How to save on income tax, how to save income tax.#How #to #save #income #tax

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How to save on income tax?

How to save income tax

If we legally plan our taxes, a lot of money can be saved, and money saved is money earned! Also, it is important to understand the possible reasons for getting an IT scrutiny.

Understanding important documents

  1. Form 16 (from employer)/ Form 16A (from bank and other sources) give details of the tax deducted at source (TDS), and deposited with the government. It mentions the FY (eg Financial Year 2015-16) as well as AY (corresponding Assessment Year 2016-17).
  2. Form 26AS is a consolidated tax statement that includes details of all TDS’ and advance tax, self-assessment tax or regular assessment tax deposited in the bank by you. Form 26AS can be downloaded from the IT website, after registering yourself. Tax officers rely on Form 26AS, so you must cross-tally amounts from Form 16A against Form 26AS to check if all TDS details are noted correctly against your PAN number (status must say ‘F’ and not ‘U’), because you will get tax credit for TDS, only if it appears in 26AS. Any discrepancy must be immediately reported to the erring authority, as this is your responsibility alone.
  3. Form 15G/ 15H can be submitted to the bank to avoid deduction of TDS, if you think your FD/ RD interest income will not cross Rs 10,000 in that financial year. 15H is for senior citizens. For 15G, your total annual income should not exceed Rs 150,000. Its misuse can invite a scrutiny.
  4. Annual Information Return (AIR) is submitted by the bank or Property Registrar etc. to the Income Tax department, to enable them to track your high value cash deposits (Rs 10 lakh+ annually), purchases of stocks and bonds (Rs 5 lakh+), property (Rs 30 lakh+), credit card (Rs 2 lakh+) etc. If under scrutiny, you will be asked to match your physical records with the AIR.

How to avoid scrutiny?

You must include all sources of income in your ITR (Income tax return) viz.:

  1. Gross Taxable Income is Gross Total Income less all exemptions like HRA, LTA and conveyance that have been claimed. Do not claim exemptions over those allowed.
  2. Even if all your taxes are paid by the employer through TDS (OR) there is zero tax liability due to deductions like 80C or LTCG, if your gross taxable income exceeds Rs 250,000, you have to file an IT Return and that too before the 31 July due date, to avoid paying penalties.
  3. If your annual interest income from your savings bank account exceeds Rs 10,000 (Section 80TTA), bank will deduct TDS (Tax Deducted at Source), which will also be reflected in your Form 26AS.
  4. Interest from Fixed Deposits (FD) and Recurring Deposits (RD) is fully taxable. Also, if bank has deducted 10% TDS, and you fall in the 20 or 30% tax slab, you have pay the additional tax
  5. Life insurance income from maturity amount that is non-qualified under Section 80C/ 10(10D) has to be reported.
  6. Short term Capital Gains (STCG) on sale of stocks, mutual funds and tax-free bonds applies for transactions within 1 year of purchase. STCG must be declared and will be taxed a flat 15%, if STT (Securities Transaction Tax) is paid, under section 111A. However if STT is not paid, then STCG is as per IT Slab. Frequent trading in stocks invites profits to be treated as a business income and not STCG. Long term CG (Section 10(38)) and Dividend income is exempt from taxes. Short term Capital Loss can be offset against STCG or LTCG, within next 8 years.
  7. For income received in cash, it is important to maintain documentation like your bills or a year-end confirmation from your party.
  8. Linking your Aadhaar card to your PAN card is compulsory.

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