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Save tax as much as you can

Posted by Yogesh on Friday, 3 October, 2008

Give your wife a loan; save tax

IF you go the extra mile, you can surely make the most of your money.

My wife works in a bank where the staff get 1 per cent extra interest on the bank’s fixed deposits. So, I plan to invest in FDs in her name. We both fall into the highest tax bracket.

What is the best option for me?

1. I give her a loan and take minimal interest. In this case:
— Will she have to pay tax on the entire interest earned on the FD or can she deduct the interest on loan and pay tax on net income?
— Should I show the interest earned (on loan) by me when I file my returns?

2. I can give her the money as a gift and she will pay tax on interest earned. Also, the TDS certificate will be in her name.

Option 1:

As per the Income-tax Act, expenses incurred to earn any income are deductible from that income.

Therefore, if your wife pays interest on loan to you, she can claim deduction on it from the interest income that she earns on the FD.

Does it make sense? NO
You will have to pay tax on the interest on loan given to your wife. Since both of you are in the highest tax slab, you will not gain anything by doing this.

Option 2:

As per the Income-tax Act, while a gift received is not taxable, any income from that gift is taxed.

Further, if the gift is from a spouse (and is made with an intention to evade tax), then the income from the gift will be taxed in the hands of the one who gives the gift. So in this case, since the gift will be made to your wife, the income from the gift will be clubbed with your own income.

Does it make sense? NO
The bank would deduct tax at source and issue the TDS certificate in your wife’s name whereas the income is taxable in your hands. This will unnecessarily complicate things.

Strategy

You can simply give an interest free loan to your wife and let her earn a higher interest on the FD. (Read: Women, Fixed Deposits and the big T )

On a regular basis, your wife can repay a part of the loan to you. You can do this to prove that this is a genuine loan and not a gift.

Source MoneyControl

Women, fixed deposits and the big T

INTEREST earned on your fixed deposit (FD) is taxable. So, don’t be surprised if your bank deducts tax before crediting the amount to you. We tackle a reader’s query on the subject.

According to my ICICI Bank statement, they deducted Rs 1, 208 (tax deducted at source or TDS) on an FD of Rs 1,50,000 at an interest rate of 9.5 per cent for one year and 23 days.

What’s the taxable income for a woman who is a non-working individual? Also, is the interest received on an FD treated as income for that financial year? If I do not fall into the taxable bracket, can I recover deducted tax from the income tax?

Read: Post TDS, there’s more tax to pay!

For a woman tax payer below the age of 65 (working or non-working), income will be taxable if it exceeds Rs 1,45,000 for financial year 2007-2008.

The threshold limit has been increased to Rs 1,80,000 for financial year 2008-2009. Interest on bank deposits and on savings accounts will be considered a part of the taxable income.

The interest received on a bank FD is considered as income. However, refund of the principal amount of the FD is not an income. It is a capital receipt. You could, nevertheless, be asked to explain the source of funds for the FD in the first place.

If you are unable to prove the genuineness of that source, then it’s possible that the income tax authorities may treat the entire amount of FD as an unexplained asset and tax the same (refer to Section 69 of the Income Tax Act)

Smart tip 1: If your total income for any year does not exceed the threshold limit for that year and if there is some amount of TDS from your income, then you can always file your returns for that year and claim the refund of the TDS.

In your case, the tenure of the FD covers two financial years.

Smart tip 2: You may as an option, decide to offer the interest for the period beginning from the date of starting of the FD up to the succeeding March 31, as the income of that first year and the balance interest for the balance period as the income of the subsequent year. This way, the burden of the entire income being taxed in one year gets reduced.

Source MoneyControl

I’m selling my house. How much tax must I pay?

WE help you compute the amount of tax you need to cough up, when selling your property.

I inherited a property jointly, along with other members of my family. Now, all of us want to sell it. The property was constructed in 1937 and will be sold in April 2008. My share of the sale is Rs 20 lakh (Rs 20,00,000) What will be the tax on this? I do not have the cost of acquisition figure.

— Anirudh K

In case of jointly owned properties, the capital gains is computed for the property as a whole and then the same is allocated among the co-owners based on their share in the property. To compute capital gains, categorise the asset sold, into a short-term capital asset or a long-term one.

Smart tip: In case of immovable property, if it’s held for more than 36 months, it’s considered to be a long-term capital asset. If it is held for 36 months or less, it is considered as a short-term capital asset. For this purpose, in case of inherited assets, the period for which the earlier owner held the said asset is also to be taken into consideration.

In your case, since the property was constructed in 1937 and presuming that it was constructed by your father, grandfather or relative from whom you and your other relatives inherited it, the property will be considered as a long term capital asset.

Computing capital gains

You can compute the long-term capital gains on sale of the long-term capital asset using this formula:

Sale Price less Indexed Cost of Acquisition or Improvement

Smart tip: You arrive at the Indexed Cost of Acquisition or Improvement after taking benefit of the Cost Inflation Index that is notified by the Government from year to year. This is meant to give the benefit of inflation to the tax payer.

How to calculate Indexed Cost of Acquisition or Improvement

The formula:

Actual Cost of Acquisition or Improvement X (Index for the year of Sale divided by Index for the year of Acquisition or Improvement)

In case of assets acquired prior to April 1, 1981, the Government has given a further concession. Instead of the actual cost of acquisition/improvement, you have the option of substituting the fair market value of the asset as on 1 April 1981.

However, in your case, you have the option of substituting the fair market value (FMV) of the property as on 1 April 1981 in place of the actual cost (since the property is constructed in 1937). FOllow these steps to calculate your tax:

Step 1: Compute capital gains

Take the Fair Market Value of the property (since you don’t know the actual cost). For which, get a valuation report as on 1 April 1981 from a Government approved Valuer.

Step 2: Indexed Cost of Acquisition

The formula will give you the Indexed Cost of Acquisition. The Index for the year of sale (ie, Financial Year 2008-09) has not yet been notified. However, it is likely to be around 575-580. The index for the year of acquisition would be the index for the base year ie, 1981-82 which is 100.

Step 3: Formula


FMV of the property (as on 1 April 1981)
X 575/580 (or whatever may be the Index that the Government notifies)
—————————————————————————————————————————
100

Step 4: Tax calculation


Sale consideration
less resultant figure of the Indexed Cost of Acquisition
= Long-Term Capital Gains on the sale of the entire property.

Out of this, you will have to work out your personal share based on your respective ownership ratios.
On your share of the Long-Term Capital Gains, you will have to pay tax at 20 per cent plus applicable surcharge and education and secondary and higher education cess.

Source MoneyControl

How to make more out of his PF.

An amount of 12 per cent of one’s basic salary goes towards the provident fund (PF).

1. Can one increase the PF contribution from 12 per cent to 20 per cent?

2. If yes, will he be eligible for tax benefits on it?

Yes, one can increase the PF contribution to 20 per cent, from the usual 12 per cent. This is commonly referred to as VPF – Voluntary Provident Fund. One’s contribution can even go up to 100 per cent of one’s basic salary. But the employer is not obliged to match this contribution.

You are eligible to receive the same rate of interest (currently 8.5 per cent) on VPF contributions as that of your regular employee PF.

As for the tax benefits, as per the Income-tax Act, the employer’s contribution and the employee’s contribution to PF are both treated differently.

1. Employer’s contribution

A contribution of up to 12 per cent is tax free. That means, your employer’s contribution of 12 per cent is not considered as taxable income (although it is a part of your CTC or cost-to-company).

If your employer contributes over 12 per cent to PF, this will be considered as income and you will have to pax tax (at your personal income tax rate) on the additional amount.

2. Employee’s contribution

Under Section 80 C of the Income-tax Act, you can get a deduction of a maximum of Rs 1 lakh under your own contribution to PF. Therefore, you can get a tax benefit for the entire 20 per cent that you contribute, provided it is within the upper limit of Rs 1 lakh.

Note: Section 80 C provides a deduction of a maximum of Rs 1 lakh for various investments put together. Contribution to PF is just one of them.

My advice: You can consider increasing your own contribution to 20 per cent and restrict your employer’s contribution to 12 per cent. However, find out from a PF consultant or your company’s HR department if your contribution and your employer’s contribution can be a different amount.

Source Money Control

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One Response to “Save tax as much as you can”

  1. […] Finance, Economy-Business News, Stock Market wrote an interesting post today onHere’s a quick excerptSave tax as much as you can Posted by naatmad on Tuesday, 30 September, 2008 Give your wife a loan; save tax IF you go the extra mile, you can surely make the most of your money. My wife works in a bank where the staff get 1 per cent extra interest on the bank’s fixed deposits. So, I plan to invest in FDs in her name. We both fall into the highest tax bracket. What is the best option for me? 1. I give her a loan and take minimal interest. In this case: – Will she have to pay tax on th […]

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