5 things to remember while filing income tax returns

Raj and Simran live in Mumbai and have to plan their taxes for the financial year 2022-23. They both want to save taxes but are in unique situations. Simran works as an employee and can claim HRA while Raj cannot claim HRA as he is an entrepreneur. They are both expecting cash as wedding gifts next year and they want to get some clarity on some health insurance matters.

Also, they have some shares that they want to keep for the long term, but both have different tax strategies. How will their taxes turn out?  

1. RENT EXPENSE

Raj and Simran plan to live together in a cozy, plush 1 BHK apartment in Bandra, Mumbai in two years' time. But their company's CTC structures are different - Simran works in an awesome company that gives her HRA benefits. But since Raj is a business owner, he can not claim HRA  (since no one gives him that in a business). So what can Raj do?

Raj finds a fabulous section called 80GG which allows self-employed people like him to claim their rent expenses as a deduction. 80GG allows self-employed people or employees whose companies do not provide HRA in the CTC structure, to claim rent expenses as a deduction.

Say his total income is Rs 20 lakh, adjusted total income is Rs 10 lakh and his rent is Rs 20,000 per month. Here are the deductions he can claim:

1. Annual rent paid  - 10% Adjusted total income: ie Rs 1.4 Lakh ( Rs 2.4 lakh (ie Rs 20,000 *12 months) - Rs 1 lakh (ie. 10%* Rs 10 lakh)
2. Rs 5,000 per month: Rs 60,000
3. 25% of total income: Rs 5 lakh

The least of these 3 options: Rs 1.4 lakh

Simran, on the other hand, stays with her family and claims HRA. She has made an official rental agreement with her grandmother (or can also do this with her mother) and transfers Rs 15,000 every month via her bank account to her grandmother's bank account. Since she gets an HRA deduction for this expense, her taxable income reduces by Rs 1.8 lakh (15,000*12 months). 

On the other hand, her 81-year-old grandmother can receive rental income and does not have to pay any taxes on it since individuals above 80 years are eligible to pay taxes only if their income crosses Rs 5 lakh. 

2. HEALTH

Raj and Simran both know that they can take a health insurance policy for their family and claim a deduction of Rs 25,000 each. Also, they both pay their parent's health insurance premium, to claim another deduction of Rs 25,000. But since their parents are senior citizens, they can claim a deduction of up to Rs 50,000 instead of Rs 25,000. 

But their annual premium only comes up to Rs 16,000, and thus they cannot utilize their entire allowable deduction of Rs 25,000. So what can they do?

They or their family (spouse, parents, kids) can get a preventive full-body checkup and spend Rs 5,000 in cash. This expense, along with health insurance, can be clubbed and deducted from Sec 80D. So their total deduction can now increase from Rs 16,000 to Rs 21,000.        

3. PAY SALARIES IN YOUR BUSINESS 

Raj owns two businesses:

1. A grocery store (managed by Raj).
2. A warehousing business that houses groceries for his grocery business (run by Raj's father since this year).

Raj's father used to work for the GST department earlier but since he retired last year, his father now manages Raj's warehousing business. Assume Raj's both businesses make a profit of Rs 40 lakh and he does not pay his father a salary (because Raj would rather share his profits with his dad than pay him a salary).  

BEFORE:  In this case, Raj's father's income is nil and no tax is payable. But since Raj's business makes profits of Rs 40 lakh, he has to pay a tax of Rs 11 lakh on the same. (Note, Raj's revenues are Rs 60 lakh and business expenses are Rs 20 lakh, thus profits of Rs 40 lakh).

Now, if Raj pays a salary to his warehouse manager (ie his dad)

AFTER: Raj would normally have to pay a salary of Rs 6 lakh to his best friend (Karan) if Karan managed his warehouse business. So, he decides to pay this to his dad for tax purposes. Here's how this helps: 

1. Raj's business profits come down to Rs 34 lakh as the business expenses have now increased because of dad's salary. (Rs 60 lakh- Rs 26 lakh= Rs 34 lakh) 
2. Tax on this is Rs 9.13 lakh, which means he can now save about Rs 1.87 lakh on tax (Rs 11 lakh minus Rs 9.13 lakh= Rs 1.87 lakh)      

This is only possible if the expense is genuine and not overstated. Else, Raj can be in trouble under section 40A (2) which disallows excess payment to related persons. 

4. TAKE A GIFT FROM RELATIVES 

Raj's dad is a thrifty man and a man of fewer wants and needs. He usually ends up saving most of his salary and has about Rs 35,000 saved up by the end of every month. After one year, he has saved Rs 420,000 (35,000*12) and today, after working for 3 years, he has saved up about Rs 12,60,000. Now, Raj's dad wants Raj and his family to shift to a bigger home and offers to contribute his savings to buy this new home. Raj can take this amount of Rs 12.6 lakh (that he gave to his father as salary for 3 years) and show this as a ''gift from relatives'' under 'income from other sources'' and pay no tax on this since this is not taxable under Sec 56(2)(x).

via GIPHY

Also, when Raj and Simran get married and receive gifts during their marriage, they need not pay tax on any gifts they receive since ''gifts received on the occasion of marriage'' is not taxable. 

5. USE YOUR LTCG WELL

So, if you trade in stocks or mutual funds, you might know that long-term capital gains are taxed at 10%. This means that if you sell your stocks after 12 months and make profits out of the sale, your gains will be taxed at 10%. But only when the long-term gain is above Rs 1 lakh. But, if you are planning to hold shares for a really long time, how will a chotu Rs 1 lakh benefit wala law benefit you? Here's how:

Eg: Simran and Raj both bought 100 shares each for Rs 1 lakh in April 2020 and want to hold these shares for at least 5 years. Assume that the price of Dominos' shares keeps rising every year by Rs 1 lakh, (ie the price is Rs 2 lakh in May 2021, Rs 3 lakh in June 2022, and so on). Both Raj and Simran keep their tax strategies a secret and by the end of 5 years, when Raj & Simran sell their shares, Raj realizes that now he has to pay too much tax while Simran has to pay none because she did something called 'tax harvesting'. 

• At the end of 5 years, when Raj sells his shares for say Rs 5 lakh, his capital gain is Rs 4 lakh (sold for Rs 5 lakh and purchased for Rs 1 lakh, so the long-term gain of Rs 4 lakh on which Raj has to pay a tax of 10% ie. Rs 40,000).
• Simran has been playing a different game consistently: Simran has been selling her shares every year after holding them for more than 365 days at one time. This means once she bought 100 shares on April 3, 2020, for Rs 1 lakh, she sold them 13 months later on May 1, 2021, for Rs 2 lakh ( received Rs 1 lakh gain and claimed it as a deduction).
• After selling her first lot of shares on May 1, 2021, for Rs 2 lakh, she immediately bought fresh shares of Dominos at the same price (Rs 2 lakh). 13 months later on June 1, 2022, she sold these shares for Rs 3 lakh. (again, received Rs 1 lakh gain this year and again claimed it as a deduction) .
• She did this 'buy and sale' process every year for 5 years and this is what happened: since her profits every 13 months were about Rs 1 lakh, she could claim Rs 1 lakh as a tax deduction every year and had to pay no tax in any year on her shares.