You must always be prepared to deal with two things in life – death and taxes. For the first, you can only wait and hope that it knocks on the doors before it comes. For the second, you must be prepared every time of your life when you are planning your investments. Income tax is levied on the income that we earn, which means that we must be aware and ready to pay taxes on the returns that we earn from our investments. Alas, the effect of inflation is such that we now have to spend more on our daily utilities, thus, leaving us with much less to save and invest. While there is no way we can reduce our tax burden, what we can do is plan our taxes in a way that reduces the overall impact while maximizing the returns on our investments.
For example, one can reduce tax outgo by investing through a Hindu Undivided Family (HUF). For the unversed, a HUF is an undivided family arrangement including all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. This arrangement is not a part of or cannot be created under any contract but is created automatically in a Hindu family.
While parking money in various investments through a HUF, the Karta can either decide on them in his or through the HUF’s name. However, to make investments on behalf of the HUF, the Karta must submit some necessary documents. This includes filling up details in the Know Your Customer (KYC) form that is mandated for all kinds of investments.
The benefit of having an extra PAN Card in it legally is much underrated. With so many individual tax-saving measures galore, many investors remain ignorant of how they can avoid losing their hard-earned money on taxes.
Reducing tax outgo with a HUF
A HUF account is very similar to an individual account. This means that members of the HUF can avail themselves of its various tax benefits. Viral Bhatt, Founder, Money Mantra said, “A HUF is assessed as a separate entity for the purpose of assessment under the Act and enjoys the threshold exemption of income of ₹2.5 lacs and is also taxed at individual slab rates. For example, if there are three members in a family and the income of each family member exceeds ₹10 lacs. Further, the family has let out an ancestral property from which it receives rental income amounting to ₹10 lakh. Now ignoring any deductions if such income is taxed in hands of any family member it shall be taxed at 30 per cent. However, if such income is shown in hands of HUF then there shall be exemption up to ₹2.5 lakh, i.e., savings of ₹75,000. Then further for income ranging between ₹2.5-5 lakh tax rate shall be five per cent instead of 30 per cent, i.e., tax savings of 25 per cent amounting to ₹62,500 if the income would have been taxed in the hands of any family member.
Bhatt added, “HUF being assessable as a separate person under Income Tax Act,1961 can avail separate deductions under Section 80C up to ₹1.5 lakh. The mediclaim benefit for family members is under Section 80D up to ₹25,000 and in case any member is a senior citizen up to ₹50,000 under Section 80TTA up to ₹10,000 and for senior citizens up to ₹50,000. Therefore, these deductions can be claimed irrespective of the individual deductions of members since two pan cards can be applied and an individual can file two income tax returns, one in his personal/individual capacity and secondly in the name of the HUF. Besides, a HUF can have a separate Demat account and enjoy a tax rate of 15 per cent on short-term capital gains (Security Transaction Tax paid) while also investing in a mutual fund. Furthermore, a HUF can carry business but not a profession but funds should be of HUF and can pay remuneration to Karta and other family members.”
Investing in PPF and ELSS
You can derive maximum benefit from parking your money in your Public Provident Fund (PPF) account at the beginning of the year to allow it more time to grow. This stands true of equity-linked savings schemes (ELSS funds) wherein your investment is tax-exempt while the returns are in sync with the market movement, thus, allowing you to avail returns synonymous with most other equity funds.
Availing of NPS benefit
Forget pension plans that are nothing but low-income annuity plans to fund your post-retirement life. Embrace the National Pension System (NPS) launched by the Pension Fund Regulatory and Development Authority (PFRDA). The contributions toward it are exempt from tax. Self-employed NPS subscribers can claim a tax deduction of up to one-fifth of their gross income or Rs. 1,50,000 whichever is less. Their salaried counterparts can claim a deduction on their contributions towards the NPS. However, the deduction would be up to 10 per cent of their salaries (Basic Salary + Dearness Allowance).