Top 10 Tax Saving Hacks for beginners

 

1. Opting into the new tax regime-

The new budget 2023 has popularised the new tax regime under Section 115BAC and it is the government’s intention to have a uniform tax regime for all in the future. This regime was introduced in 2020 due to major disallowed exemptions and deductions with minuscule added benefits. However, in this budget the new tax regime got a transformation with lesser slabs and most interestingly it has raised the limit of 5 lakhs to 7 lakhs in order to provide the benefit of rebate. It is now optional to convert into the new tax regime and enjoy the benefit of zero tax in case your income is up-to 7 lakhs but there’s obviously a catch. The new tax regime actually disincentivise the thrift because in the old tax regime you could save taxes by doing tax saving investments in 80C, 80D,80TTA, 80TTB Employee’s contribution to NPS and later on earn income from that source. 

If you are already claiming deduction more than 250000 in the old tax regime, new tax regime won’t be beneficial.

 

2. Presumptive Taxation Section 44AD and 44ADA-

If you are a small business owner or a professional then presumptive taxation might be good choice subject to certain criteria.

Presumptive taxation for businesses is covered under section 44AD of the income tax act. Any business except life insurance agent, commission-based service, hiring or leasing which has a turnover of less than Rs 3 crore can opt to be taxed presumptively. They must declare profits of 8% for non-digital transactions or 6% for digital transactions, whichever one is applicable. This means if you are income is even more than 6% of turnover, still you have to pay tax on only 6%.

Under 44ADA, A professional having a gross revenue up to Rs 75 lakhs can opt for the presumptive scheme of tax wherein he can straightaway offer 50% of the gross revenue as his taxable income and pay taxes as per his slab rates on such income.

Individual, HUF and Partnership (but not LLP) can opt for it. Another added advantage is that you don’t need your accounts get audited or maintain books of accounts u/s 44AA

3 Claiming Deductions of expenses

To claim deduction, you need to be proactive about the expenses you make. There are many such deductions available in the old tax regime. Under 80C, you can get deduction up to 150000 for paying tuition fees of maximum 2 children for full time education in India. Under section 80D, you can deduction by paying for medical treatment for self, spouse, children and parents. Under section 80DD, you can claim deduction up to 125000 by incurring medical expenditure for your handicapped and dependent relative. If you are not a salaried person, still you can get deduction on house rental expenses under section 80G.

4. Making Tax saving Investments and exempt income sources-

When we talk about saving tax, it is always better to proactively resort for exempt income sources. Some popular exempt incomes are any type of agricultural income except in the cases where the nature of the product changes completely like Potato chips. National savings certificate is a good option as you do not only get deduction under section 80C but also its interest is exempt. 80C also offers instruments such as Term deposit of 5 years or more in a scheduled bank in Post office, Deposit in Senior Citizen Saving scheme providing return of 8% per annum where, in the recent budget, the deposit limit has been doubled. Public Provident fund is a sustainable tax saving instrument providing about more than 7% tax free return.

5. File returns on time to not forgo the benefits

Filing return on time is one of the most important steps in your tax planning. If you do not file return, apart from the interest and penalty, you lose major benefits. You cannot carry forward losses that you could have charged against in your income the next assessment year to reduce you taxable income. No deduction under Chapter VI-A will be available for deduction and you end up with burden of heavy late fees and interest. If you are a person deducting TDS or collecting TCS, you have to be alert on payment and return as on default you may have to pay such amount from your own pocket. One should also be aware about advance tax estimation and timely payment to avoid opportunity cost of blockage of funds in case of hefty excess or interest in case of hefty deficit.

6.Taking Loan

Loan is a liability and Indians are risk averse but taking loan, in many cases , can be beneficial too. Following are few types of loan:

Educational Loan- Under Section 80C, you get deduction of the interest paid due to educational loan taken for higher education of self, spouse, children or any student whom assess is a legal guardian.

Home loan- If you take loan for the purpose of purchasing/construction of your residential house, you can get deduction up to 200000 under section 24(b) and if it is for repair and renovation, deduction can up to 30000 but you can get whole interest deduction if it is let out property. Further deduction under section 80EEA up to 150000 is available on the excess of 200000 if  the loan was sanctioned between 1/4/2019 to 31/3/2022 for construction of your first house.

Electric Vehicle loan- To popularise the electric vehicles in Indian market, deduction on interest up to 150000 under 80EEB is available if such loan has been sanctioned between 1/2/2019 to 31/3/2023 for the purpose of purchasing an Electric vehicle.

7. Taking Insurance policy-

It is a common thinking of Indian middle-class household to take insurance as a waste of money due to documentation complexity, difficulty in getting claims. But insurance insures the risk of loss. Apart from that it provides tax saving advantage. You can get deduction under section 80C upto 1500000 by paying life insurance premium for self, spouse, children and in the name of HUF , by paying for any members of the HUF. You can further get deduction under section 80D in respect of paying medical insurance premium for self, spouse , and children upto 50000 and for parents upto 50000 provided at least one person in aforementioned block is senior citizen. You can also claim exemption under section 10(10D) on any amount received from the life insurance policy. Before budget there was no condition but from policy purchased on or after 1/4/2023 , exemption is applicable if and only if the aggregate of annual premium paid is up-to 500000 only.

8. Gift-

This is a very sought way of tax planning under Section 56(2)(X). Amount gift received will not be taxable if given to the relative, in occasion of marriage, death or inheritance. Any property other than jewellery, artworks, bullion, immovable property, shares and securities can be received with out tax liability. For example- TV, Car, Mobile can be received without incurring any tax liability. Apart from that, money up to 50000 and movable property whose fair market value is upto  50000 can be received from any person without any tax liability. An important consideration is to accept the gift by forming a gift deed for legal objectivity.

9. Charity and Donations-

Charity and donations are for non-economic pleasure but what’s wrong in getting tax benefits if both these sides are taken care of. Let us understand how can you get tax deduction. Under section 80G, you can get unlimited deduction by donating in National sports fund, National children fund, Clean Ganga fund, National cultural fund, P.M. National relief fund & PM care fund, National defence fund. You can even get limited deduction by donating it to religious centres, public charitable trust. You can avail 100% deduction by donating to political parties or electoral trust under Section 80GGC.  

10.  Marginal relief

Marginal relief is a special advantage in our tax regime which provides tax advantage in relation to marginally additional income higher than the surcharge slab which if not provided, could incur higher tax liability. Let us illustrate this via an example-

Suppose, an individual has a total income of Rs.51 Lakhs in a FY 2022-23.

He will have to pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax payable will be Rs. 14,76, 750. But, if he would have earned only Rs.50 lakhs, then the tax liability would have been Rs.13,12,500 only (excluding cess).  Isn’t it unfair for the individual? For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,64,250. The individual’s tax liability should be reduced to avoid any such excess tax payable. The individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.14,76, 750 minus Rs.13,12,500 = Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lakhs i.e. (Rs.51,00,000 minus Rs.50,00,000 = Rs.1,00,000). The marginal relief will be Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000). Hence, income tax liability on income of Rs. 51,00,000 will be Rs.14,12,500.

The concept of marginal relief is that the amount of increase in income tax should not be more than the amount of increase in income. So, to do that you have to proactive tax planning with the help of exemptions and deductions.

 

Researched by Soumyadeep Pramanick