Availing tax benefits under chapter VIA is a common knowledge. If you are a high earning individual then you need to adopt different tax saving strategies.
There are many tax-saving avenues which can help us save tax. Remaining within our legal boundaries, we can make investments to save taxes. However, not all of us are aware of the ways to adopt the optimum tax-saving strategies.
Ask tax experts, they will recommend against taking a home loan for interest benefits. There has been a trend amongst the HNIs to avail a home loan to invest in real estate rather than using it for taking advantage of the available tax breaks. Doing this, they reserve funds for more liquid asset classes rather than high-value real estate which can not be easily liquidated. Secondly, they claim the deduction on the entire interest paid to the bank against rental income generated from the property u/s 24 of the Income Tax Act.
FORM SEPARATE LEGAL ENTITIES
However, this interest is shown as the loss form the income from the house property and the Finance Act, 2017 limits this amount to Rs 200,000. In other words, the deduction on the home loan interest pays is limited to Rs 2 lakh. The balance loss is allowed to be carried forward and claimed as expenditure in subsequent eight years.
HNIs should avoid taking a home loan and cut down the interest outflow if it was done for tax saving purposes. One thing that can be done is to form separate legal entities for different areas of income. Large investments can be routed through the private investment trust. You will get a diversified portfolio, no disputes at the time of inheritance, assets will be safeguarded against personal liabilities and there is no personal onus of tax liability on income generated.
MAKE CAPITAL GAINS TAX FREE
Other options to consider is the investment in capital gains saving bonds. The ones issued by the National Highway Authority of India (NHAI) and Rural Electrification Corporation(REC) do not give higher returns than term-deposits. However, the capital gain amount from the sale of capital assets if invested in these bonds is tax-free. One can save up to Rs 50 lakh by investing in these bonds. Also, most households have the habit of investing in term deposits. However, income generated in the form of interest in term deposits is taxable.
Moreover, the capital gains are not only exempted from the sale of the residential property, but also in other asset classes like gold, shares in unlisted shares, shares in alternative investment funds. The sale proceeds if invested in the capital gain saving avenues, within the prescribed time, can help in saving tax at the rate of 20% on the capital gains earned.
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PAY SURCHARGE ELSE PAY INTEREST
Our income tax regime is progressive in nature. Meaning, the higher the income, the higher the tax incidence. While being penalised for making more money may not seem fair to most of you, but, paying more taxes owing to negligence can hurt more. A surcharge of 15% is charged on income exceeding Rs 1 crore. Care should be taken to pay this surcharge while paying advance tax. Failing to pay this attracts the simple interest of 1% per month. Also, if a person fails to pay 90 per cent of the tax liability in the form of advance tax, simple interest at the rate of 1% is attracted.
Also, a short-term capital gain is chargeable to tax at the rate of 15 per cent. HNIs can avoid short-term trading. First, it attracts flat 15% tax and second, chances of losing money in short windfalls is higher. Moreover, some derivatives transaction like future and options attract taxation at the maximum taxable rate of 30%. It can be avoided.
The tax deduction under chapter VI-A is very limited. For high net-worth individuals, the ball game of tax saving changes drastically. A holistic look at the tax saving options is very much needed.