Taxes chase us everywhere, in the income we earn, the things we purchase and in the assets we build our wealth. The burden of taxes is felt higher as our income and wealth grows. This is why it is important that our financial decisions are conducive to a lower tax burden. 

 

In this article we will briefly summarize ways to keep taxes low. We will delve into three important areas in our financial life that have the most tax-related issues. 

 

Taxes on salary income – Salaried people should make full use of Section 80 deductions in lowering their taxable income. The most important Sec 80C deduction is up to Rs 1.50 lakh per financial year, and there are many expenses and investments that can be claimed as deduction under this section. But our recommended choice is equity-linked savings schemes, term life insurance premium, home loan principal paid in a year and all expenses eligible under the section. 

 

There are several other Sec 80 deductions such as Sec 80D for premium paid toward health insurance, Sec 24 and Sec 80EE for interest paid on home loan, Sec 80E for interest paid on loan for higher education, Sec 80G for contributions to charitable institutions. 

 

One of the other main tax saving tools for salaried people is NPS, which is quite useful for those whose tax liability remains in 30% tax bracket even after taking the aforementioned deductions, usually those earning over Rs 15 lakh per annum. If you belong to this group then restructure you must take benefit of Sec 80CCD (2) which allows contribution to the NPS scheme by your employer up to 10% of basic+DA. Usually this is done by restructuring the components in the salary to fit this contribution.

 

Taxes on assets – avoid investing in products which pay interest or dividend, to keep taxes minimal. Both dividend and interest are now taxable at the slab rate. The investments you should have for a lower tax burden are those with capital gains. The best product for this is growth plan in mutual funds and growth stocks. Mutual funds have various products catering to different asset classes; this means you can plan your entire financial portfolio with mutual fund schemes. Real estate is also taxed on capital gains, with further tax benefits on reinvestment in another property.

 

Another investment you can consider are the fully tax exempt ones like Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), but keep these limited to 10%-20% of your portfolio.

 

Limit money in savings account to a few months household expense. Avoid bank fixed deposits, debentures, bonds, post office schemes and investment oriented life insurance products.

 

Gifting - there is a particular notion that gifting can save taxes. That is not true, and mostly unnecessary if you are holding assets which have long-term capital gains. Long term capital gains are taxed at a special rate, and therefore the tax liability would be the same regardless of who owns the asset. 

 

Most people ask us whether they can transfer money to their spouse to save on tax. Usually it is to avoid taxes on the interest earned on fixed deposits. Any transfer of asset to your spouse would attract clubbing provisions, which means any income from such asset will be clubbed that of the transferor for purpose of taxation. Therefore, any interest from fixed deposits would be taxed in the transferor’s hand.

 

The solution here is to not invest in fixed deposits and rather invest in capital gain asset like debt funds. The taxation will be at a lower, fixed rate and also there will be no need to transfer the asset to save taxes.

 

Gifting to your children and parents does not attract clubbing provisions, and therefore, a recommended way to transfer an asset and its tax liability.

 

However, such gifting should be done in a proper manner, with all documentation in place. This is because the taxman keeps a close eye on gifts of high value. It is best to consult a tax expert when transferring any high value asset.