For instance, if you have taken a medical insurance plan for yourself, your spouse, dependent parents and dependent children, you can under Section 80D claim deduction up to Rs 15,000 for the premium paid.
For senior citizen tax payers, the limit now has been enhanced to Rs 20,000. One condition being that the premium should be paid through a cheque.
Medical treatment of dependent
Expenses on the medical treatment of a dependent who is a person with a disability also qualify for tax benefits under Section 80DD. In this case, deductions up to Rs 50,000 can be claimed. A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000.
In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, certification by a medical authority is mandatory.
Medical treatment of specified ailments
Deductions of expenses on medical treatment of specified ailments (such as AIDS, cancer and neurological diseases) can be claimed under Section 80DDB. The maximum amount of deduction allowed from gross total income is restricted to Rs 40,000 (which goes up to Rs 60,000 if the age of the person treated is 65 years or more) on condition that no medical reimbursement is received from any insurance company or employer for this amount.
In order to claim this deduction, however, you will have to submit Form 10-1 from a specialist doctor working in a government hospital in India, confirming the treatment of the disease.
Interest component of home loan
You can claim a deduction for the interest paid on a housing loan, even on loans taken for repair, renewal or reconstruction of an existing property. The interest component of home loan is allowed as a deduction under the head ‘income from house property’ under Section 24(b) up to a limit of Rs 1.5 lakh a year in case of self-occupied house.
One condition being that your house must have been financed by a housing loan taken after April 1, 1999. It is also essential that the acquisition or the construction of the property is completed within three years from the end of the financial year in which the loan is taken.
Cash gifts received from specified relatives are exempt from income tax, and there is no upper limit also. Similarly, cash gifts of any amount and from anyone received during your child birth, marriage or any other specified event are totally tax-free.
However, if you receive a cash gift of more than Rs 50,000 from a friend, you are required to pay tax on the excess amount exceeding Rs 50,000.
You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act. The rate of deduction is either 50 or 100 per cent, depending on the choice of fund.
There is no restriction on the amount of charity. However, donations must be made only to specified trusts. Also, only donations of up to 10 per cent of your total income qualify for such a deduction.
If you invest in your wife’s or child’s (who is below 18) name, the income generated from such investments will be clubbed with your income and taxed accordingly.
However, if you transfer money to a child who is over 18 years of age and invest in his name, then the income generated from such investment will not be clubbed with your income. Instead, that will be clubbed with the income of your child and taxed accordingly.
Long-term capital gains
If you invest in stocks, “you should sell them only after a period of 12 months to avail nil/ lower tax rate on long-term capital gains,” advises Sonu Iyer, Partner - Tax, Ernst & Young.
However, you are required to mention the amount of gain in your I-T return under the head ‘capital gains’ and claim exemption.
Never ask a man his wage and a woman her age is an adage often quoted but not one that your taxman upholds.
Yet again, it’s that time of the year when you are required to disclose the details of your income and file income-tax returns.
To make this pocket-pinching process a non-taxing job, SundayET lists down six steps which you can follow to sail through.
Do you need to pay tax?
This year, the income-tax department has made revisions with regard to tax slabs and exemptions.
"The income slabs for different categories have been revised this year, so verify if you need to pay tax at all," explains Bharat Dhawan, MD, Mazars India.
You are not required to file tax returns if you are a man whose earnings were less than Rs 1.1 lakh in 2007-08.
On the other hand, in case of a woman, an income of less than Rs 1.45 lakh during the previous financial year is exempt from filing tax returns.
Similarly, senior citizens whose income was below Rs 1.95 lakh in 2007-08 is also free from this obligation.
Get your facts right
Once you’ve ascertained that you have to pay tax, you need to choose from the forms titled ITR 1 to ITR8.
ITR 1, ITR 2 and ITR 4 are the forms most commonly used by an individual and an HUF.
ITR 1 is the form that you must pick up if your income is from salary, pension or interest income.
Property or Capital gains
ITR 2 caters to individuals who have an income apart from salary (from property or capital gains) but not from a business or profession.
An individual who makes an income from his business or profession, including investments in the stock market, should fill ITR 4.
An individual who is a partner in a partnership firm is supposed to fill up ITR 3.
Compile your documents
To fill your form with ease, you must get your documents together with necessary details.
This includes documents such as Form 16 (which is given by the employer and includes details about yearly income) and Form 16(A) with details of tax deducted at source on income other than the salary.
In addition, chartered accountants advise that you should have a copy of the returns filed the previous year, bank statements with details of accounts operated not only by you but also by your spouse (provided she does not have an income of her own) and children who are minors.
Savings statements and interest statement
Besides, you need to have your savings statements and an interest statement that reflects how much was your interest income in the previous year.
