Tax Planning for Different Sources of Income

This document covers

1. Residential Status
2. Opting of Old Tax and New Tax Regime
3. Deductions under Chapter VIA in Old Tax Regime
4. Allowances and Exemptions
5. Tax Saving Strategies for Capital Gains
6. Investment in Tax efficient Instruments
7. Investment in House properties
8. Tax Planning for Business & Professional Income

1. Residential Status

• The taxability of an individual depends on residential status of Individual.
• If the Individual is resident, he is required to pay the taxes on global income. If the individual is NRI, he is required to pay taxes only on Indian income.
• If the individual is earning in foreign countries, he should plan his stay in such a way that his residential status is NRI so that he is not required to pay taxes on his foreign income in India.
• NRI's can park their funds in NRE accounts so that interest is tax free in India

Refer @ Tax Residential Status Calculator for more information

2. Opting of Old Tax and New Tax Regime

• The Individuals/HUF can opt between the Old Tax Regime and New Tax Regime. The Old Tax Regime allows various deductions and exemptions whereas the New Tax Regime offers lower tax rates but no deductions.
• The taxpayers must evaluate their income and deductions to decide on the most beneficial regime

Refer @ Difference between Old Tax Regime and New Tax Regime for more information

3. Deductions under Chapter VIA in Old Tax Regime

• The taxpayers can claim various deductions under the Old Tax regime like 80C (LIC, Insurance, PPF, ELSS etc), 80D (health insurance), 80DDB/80DD/80U (disability), Donations (80G) etc.
• If the taxpayers want to opt for Old tax regime, they can plan various investments depending on their taxes.

Refer @ Best Income Tax Saving Investment Options for more information

4. Allowances and Exemptions

• The taxpayers can claim various exemptions like standard deduction, HRA, LTA, conveyance, Home Loan interest etc if they are opting for old tax regime.
• The salaried employees can structure their salaries in such a way that they can minimize taxes. Opt for reimbursements, allowances, and employer’s NPS contributions to reduce taxable salary.

Refer @ Best Income Tax Saving Investment Options for more information

5. Tax Saving Strategies for Capital Gains

• Reinvestment options: If the taxpayer is selling a property or any other assets like shares / mutual funds, reinvestment of proceeds into specified assets like house property, bonds etc (Section 54,54EC, 54F) can save the taxes
• Tax loss Harvesting: The taxpayers can sell loss-making investments to offset capital gains from profitable investments. It helps in reducing taxable income by utilizing losses. It is applicable for stocks, mutual funds etc

Refer @ Capital Gains Income Tax Guide for more information

6. Investment in Tax efficient instruments

• Interest income from fixed deposits (FDs), savings accounts, bonds, and other instruments is taxable under "Income from Other Sources". However, smart tax planning can help reduce this liability.
• Investment in tax free bonds like NHAI, PFC etc will give interest which is free from taxes, and it helps the taxpayers who are in higher tax bracket (30%)
• Investment in tax efficient instruments like PPF, Sukanya Samriddhi Scheme, Senior Citizens Savings Scheme etc can give returns which are tax free
• Investment in Sovereign Gold Bonds (SGBs) till maturity where interest is taxable but the capital gains are tax free.

Refer @ Guide on Other Income from IT perspective for more information

7. Investment in House properties

• Investing in multiple properties can create wealth appreciation while allowing tax benefits.
• The taxpayers can claim property taxes, Home Loan interest and Standard deduction from rental incomes
• The Home Loan interest can be claimed fully again the rental income from house property without a cap
• The taxpayers can show 2 properties upto self-occupied.
• Joint Ownership of Property reduces tax liability by splitting rental income among co-owners.
• Wealth Creation Strategy: Investing in multiple properties provides passive income, appreciation in property value, and tax-efficient deductions.

Refer @ A Guide on House Property Income Tax Savings for more information

8. Tax Planning for Business & Professional Income

• For individuals earning from business, freelancing, or investments, choosing the right legal entity like sole proprietorship, LLP, Firm, Pvt Ltd, OPC etc can minimize tax liability and optimize compliance costs.
• Opting for presumptive taxation u/s 44AD and 44ADA can allow the individuals to have low compliance burden
• The taxpayers can claim the expenses to reduce the taxable income and minimize the taxes
• The taxpayers can claim depreciation on business which helps in minimizing the taxes

Refer @ Guide on Presumptive Income Tax Scheme for more information