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It may be well known to some, but not all employees are aware of all tax-saving measures and their nitty-gritty details.
TLDR: The Old Regime of Tax is Beneficial for Majority of the Taxpayers for the FY 23-24. Plan for your Deductions now.
The taxpayer must ensure
The tax payer can avoid 100% of interest income or Short/Long Term capital gains on Deposits, Mutual Funds and Stocks. The following needs to be ensured:
Contribution from
Towards
Tax upon Contribution exceeding limit
Tax upon Income on that Contribution
Limit
How to get away
Employee
Own PF
Not Taxable
Taxable
2.5L
Limit own contribution to up to 20.5k per month
Employer
Your PF and Your Corporate NPS
Taxable
Taxable
7.5L
The limit is good enough, however if not, Case specific advice
I'll write down some cases:
Clubbing as per IT Act
10.Please consult a CA or a Financial Advisor for the same as each case is different
TLDR: The Old Regime of Tax is Beneficial for Majority of the Taxpayers for the FY 23-24. Plan for your Deductions now.
- House Rent Allowance (Section 10(13A))
The taxpayer must ensure
- A rent-paying contract with e-stamp paper is made with a family member
- Rent should be on par with the society where that address is located
- Refundable deposit should be given on par with the society where that address is located and not treated as Rental income
- Rent has to be through Bank transfer and be paid each month as per the agreement
- Rent receipts should be made and signed by the Landlord each month and submitted
- The taxpayer should not have a property in her name in the same city in which the Landlord (Family member) has the property
- Interest on Home loan can be allowed on property in name of Taxpayer as per 24B with HRA exemption subject to the
- Both Properties are in different cities
- Property, where Rent is being paid, is nearby to Place of employment than the other property on which the Home loan is taken.
- Rental amount can be Reverse engineered. However that amount should also fulfill above conditions.
- Now the reverse-engineering. If your HRA is say 24% of Basic salary. Then add 10% of basic on it. So a Basic salary of 90k pm with a HRA of 21k pm can have a rent p.m. of about 30k per month and thus the HRA of 21k per month will whole come out to be exempted. If you live in Delhi, Mumbai Kolkata or Chennai then do not exceed you HRA above 50% of Basic. If you live anywhere else, then limit it at 40% of Basic Salary. The (base)rent for the above can be calculated at 60% of Basic and 50% of Basic respectively. Remember that amount should also fulfill above conditions.
- I am adding my Income Tax comparison calculator here for your reference on HRA https://docs.google.com/spreadsheets/d/1XLJNW24Hpit681sE2_YqyQfTBG0fDJeswNrK7ApcfGY/edit?usp=sharing.
- Should be entered with a family member (Spouse is allowed)
- For paying to the spouse. Approval is granted due to the decision of ITAT Delhi of M/S Abhay Kumar Mittal. You can read the case law here and for the case document here ITAT Delhi: Income tax act does not prohibit HRA exemption on rent paid to wife | A2Z Taxcorp LLP and Microsoft Word - 3385 Abhay Kumar Mittal (livelaw.in)
- Should be genuine in law transaction
- Money sent through Bank transfer should not be transferred back
- Choose that family member who has: 0 Tax Liability (Whole slab Empty) or Lower tax Liability (His/her slab is lower than Yours)
- Income Tax Declaration form at start and Proof of Deductions should have all the agreement/PAN Copy of landlord/ Rent Receipts(signed)/ Bank transfer proofs.
- Rental income will be shown in Income Tax Return of Landlord
- Old Regime
- 30% deduction will be allowed on Rent Received if old regime is followed
- No tax liability upto (₹)5 lakh net rent received after 30% standard deduction
- New Regime
- · 30% deduction will not be allowed
- · No tax liability upto (₹)7 lakh for total rent received from FY 2023-2024
The tax payer can avoid 100% of interest income or Short/Long Term capital gains on Deposits, Mutual Funds and Stocks. The following needs to be ensured:
- Deposits/Mutual Funds/Stocks should be gifted to family Members (including HUF)(Should be a relative as per definition however sons/daughters/spouse/Parents should be preferred as their Bank accounts can be open and controlled without much drama)
- By Family member just for this part I prefer major children, parents, HUF, parents-in-law but would avoid spouse and minor children(Clubbing provisions apply in the later case).
- To avoid clubbing please check the note 9 in the end.
- Choose that family member which has: 0 Tax Liability (Whole slab Empty) or Lower tax Liability (His/her slab is lower than Yours)
- A bank account and/or a Demat Account needs to be opened for that family member
- HUF needs to be created in the eyes of law if HUF route is taken
- Interest/Income of any sort will be then shown in the name of the transferee
- A Gift deed (stamped) needs to be executed before the transfer
- No tax on Gifting to relative
- ITR must be filed with the accrued interest income as per provisions.
