The Income Tax Act 1961 is a voluminous piece of legislation. Taxmann Publications' latest edition of the Act runs into 1,125 pages. It's enough to intimidate even the most diligent law student and tax expert, leave alone ordinary taxpayers. But hidden away in the 300-odd sections and 14 schedules are clauses that can benefit ordinary taxpayers-provided they know how to claim those benefit.
1. Use losses in stocks to cut tax
Can you gain from the short-term losses you made on stocks? Yes, says the Income Tax Act. If you have made any long-term capital gains from sale of property, gold or debt funds, you can set them off against short-term capital losses made on stocks and bring down your tax liability. "Short term capital losses can be set off against both shortterm capital gains as well as taxable long-term capital gains"
2. Get deduction for rent even without HRA
House rent can account for as much as 40-50% of the total household expense. That's why the house rent allowance is exempt from tax to a certain limit. But what if your salary does not include an HRA component or you are a self-employed professional or businessman? Under Section 80GG, you can claim deduction of the rent paid even if you don't get HRA. "Not many people are aware of this deduction." The least of the following three can be claimed as deduction: rent paid less 10% of total income; or Rs 2,000 a month; or 25% of total income. Also, the taxpayer should not be drawing any HRA or any housing benefit.
3. Pay lower tax if someone is ill
The Income tax Act allows a taxpayer to claim a deduction of Rs 40,000 if he has a dependent who suffers from any of the ailments specified under Section 80DDB. "The deduction is higher at Rs 60,000 if the patient is a senior citizen". The diseases include, neurological diseases (including dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia and Parkinson's disease), malignant cancers, full-blown AIDS, chronic kidney failure and haematological disorders (haemophilia and thalassaemia). Dependents can include spouse, children, parents and siblings.
4. Claim benefits for your political affiliations
Any amount contributed to a recognized political party can be claimed as a deduction under Section 80GGC (80GGB for corporates). "This is a new deduction and was introduced in April 2010. The donation can also be made to the electoral trust which works for the purpose of conducting elections." Interestingly, unlike other deductions, there is no ceiling on the amount that can be claimed as a deduction.
5. Use education loan to lower tax
The interest paid on an education loan is fully deductible from taxable income under Section 80E. Till a few years back, this deduction was available only to the borrower. Now, even a parent or a spouse can avail of it.
6. Disabilities can be tax savers
If a taxpayer suffers from a disability, he can claim deduction of Rs 75,000 under Sec 80U. If he has a disabled dependent, he can claim the deduction under Sec 80DD. Disability includes blindness, low vision, leprosy, hearing impairment, loco-motor disability, mental retardation and mental illness and deduction is available only if the impairment is at least 40%. If the disability is severe (80% or above), the deduction is Rs 1 lakh a year. The dependant could include the taxpayer's spouse, children, parents and even siblings.
7. Take unlimited deduction for your second home loan
Under Section 24b, one can claim deduction of up to Rs 1.5 lakh a lakh for interest paid on a home loan. But if the taxpayer buys a second house through another home loan and gives it on rent, the entire interest paid on the home loan during a given year can be claimed as a deduction.
8. Claim HRA as well as home loan benefits
HRA and interest on home loan are two separate provisions and claiming one of them as a deduction does not influence the other. There are many such examples in the tax laws. Let's take for instance, Section 80C (PPF, NSC, ELSS etc.) and Section 80D (medical insurance premium). "Everyone will agree that both Section 80C and Section 80D can be separately claimed.
9. How to cut tax by investing in spouse's name
Section 64 of the Income tax Act says that income derived from money gifted to a spouse will be treated as the income of the giver. It will be clubbed with his (or her) income for the year and taxed accordingly. Are there ways to avoid the clubbing provisions without crossing the line between tax avoidance and tax evasion? Yes.
If you want to buy a house in your wife's name but don't want the rent to be taxed as your income, you can loan her the money. In exchange, she can give you her jewellery. For example, if you transfer a house worth Rs 10 lakh to your wife and she transfers her jewellery for the same amount in your favour, then the rental income from that house would not be taxable to you.
One can also avoid clubbing of income by opting for tax exempt investments. There is no tax on income from the Public Provident Fund (although the 8% interest rate offered and the 15-year lock-in does not compare with fixed deposits). There is also no tax on gains from shares and equity mutual funds if held for more than a year. So, if one invests in these options in the name of the spouse, there is no additional tax liability.