8 smart ways, beyond section 80C, to save substantial tax in 2016

Wish you a Happy, Healthy and Prosperous New Year. You being here means that you want to do something about high outflow of tax.

Tax deductions comprising section 80C, 80CCC, 80CCD are normal and something that are so obvious. But, there are ways beyond these sections that can help individual save decent tax – in a legal way, off-course – and this topic is all about these ways.

  1. Using non-earning or low-earning family members for tax saving – There are instruments that generate taxable income – like Fixed deposits, recurring deposits, NSC etc. Such instruments can be brought in the name of non/low earning family members like parents, adult children etc. However, note that an individual should not invest in the name of spouse, daughter-in-law and minor child as that is clubbed to individual’s income. This tip works till the time income tax rate applicable to other family members (in whose name investments have been done) is less than the tax rate applicable to the individual.
  2. Create an HUF – An HUF (Hindu Undivided Family) gives similar deductions as an individual and can lead to substantial tax savings. Income generated under HUF shall be eligible for standard deduction and additional savings leading to much better absolute returns. Creation of HUF is a separate topic however.
  3. Investing in the name of minor child – Income (Beyond Rs 1,500) generated on investments in the name of Minor child is clubbed to the income of parent with higher income. So instead of investing in instruments earning taxable income, invest in instruments that generate tax-free incomes like PPF and Tax-free bonds. The income generated would be tax-free without any limits.
  4. Home loan as a tax saving instrument – Loan on self-occupied property can help individual claim a deduction of 2 lacs against payment of interest (4 lacs in case of jointly owned property). Principal repayment is still part of section 80C.
  5. Buy a property and rent it out – Interest paid on a rented out property is a loss on property. This is by-far the only mechanism that can reduce a salaried individual’s taxable salary. The deduction available is unlimited.
  6. Education loan – Interest payment on education loan for higher studies for self, spouse, children or student, to whom, individual is a legal guardian is completely deductible from taxable income. There is no limit of such deduction.
  7. Rajiv Gandhi Equity Savings Scheme – Offers a deduction of Rs 50,000 for retail investors (with annual income less than Rs 12 lacs) investing in specified stocks or mutual funds. The lock-in period is 3 years under this scheme and this is available only the first time investment is made.
  8. National Pension Scheme – Though individual contribution to NPS account is clubbed to section 80C, but contribution upto 10% of basic salary made by employer is tax-free i.e. a person in 30% tax bracket can save upto 3.009% additional tax through this option. Specifically for FY 2015-2016 there is an additional rebate on Rs 50,000 invested in NPS resulting in an additional tax-saving of Rs 15,045. In case the employer is not providing NPS currently, maybe it’s time to ask for one.

May 2016 take you a step closer to your financial goals.

Happy Investing!!

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