- In case of Shares or any other Securities:
- If you gift stocks/MF units (or any security) you don't incur any tax (Gift tax is abolished)
- As the receiver is Relative by definition (Family), she/he doesn't need to pay the tax on Fair market value as on the date of Transfer (Closing price on that day LESS Cost of Acquisition) For please refer to this from the Income Tax department (Page 9,10)
- The issue is the Cost of Acquisition and the Period of holding on the actual sale.
- The cost of Aquisition will be the transferor's Cost (Section 49(1)). In case of equity shares even if your depositary participant/broker shows you any other price as cost price (they generally take the closing CMP on the date of transfer as cost, you don't have to take that but the acquirer's cost while filing ITR)
- The period of Holding will start from the transferor's date of Purchase.
- All provisions of sections 112A and 111 will remain the same, that means for 1 lakh no tax and thereafter 10% on equity stocks or Equity MFs after 1 combined Holding Period, For Debt funds, replace it with 20% with indexation after 3 combined years of Holding or as per transferee slab rate.
- 12% of Actual Basic plus DA needs to be paid from Employer to Employee’s Provident Fund account
- The whole amount paid will not be shown while computation in your Income under head salary thus whole tax will be saved upon it
- Basic + DA +Allowances should be structured in such way that with the same Gross salary, Maximum amount can be allotted to Employer’s contribution to EPF.
- Not allowed under New Regime
- 10% of Actual Basic plus DA needs to be paid from Employer to Corporate NPS account
- The whole amount paid will Allowed deduction under section 80CCD(2) which will reduce Net taxable income
- 80CCD(1B) 50,000 per year will be continue as deduction
- Basic + DA +Allowances should be structured in such way that with the same Gross salary, Maximum amount can be allotted to Employer’s contribution to NPS.
- 80CCD(2) is also Allowed under New Regime
- Plain old Salary Structuring does wonders.
- Basic + DA +Allowances should be structured in such maximum tax can be saved.
- They are in addition to Chapter VI-A deductions(Section 80C,80CCD etc) .
- A family member is a person I recommend to be that person whose Bank a/c and deemat account transactions you can control. For Gifting he/she should also be a complaint by definition of relative which you can find here.
- They cannot be done at the End of the Financial year and needs to be planned in advance thus no you cannot save tax for whole year now
- Rent amount above 50,000 per month needs a TDS to be deducted at the end of the year@ 5%(@zacjesus) and the payment shall be through Form26QC plus a Form16C needs to be taken out. The whole process is cumbersome and has a blockage of 5% of the Rent paid which you can claim back however if this is your case please consult a professional.
- Some more cases which I can highlight but the post will be too long thus its better to DM me or drop a mail to me (Check profile). Cases such as HRA: Two or more landlords(Parents are joint owners), Wife and Husband have made two agreements for their employers A and B respectively,
- Make your own rent receipts at not sponsored
- Interest income on EPF own contribution above 2.5 lakhs needs to considered before salary structuring
- Excess contribution and Income on EPF/NPS contribution from employer above 7.5 lakhs needs to considered before salary structuring .
Contribution from
Towards
Tax upon Contribution exceeding limit
Tax upon Income on that Contribution
Limit
How to get away
Employee
Own PF
Not Taxable
Taxable
2.5L
Limit own contribution to up to 20.5k per month
Employer
Your PF and Your Corporate NPS
Taxable
Taxable
7.5L
The limit is good enough, however if not, Case specific advice
- Clubbing: Asset transferred(Monetary or not) will be clubbed. There are two workarounds if there is no choice other than to gift it to your spouse/minor children. For rest family which fell under the definition of relative you can gift and there will be no clubbing on the income on the gifted money.
- Give Loan than Gifting. Instead of gifting which again clubbed into your head, you can give a loan to your wife with the nominal interest rate and can be for a indefinite period(there is no such rule that to specify the interest rate or tenure). Then all such income should be your wife’s income. It will not be clubbed with your income. As for accounting purposes its a Loan.The only caution here is that she has to repay the loan and interest to you (OFFICIALLY). But you must have a documentary proof of Loan. A simple letter of Loan with Signatures of both the parties will be enough as a proof.
- Investing in products like PPF-By investing in products like PPF (which is EEE product) in your spouse or minor child name, then as the maturity proceeds of PPF is tax-free, you will enjoy the tax-free income.
I'll write down some cases:
- My father or mother gifts Money to me and I open a FD with it. The income will not be clubbed.
- Similarly I can invest in name of my siblings, parents or whosover who falls in the definition of relative
Clubbing as per IT Act
10.Please consult a CA or a Financial Advisor for the same as each case is different
- This is for education Purpose only.
