Taxes by citizens to the Government are the major source of income for the Government which the Government spends for the development and welfare of the citizens. Taxes are not a burden on our shoulders; instead we receive many utilities because of regular payment of taxes. In simple words, Taxes are like paying rent for staying in a country.
Currently, the income tax slab rates for individuals and HUF below the age of 60 is – No tax when the total income does not exceed Rs. 2,50,000, 10% of the amount by which it exceeds Rs. 2,50,000 when the total income exceeds Rs. 2,50,000 but does not exceed Rs. 5,00,000, 20% of the amount by which it exceeds Rs. 5,00,000 when the total income exceeds Rs. 5,00,000 but doesn’t exceed Rs. 10,00,000 and 30% of the amount by which it exceeds Rs. 10,00,000 when the total income exceeds Rs. 10,00,000. For all senior citizens who are above the age of 60 years the minimum income level for which tax can be levied is Rs. 3,00,000 and the tax rates increment at Rs. 5,00,000 and Rs. 10,00,000. For all senior citizens who are above the age of 80 years, no tax levied upon them when the total income is Rs. 10,00,000, 20% of the amount by which it exceeds Rs. 5,00,000 when the total income exceeds Rs. 5,00,000 but doesn’t exceed Rs. 10,00,000 and 30% of the amount by which it exceeds Rs. 10,00,000 when the total income exceeds Rs. 10,00,000.
So, as per the tax slab rates an individual who earns Rs. 12 lakhs per annum and who is below the age of 60 years of age has to pay Rs. 1,85,000 as yearly tax which is 15.42% of his total yearly income. Similarly when an individual who is below the age of 60 and earns Rs. 20 lakhs per annum has to pay Rs. 4,25,000 as yearly tax which is 21.25% of his total income. It becomes painful when one-fifth of a person’s hard earn money is been taken away as taxes. There are certain ways in which taxes can be evaded legally without violating any law and by remaining within the regulations stated in the act.
- After the taxpayer has crossed all limits stated under Section 80 (c) of the Income Tax Act, he can transfer the fund to the account of non-working spouse or minor child and invest in tax-free instruments like PPF, tax free bonds and Ulips. The investment made in tax-free instrument won’t be affected by the clubbing of income clause.
- A tax payer can happily invest in his parents name and it won’t be covered under clubbing of income clause. Also transactions made to the accounts of parents won’t be considered as gifts. It is judicious to make use of their exemption limits, which is Rs. 2.5 lakhs for up to 60 years, Rs. 3 lakhs for those above 60 years and below 80 years and Rs. 5 lakhs for those above 80 years.
- Clubbing of income is applicable when gifts are made. However if the transaction is shown as a loan taken by a kin or relative from the taxpayer and the kin or relative pays nominal interest for the loan then income from the investment won’t be considered as taxable.
- Clubbing of income is taken only at the first level. The further earnings when reinvested, will be considered the income of the spouse or relative. There shall be no tax liability on that money from the second year onwards. This proves effective when the earnings of the wife and relative are in a lower tax bracket.
- Clubbing of income is considered only when the children are minor. It becomes inapplicable when the child turns into an adult. In that case, when an adult child is not earning then 2.5 lakh rupees can be transferred into their account and exemptions can be enjoyed. Also, more exemptions can be enjoyed by transferring more money if the taxpayer falls in a higher tax bracket.
- When the tax payer has got minor children he is entitled to get deduction up to Rs. 1500 per child for two children in case investments are made in the name of those minor children.
- Investments made in equity market and mutual funds are considered long-term investments when it is held for more than a year. Also investments made in gold, property and debt oriented mutual funds are considered long term investments when it is held for more than a year. No capital gains tax is charged in any long term investments.