Income tax filing (ITR): Invested heavily, but still paying a bomb of tax? Find out where you’re going wrong

Income tax filing (ITR): It is very difficult to part away with your hard-earned money, especially for taxes. A sound investment strategy, however, can help you save taxes. With the financial year nearing its end, tax-paying citizens would be looking to invest as much as possible, and still landing into a situation where your investment may not be enough to save you from the tax burden. Therefore, learning the nuances of taxation becomes imperative. 

Faulty investment policies
Fixed Deposits are preferred investment options for many as they are considered to be a safe bet. But is it an efficient option to save tax as well? You have to pay taxes on the interest earned on these fixed deposit every year as part of your income. You are also expected to pay taxes on interest accrued on these fixed deposits every year even if you get the full amount only on maturity. Some other financial instruments such as Recurring Deposits, infrastructure bonds, NSCs and Kisan Vikas Patra get the same tax treatment. Debt Funds score over fixed deposits as they allow you to defer the tax on such instruments till the time you withdraw the amount. The tax is calculated on income of such debt fund @ 20% after indexation or adjusting the buying price after taking inflation into account, thus helping you in reducing your tax burden.

HRA benefit
House rent allowance is a significant component of one’s income. You can avail deduction under Section 10(13A) for paying rent when you are living in a rented accommodation. But if it is your own house, you cannot avail deduction. However, if you stay in your parent’s house and it is registered in their name, you can claim deduction by paying rent to your parents. This helps in reducing your taxable income.

Write-off losses
You may not be aware of tax rules and hence, might have failed to book the losses. Do you know you can set off short-term losses on stocks against short-term or long-term capital gains? Yes, you can do so and not even that, you can even carry forward these losses to be written off against future short-term and long-term capital gains. These write-offs can reduce your taxable income. But you should file your tax return before July 31 to avail the benefit of carrying forward the losses in future financial years. Any short-term or long-term capital gains from the sale of property, gold or debt funds are eligible to be used to write off these short-term losses on stocks.

Go for growth option to save tax
If you have opted for dividend option in the mutual fund schemes, then you are paying dividend distribution tax of 28.33%, which you might not be aware of. You can actually go for a tax-efficient method by opting for growth option in non-equity funds. In this growth option, only the capital gain is taxable and not the entire sum. Or, you can start a systematic withdrawal plan if you are looking for a quarterly or monthly income.

Availing tax deductions
You might not be aware of various tax deductions. There are some tax deductions that might be applicable and you can enjoy the benefits. For example, you can avail tax deduction of Rs 50,000 if you or your dependent suffers from a physical disability. The amount goes up to Rs 1 lakh if the condition is severe under Section 80DD. Under Section 80G, you can claim deduction on the donations you make during the financial year.
It would also be wise to consult a tax expert to reduce your burden and save money on taxes.

(By Adhil Shetty, CEO, Bankbazaar)