Maximum Money: Five Tools to Lower Your Tax Bill | Play Ball

By SHEFALI ANAND

It?s that time of the year again ? time to think about your taxes.

With just two months before the financial year-end, now is the time to make tax-saving investments and provide their proof and other documents to your employer, helping you get you tax deductions.

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A sign outside the income tax office in Kolkata, India, March 14, 2011.

Self-employed professionals need to pay their full advance tax by mid-March. ?Otherwise, you?ll be paying penal interest,? says Rajesh Srinivasan, leader of individual taxation at consulting firm Deloitte Touche Tohmatsu India Pvt.

Here are five ways to lower your tax bill this year:

1. Stock losses: The stock market?s ugly losses of 2011 have a bright side ? they can help you lower your taxes.

If you sold an equity mutual fund or individual stocks in this financial year at a loss, this is considered a capital loss, which can be offset against any capital gains you may have made, such as on the sale of property or gold.

Remember, however, that capital losses cannot be offset against your salary or other income. A short-term capital loss (for investments held for less than one year) can be offset only against a short-term capital gain, whereas a long-term capital loss can be offset against any gains.

If you don?t have capital gains this year, no worries. You can bank your capital losses and use them for the next eight years, says Mr. Srinivasan.

2. Infrastructure bonds: Introduced by India?s finance minister in 2010, these are a relatively new option for saving on taxes.

Basically, an investment of up to 20,000 rupees ($400) made into bonds issued by qualified infrastructure companies can be deducted from your taxable income. This deduction is over and above the 100,000 rupee ($2,000) deduction available under Sec 80C of the Income Tax-Act, 1961.

At the moment, issuers like L&T Infrastructure Finance Corp. and Infrastructure Development Finance Corp. have such bonds available, paying an interest of 8.7%. However, these bonds require you to be locked in for at least five years.

These bonds make most sense for individuals falling in the highest tax bracket, and who want to play safe. The interest earned on these bonds is taxable.

These are not to be confused with tax-free bonds, which have also recently been introduced. The investment in these bonds is not tax-deductible.

3. Home loan deductions: Many people don?t realize that deductions on loans taken to buy a house are available for more than one home.

If you have taken a loan for one home, interest payments of up to 150,000 rupees ($3,000) per year can be deducted from your ?income from house property.? If you live in this house, you obviously don?t have any income from it, so the interest deduction effectively results in a ?loss? from house property. This can be offset against your salary income.

Shefali Anand

If you have a second house, whether you rent it or not, it is considered to be let out for taxation purposes. You have to show a ?notional? rent or the actual rent as your income from house property. The notional rent is calculated based on factors such as the rent of similar houses in the neighborhood. From this, ?you get the deduction of the entire interest,? says Naresh Ajwani, partner at Mumbai tax firm Rashmin Sanghvi & Associates.

Interest on loans taken for repairs and renewals is also deductible for the second home, according to the Income Tax department.

You need to furnish the interest details to your employer to get the benefit in your tax deduction at source.

Note that repayment of home loan principal can be deducted only under Section 80 C, up to 100,000 rupees ($2,000).

4. Section 80C: Most individuals are well aware of this section of India?s tax law, which allows you to deduct up to 100,000 rupees ($2,000) from your taxable income by making certain types of investments. But many don?t know all that is included in this section.

Your contributions to the Employees Provident Fund, or Public Provident Fund, count toward this limit, so first check if there is any shortfall. If so, your best options are:

Equity-linked saving schemes, for young people who can handle some risk. These are mutual funds which buy stocks from a wide range of Indian sectors, and in which need you to stay invested for at least three years.

If you, like me, already own such funds, you are likely sitting on losses. But believe it or not, they are still a good option.

By buying at a lower price now, you lower the average cost of buying these funds, and boost your eventual profit. Some good options for such funds are the Franklin India Taxshield fund and Fidelity Tax Advantage.

Debt options: For ultra risk-averse individuals who are okay with lower returns but want guarantee, debt investment options include government-issued bonds called National Savings Certificates, and tax-saving fixed deposits issued by banks which are currently paying annual interest of around 8.25% to 8.75%. These options have a lock-in of five years or more.

5. Charity: If you have donated to charity in this financial year, your employer won?t be giving you the benefit of deduction. You?ll just have to apply for a refund when filing your tax return. Make sure you save all your receipts, or other proof of payment to the charitable institution.

Depending on the type of charity, you can deduct 50% or 100% of the donated amount from your income.

If you haven?t already made any charitable donations, ?this is the right time,? says Mr. Srinivasan of Deloitte.

?Write to Ms. Anand at shefali.anand@wsj.com, or follow her @shefalianand.

Write to Shefali Anand at shefali.anand@wsj.com

Source: http://www.pembrokemayball.com/maximum-money-five-tools-to-lower-your-tax-bill

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