Saving tax on salary has few options, e.g. HRA, the Rs 1 lakh investment slab, interest on education loan, amount spend on children's tuition fees, interest on home loan etc. Apart from this, FBT structured salary package (discussed in article right below) leads to higher income in hand and depends on your employer's willingness -as it leads to compliance costs. At such a time, if you are in receipt of any arrears owing to revision in salary with past effect or for any other reason, you end up paying tax on the entire amount (provided you are already in taxable bracket). Section 89 deals with appropriating income to previous years' salary and thus alleviating tax pressure to some extent if situation allows for, but if you were already in taxable income bracket then even this too doesn't come as a succour. Similarly, the performance bonuses that you receive at the end of every year (and usually in beginning of next year) has the same effect. Is there a way to save tax on these windfalls? Yes, but at a cost, which per se is not a cost but an investment actually.
Let me begin with an example to understand what I am suggesting. Say
you have an annual gross income of Rs 12 lakhs p.a. i.e. Rs 1 lakh p.m.
Probably, Basic would be at 30k,
HRA would be 15k,
LTA would be 3k, Medical 1.25k, PF 3.6k, gratuity 2.5k,
and remaining approx 45 k as supplementary allowance.
Lets assume there is no FBT item. Your tax free salary'd be 25k of above items i.e. 3l p.a. plus 1 lakh of investments i.e. 4 l. If you've higher education loan, mediclaim etc then they too. You're left with approx 5-6l of taxable income (T.I.). At 5l of T.I., you need to shell out 60 grands plus cess i.e. 62k or 5 k p.m. Now, suppose you get another 3 lakhs as bonus in this year on top of this package and there's no way escaping tax on this, so another 93 grands you've paid as tax, so a total of 1.5l.
If you've a home loan, then you save another upto 1.5l as interest on home loan. Also, you may or may not get HRA benefit depending upon you're occupying that house or not. If yes, then even this deduction can be factored in with you saving more tax.
Now, this is not end of the story. One last source of saving tax for salary income is loss on housing property. The one you've claimed in previous para is limited to interest upto 1.5 lakhs. However, if you've another property with a loan on it, you get to save more tax. Here's how it works.
IT assumes your second and subsequent properties to be a source of income/loss and thereby allow adjustment of the same with salary income. So, say now if you've another house worth 50l with a loan of 40l, you'd be paying approx 4.8l as interest. Income typically is 3% of property value i.e. 1.5l. You are allowed a 30% deduction on this income towards maintenance. Also, if there are any taxes, they can be deducted. Assuming none, your ncome here becomes 1.05l. Subtracting this from interest of 4.8l leaves you with 3.75l of loss that can be adjusted against your T.I. saving you upto a max of 1.11l in taxes (if all of this is in highest bracket, else a lower amount). So, your cost of owning this house is interest cost 4.8l minus income of 1.5l and tax benefit of 1.11l i.e. 2.3l or you can say that here you've reduced your interest burden by half.
Therefore, if you have disposable income or you are receiving arrears/bonuses, consider buying a second house at a 50% interest cost. Also, rental income goes up every year as well as capital value of property and maybe in 3-4 years your income will overcome interest cost.
IMP: As per IT, if you have two properties, then irrespective of which you live in, you can claim which property you want to be treated as self-occupied and which one you show let-out. So, if you are already staying in/owning an expensive property, then you can buy a 15 lakh property and use it for 1.5l limit and show the other one as let-out.
From my experience with my colleagues, this fact is often not known to many salaried folks even though they might be owning two or more properties. So do let me know if it's news to you by participating in poll in right hand side. Suggestions/feedbacks are welcome. I'll make it a point to attend to them. Any other thoughts/queries related to tax is also welcome and so are recommendations/subscriptions.
Some related links:
http://www.rediff.com/money/2007/feb/13tax1.htm
http://www.moneycontrol.com/india/news/loansexperts/harshroongtahomeloan/twohomeloans=moretaxbenefit/market/stocks/article/304688
http://im.rediff.com/getahead/2006/apr/10home.htm
http://www.moneycontrol.com/india/news/loansexperts/harshroongtahomeloan/twohomeloans=moretaxbenefit/market/stocks/article/304688
http://im.rediff.com/getahead/2006/apr/10home.htm
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3 comments:
Nice Post. But i think there is an een simpler way to save tax. This is if you buy a house, rent it out, and live in a rented house yourself. This way a) You can claim both HRA and IT rebate on the HL interest (even if both are in the same city) and b) Since the house is let-out, there is no 1.5L cap on the tax-dedutctible interest. The ENTIRE interest become tax free.
There's only one problem with this, that the 1L principal component may no longer be applicable since the house is not self-occupied. And of course, the income from the let-out house will have to be offered for tax.
very intresting, so can we buy N no of houses to save tax (providing i have capacity to pay EMI:)), and what after the housing lone is paid off?
Balakrishnan - thanx for that input, I realised that soon after the post. Readers wcan definitely benefit from this. However, investing in multiple properties still fetches more benefit.
Amit - Much before ur 20 yr home loans come to an end, you can add more properties, you see!!!
Thanx for visitinng and commenting, do you guys run any blogs? would like to visit them..
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