GET THE EDGE

Five ways with which you can effectively structure your loans and investments to reduce the tax burden Kanu H. Doshi“The way of taxpayers is hard and the legislature does not go out of its way to make it any easier.”

Lord CurzonDeduction on jointly-taken home loans is available individually to both the spouses Lord SummerLord Summer’s aphorism about taxation remains true despite personal direct income tax rates having come down from the dizzy heights of 97.75 per cent in the 1970s to 30 per cent at present.

The decrease in tax rates have also been accompanied by elimination of many routes for tax planning, most notably tax rebates, such as those under Section 88 and Section 80L. However, there still exist some provisions in the Income Tax Act, 1961 (Act) that contain some possibilities of reducing the personal tax burden.

I suggest moves that may help you in the smart management of finances.
Smart MoveApply jointly with your spouse for a home loan to claim larger tax deductions. Section 24(b) grants deduction for interest up to Rs 1.5 lakh per year on a loan for acquiring a residential house.

This deduction is available individually to both the spouses.

To be eligible for the deduction, the home loan needs to be taken in joint names, property be owned and financed jointly in equal shares, with both spouses being joint owners. Needless to say, a joint loan application will also help a couple avail of a larger loan. Smart MoveGet tax deduction for home loan interest repayments.

Self-occupied residential properties can avail of another tax concession under Section 23(2) that provides that the notional income for the purpose of income tax for such properties will be deemed nil and yet the deduction for interest up to Rs 1.50 lakh will be available. In other words, there will be negative income (loss) from such property that will be available for set off against the tax payer’s any other income, including salary income.

To put it differently, interest on borrowed money becomes tax deductible. If husband and wife both were to have an annual income of Rs 15 lakh each, they could claim an annual tax deduction of Rs 3 lakh (Rs 1.5 lakh for each) and save aggregate tax of Rs 1,01,970 (33.99 per cent of Rs 1.5 lakh multiplied by 2) between them.

For convenience, they can file a declaration with their respective employers to deduct a specified amount of lesser tax at source from their salaries. Smart MoveClaim tax deduction for principal repayment for home loan.

Repayment of the principal amount of a housing loan is one of the tax concessions a taxpayer can enjoy under Section 80C. But unlike Section 24, this deduction is available only for repayment of the loan from an approved source like banks, HDFC, HUDCO or the employer company.

The repayment of principal part of the loan qualifies for a deduction under Section 80C up to a maximum of Rs 1 lakh per year. In case of joint home loan application, this results in joint tax saving of Rs 67,980 (Rs 33,990 multiplied by two).

But the biggest advantage in availing Section 80C deduction for repayment of housing loan is immunity from any adverse tax consequences of the proposed EET (Exempt, Exempt and Tax) system—where investments will get taxed on maturity, redemption, or sale.

The simple reason for this is that by the very nature of the transaction (repayment of a loan), there is no question of “withdrawal’ of funds to attract tax, unlike in the case of National Savings Certificate (NSC), Public Provident Fund (PPF) or life insurance policies with cash values.The growth option in MFs is a tax-efficient option for those trying to create wealth for kidsSmart MoveWhile investing for kids, opt for growth option in mutual funds (MFs).

The growth option in MFs is a great tax-efficient option for higher net worth individuals trying to create wealth for their kids. With the clubbing up provisions of Section 64 in the Act, by which all incomes of minor children (under the age of 18 years) are to be added to the income of that parent (father or mother) whosoever’s income is higher, the scope of tax planning here is very limited. The growth option comes in handy in such cases.

Here’s how. The father could subscribe to a MF scheme with a large cheque of Rs 25 lakh and opt for growth option till the minor child attains majority. Under this option, the scheme does not declare any income distribution but merely accumulates it. Because the scheme does not declare any income, it does not pay income distribution tax (or dividend distribution tax) of 12.5 per cent, imposed by Section 115-R.

The accumulated income of the scheme has the effect of enhancing from year to year the net asset value (NAV) of units held by the parents for the benefit of their minor children. When the child attains majority, the parents may transfer the units to the child and allow it to grow or encash the units (likely to be over Rs 1 crore) to fund future requirements such as higher education and marriage.

This can be done without paying any gift tax (abolished from 1 October 1998) or any wealth tax (since units are exempt from wealth tax) or any income tax (since there is no income declaration). Smart MoveStocks: Buy cum-bonus, sell ex-bonus. Equity shares of listed companies that announce bonus shares present excellent opportunity to book short-term capital loss without effectively losing any money.

Such loss is available for set off against any other capital gain, including long-term capital gain. The modus operandi goes like this. Let’s assume that a company’s shares are quoting at Rs 2,000 per share on 20 June 2007. On 22 June, the company announces one bonus share for every one share held and declares 10 July 2007 as the record date for allotting bonus shares. A taxpayer buys 1,000 shares (cum bonus) on 25 June 2007 at Rs 2,000 per share and pays Rs 20 lakh for the same. On 11 July 2007, the price of the company’s share drops to Rs 1,000 per share and hence the taxpayer will sell 1,000 shares for Rs 1,000 per share and get Rs 10 lakh as sale proceeds. Since he was holding 1,000 shares on the record date (10 July 2007), the company will allot him 1,000 bonus shares.

He bought 1,000 shares at Rs 2,000 per share cum-bonus and sold 1,000 shares at Rs 1,000 per share ex-bonus booking a short- term capital loss and yet in effect retaining his original holding of 1,000 shares.

The loss, as indicated earlier, can be used for setting off against any other capital gain and can’t be contested by authorities since there is no legal bar on it.;