Remember, these documents are for your reference while filing tax returns and none of these documents needs to be attached with the form.
Make your disclosures
According to Kuldeep Kumar, associate director, PricewaterhouseCooper (PwC) India, you are also obliged to make disclosures in the following cases: If you have invested more than Rs 2 lakh in mutual funds, withdrawn over Rs 10 lakh in cash from your savings account or if you have purchased bonds worth more than Rs 5 lakh.
You also need to furnish details of your immovable property if they exceed Rs 30 lakh, to disclose the acquisition of shares beyond Rs 1 lakh and an aggregate payment of Rs 2 lakh or more via a credit card.
Be aware of deductions
To avail of the legal deductions, financial planners advise that you should acquaint yourself with the terms of section 80 of the Income-tax Act 1961.
Tax breaks are available on both incomes and payments.
For instance, you are eligible for a deduction for the premium paid towards your life insurance policy, or if you have contributed to funds such as the provident fund set up by the government, or for that matter, deployed funds in the pension scheme set up by the Central government or a superannuation fund.
The deduction on medical insurance premium and on medical treatment are beneficial for the elderly.
There is, however, an upper limit to the deductions possible.
Filling and submittimg the form
For your own benefit, the form should be filled accurately, if possible without any overwriting. You should re-check details, particularly where you quote your Permanent Account Number (PAN) and Transaction Authentic Number (TAN).
The forms can be filled and submitted on paper at the income-tax office or at specified post offices or digitally (it is, however, mandatory to have a digital signature) or as a combination of both, in which case there are more procedures for verification involved.
Chartered Accountants , advice
Ashish Ahuja, partner, Ahuja and Ahuja Chartered Accountants, advises that you should try to follow, as much as possible, the calculation methods which are described in the form itself.
"Also, remember to get an acknowledgement slip in every case," he says. The final date for filing tax returns is July 31.
If you don’t want to file the returns on your own, you can hire the services of a government-trained tax return preparer or a chartered accountant.
If you delay filing your tax returns beyond July 31, an interest of 1% per month will be charged.
10 important things to do before filing I-T returns
It is that time of the year again when tax payers - particularly the salaried class - scramble to file I-T (income tax) returns.
After all, filing of tax return is compulsory for everyone whose gross total income exceeds the basic exemption limit.
For financial year 2007-08 (assessment year 2008-09), for instance, this limit was Rs 1.45 lakh for women below 65 years of age, Rs 1.95 for senior citizens and Rs 1.10 lakh for any other individual. If your income for the year exceeded the exemption limit, you will be required to file the return by the due date (July 31, in this case).
However, despite all the precautions taken by you, rush-hour filing may mean that you could inadvertently miss out on certain details and disclosures, and therefore be on the bad books of the taxman.
If not that, you might just forget to make the most of the tax breaks available to you, thus paying more tax in the process and claiming no or less return. Here are 10 important things to do before filing your I-T returns:
1. Choose the right form:
The first thing to do is to see that you have chosen the right form to file your return. For example, there are two I-T return forms -- ITR-1 and ITR-2 - available for salaried individuals at the moment, and your sources of income will decide which form to use.
Use the first form if your income is from salary, pension or interest, and use the second one in case of any capital gain, income or loss from house property and income from any other source.
The Tax Department will refuse to accept your form in case you have chosen the wrong form.
2. Fill in correct personal details:
Ensure that you fill in correct personal details in the form meant for you, especially your name, address, bank account details and PAN number.
Bank account details include the bank account number, type of account and the bank’s MICR code. This is crucial, especially if you are claiming a refund.
Likewise, your PAN is very important because the tax laws levy a fine of Rs 10,000 for not quoting or misquoting your PAN number.
3. Attach Form -16:
Check that you have already received your Form -16, i.e. certificate of tax deducted at source by the employer on your salary income. The original Form-16 will have to be deposited with the I-T return form.
Similarly, "if any tax has been deducted by bank on interest or any other party on the payment made to you, then you will have to obtain Form -16A, i.e. certificate of tax deducted at source on rent, interest etc," informs Vikas Vassal, executive director, KPMG.
4. Analyze your bank statement:
Ensure that you have analyzed your bank statement as to any income received or any investments made that are required to be disclosed in your tax return.
"A common mistake most salaried tax payers tend to commit is the exclusion of interest income. Your assessing officer doesn’t have to a genius to guess that any person who maintains a savings/deposit account would normally also receive interest income and not disclosing the same may.Therefore, be one sure way to get discomforting correspondence from the tax office," says R K Chopra, V-P (Finance), Alankit Assignmets Ltd.
