Set up a Hindu Undivided Family (HUF) Trust: A HUF Trust is considered to be a separate entity for the purposes of taxation. A HUF Trust enjoys the same tax exemptions and tax slabs as a resident individual. Hence, you can gain a significant tax advantage by creating a HUF Trust. Please click here to understand more on this.
Parents' investments: If your parents are above 65 years, they enjoy a higher basic exemption limit compared to you. When investments are made in your parents' name and if your parents have a low income or nil income, a better tax-adjusted returns can be enjoyed by your family.
Minor child’s income: A minor child’s income is clubbed with the parent’s income. If you have invested anywhere in your minor child’s name and this investment generates an income, you can claim upto Rs. 1500 per minor child as a deduction on this income.
Rent paid to parents: If you stay in a property which is registered in your parents’ name, don’t think you will miss out on HRA benefit. You can still claim HRA benefit by paying rent to your parents. However, your parents will be taxed for the rental income they earn. Thus, this is most beneficial if your parents are in the lower income tax bracket. Also, in this case, it is advisable to make an agreement with your parents, get this agreement registered and keep a record of the cheque payments you make to your parents towards rent.
Shares sold to parents to offset gains: A long term capital loss on shares can be set-off against gains if you choose to make an off-market sale (without going through the exchange). As finding buyers for off-market transactions can be difficult, you can sell these shares to your parents to get the set-off benefit. However, shares should be sold at the market price and cheque payment should be made for purchase.
Reduce your long term capital gains tax on property: If you sell your house after 3 years of purchasing it, you will be subject to long term capital gains tax. This can be exempt if you invest the capital gain you get in another house (within 2 years) or use it to construct another house (within 3 years). However, the new house purchased or constructed should not be transferred by you within a period of 3 years from the date of purchase or construction, as the case may be.
Structure your salary package, if possible: Some employees are given the option to choose their salary components. A substantial amount of tax can be saved by opting for tax-friendly components like food coupons, HRA (if you are staying in a rented accommodation), medical expenses reimbursement, transport allowance and Leave Travel Allowance.
Invest in tax-efficient mutual funds: When you invest in mutual funds, look at tax efficient funds, as they can increase your post-tax return. If you prefer equity mutual funds for a short term, it is better to invest in a dividend scheme rather than growth scheme, as dividend is tax free, and the short term capital gain is lower due to a downward adjustment in NAV. On the other hand, if you prefer debt funds, a short term investor with a high tax bracket should opt for a dividend scheme, as the dividend distribution tax of 13.52% works out to be lower than the short term capital gains of a growth scheme, which is as per tax bracket.
Tax benefits from an under-construction house: Under Sec 24 of the Income Tax Act, you are not eligible to claim interest paid on home loan during the period the property is under-construction. However, the interest paid during the pre-construction period can be claimed as a deduction in 5 equal instalments from the year the construction is complete.
Owning a house is another city: You can claim tax benefits of both home loan (under Sec 80C and Sec 24 of the Income Tax Act) and HRA benefits at the same time, if you stay in a rented house, but own a property in another city.
A Summary of various tax-saving methods: