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How Can High Earning Individuals Optimize Tax Deductions? Research Team | Posted On Wednesday, August 08,2018, 07:13 PM

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How Can High Earning Individuals Optimize Tax Deductions?



It is the season of taxes. The Income Tax Act, 1961, not only taxes you but also encourages you to plan your investments. It rewards you by conferring tax benefits under Chapter VIA. However, this is not enough for individuals earning high income. Taxes increase as your income increases. High earning individuals need to adopt additional tax-saving strategies.

By strategies, we don’t mean diverting your income to other people to evade taxes. Sharing is caring. Usually, taxpayers falling in the higher tax slabs, divert their income to a spouse, major children or parents to avoid paying a high amount in tax. However, in the world of tax, sharing means shifting your tax burden to someone else, so as to reduce your taxable income. This is tax evasion and not a legal tax saving strategy.

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How Can High Earning Individuals Optimize Tax Deductions?

High earning citizens need to go beyond the tax deductions under Section 80C to 80U (Chapter V1A). A number of tax-saving avenues help save tax. These are legal too! However, not everyone is aware on the ways in which you can optimize tax-saving strategies.

Donations eligible under Section 80G and 80GGA

What can be a better way to save tax other than charity? Yes, donating to a cause that you believe in, not only makes a difference, but also save you taxes. Section 80G of the Income Tax Act, 1961, allow you to claim a tax benefit in the form of a deduction on donations made to a charitable organization and certain relief funds. Section 80GGA allows you to claim deductions for donations made towards scientific research or rural development.

Get Tax Deductions Through Relatives

Investing in the name of family members helps save tax. Investing in the name of your parents, major children and wife can save you taxes. It’s simple. Invest through your family members in ways that shift your tax burden to them. By doing so, you can avail the benefit of income tax slabs.

Give some money to your parents if they are senior citizens. Senior citizens are exempted from tax up to Rs 3 Lakhs a year if they are between 60 to 80 years. They can invest in a Senior Citizens Savings Scheme (SCSS) and save tax under Section 80C up to Rs 1.5 Lakhs a year.

Gifts are taxed only if their value is more than Rs 50,000 a year. If the value exceeds this amount, it is taxed in the hands of the receiver. However, this rule is not applicable when you gift the following people:

  • Parents
  • Spouse
  • Your and your spouse’s siblings
  • Your parent’s siblings
  • Your lineal descendants including spouses
  • Your spouses’ lineal descendants including their spouses

Give your family members tax-free loans. It is obvious that you cannot make any income out of this, but it’s a good way of avoiding tax and it’s legal. Think family and save taxes!

SEE ALSO: What Are All Comes Under Section 80C?


Making Capital Gains Tax Free

High earning individuals can also consider investing in capital gains bonds. What are capital gains bonds? Capital gains bonds are issued by:

  • National Highway Authority of India (NHAI) and
  • Rural Electrification Corporation (REC)

Capital gains bonds give lower returns, compared to term-deposits. However, the good news is that the capital gains arising from the sale of capital assets are tax-free, if invested in these bonds. Investing in these bonds can save you up to Rs 50 Lakhs a year.

See Also: How To Save Long Term Capital Gains Tax on Sale of House?

Better Surcharge Than Paying Interest

Our income tax regime is progressive in nature. Higher the income, higher is the tax. For taxpayers whose income exceeds Rs 1 Crore, a surcharge of 15% is charged on income exceeding a Crore. Give special attention to this surcharge while paying advance tax. If you fail to pay the surcharge, you will be charged a simple interest of 1% a month. If you fail to pay 90% of the tax liability as advance tax, you will be charged a simple interest at the rate of 1%.

Avoid Short-Term Trading

High Net worth Individuals must avoid short-term trading. Short-term capital gains are taxable at the rate of 15% + cess. If you are engaged in short-term trading:

  1. You have to pay flat 15% tax
  2. You will have to pay a maximum of 30% tax on certain derivative transaction like futures and options.

You can claim deductions on certain investments like PPF, EPF, NSC, and so on. But, a HNI needs more. Explore other tax saving ways instead of invading tax.

Be Wise, Get Rich.

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