5. Compute your tax liability:
Ensure that you have computed your tax liability, including your salary income, and "if any tax is payable, the same has been paid as ‘self assessment tax’ before filing the tax return.Further, if any interest is payable for late payment of tax, then the same has also been deposited," says Vassal.
6. Fill in income details:
Check whether you have correctly filled in details of your salary income/other income and also the tax deducted at source in the relevant columns of the tax return form to ensure that you get the credit for TDS.
7. Income from stocks:
Don’t miss on the details of your stints with stocks last year.
Note that even if the markets haven’t been kind, the loss would be allowed for carry forward for luckier times in future for setoff only if the same has been appropriately been disclosed in the form.
8. Claim all deductions:
Ensure that you have, under various sections of the I-T Act, claimed all the deductions that you are eligible for. For example:
a. Under Sec 80 C - For investments made like PF, PPF, NSC, school tuition fees of children, insurance premium investments in specified mutual funds etc.
b. Under Sec 80 G - Donations made to charitable organizations.
c. Housing deduction for interest on housing loan etc.
9. Information of specified investments:
You also have to fill in information in respect of specified investments, as per prescribed limits, such as:
Property bought or sold in excess of Rs 30 lakh
Mutual funds, in excess of Rs 2 lakh;
Cash deposits in excess of Rs 10 lakh;
Credit card payments in excess of Rs 2 lakh;
Bonds etc in excess of Rs 5 lakh
10. Disclose exempt income:
It is also important to know that certain income that is exempt (i.e. income which is not taxable) is also required to be disclosed in the I-T return form.
For example, dividend received and receipt of PF balance, among others. Not disclosing these incomes may land you in trouble also.
How to file your income tax return online
Gone are the days when you really had to struggle to fill those lengthy I-T return forms and also stand for hours in a queue to file your return.
Now, with the help of technology, you can do that from the comfort of your home or office.
In a bid to make the process of tax filing convenient and handy for the citizens, the Income Tax Department has, in fact, introduced a convenient way to file tax returns online using the Internet facility.
The process of electronically filing your return is known as e-filing.
1) Advantages of e-filing
E-filing offers convenience of time and place to tax payers. This facility is available round the clock and returns could be filed from any place in the world.
It also eliminates/ reduces interface between assessee and tax officials.
The other advantage being that it is a paper-less process as it doesn't requite any annexure with the return.
Also, according to sources, e-returns will now be processed faster than physical returns.
2) Who can file returns online?
Although this scheme is available to any tax payer, filing of returns electronically is mandatory for firms required to furnish the return in Form ITR-5 and to whom provisions of Section 44AB are applicable, or a company required to furnish the return in Form ITR-6. That, however, does not mean that an individual tax payer or HUFs can't file their returns online.
Thus, any individual or organization that files returns using the general method can take advantage of this facility. The pre-requisite for filing online is that one must have a valid PAN number. Direct e-filing, in fact, is available for Form Nos: ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6 & ITR-8.
3) Types of e-filing
E-filing can basically be done in three ways:
Type I: In case you are using digital signature, no further action is required.
Type II: In case you are filing the return without digital signature, ITR-V form is to be filed with the department. This is a single page receipt-cum-verification form.
Type III: You can also file your return through an e-return intermediary who would do e-filing and also assist you file the ITR -V Form.
But you need to pay their fees (currently in the range of Rs 150 to Rs 1,000 for individual tax payers) for taking their help.
4) Process of e-filing
E-filing is easy and also takes very little time. All you need to do is to log on and follow the simple instructions while filling up your tax return form online, giving the required information about your income, expenditure and savings.
However, for doing that you need to have a software application that generates the income tax form. The form is available at the various tax-filing sites, apart from the Income Tax Department portal (incometaxindiaefiling.gov.in) which is free. But unlike the private portals, the government portal doesn't calculate your tax liability.
5) Step-by-step process
a) Select appropriate type of return form
b) Fill your return offline and generate an XML file
c) Register and create a user ID/password
d) Login and click on relevant form on left panel and select 'Submit Return'.
e) Browse to select XML file and click on 'Upload' button
f) On successful upload, acknowledgement details would be displayed. Click on 'Print' to generate printout of acknowledgement/ITR-V Form.
6) Complete the process
a) In case the return is digitally signed, on generation of 'Acknowledgement', the return filing process gets completed. Assessee may take a printout of the acknowledgement for his record.
b) In case the return is not digitally signed, on successful uploading of e-return, the ITR-V Form would be generated which needs to be printed by the tax payers. This is an acknowledgement-cum-verification form. The tax payer has to fill up the verification part and verify the same. A duly verified ITR-V form should be submitted with the local Income Tax Office within 15 days of filing electronically. This completes the return filing process for non-digitally signed returns.