Direct Taxes: How to Avoid Being Overtaxed

Taxes paid by you generally reach the government via two channels; Indirect and Direct. Unlike the former where three parties are involved (taxpayer, tax collector, and tax imposer), Direct tax collection involves only two parties, i.e. the taxpayer and the tax imposer. These taxes are levied on income and properties of persons and are categorised into the following types:

• Income Tax
• Corporate Tax
• Corporate Gains Tax
• Wealth Tax
• Estate Tax

Taking advantage of the provisions provided under Income tax act 1961 , you can benefit by saving tax amount and avoid being overtaxed.

• Deductions under Section 80C
• Deduction under Section 80D for house loan interest, health insurance premiums, house rent allowance.
• Deductions under Section 80TTA/80TTB
• Deduction under Section 16
• Deductions under Section 80DD and 80DDB
• Deduction under Section 80E

• Fixed Deposits : Subject to a lock-in period of 5 years.
• Equity Linked Saving Scheme : Subject to a lock-in period of 3 years. Also, the returns from ELSS are subjected to long term capital gain tax only if they cross Rs. 1,00,000.
• National Pension Scheme : This option qualifies for additional exemptions. The relevant provisions are

1. Tax exemption on investments in NPS which are equal to 10% of basic salary + Dearness Allowance. This is limited to Rs. 1,50,000 exemption that applies to the whole section (80C)
2. Additional exemption of Rs. 50,000 on investment in NPS. [Section 80CCD 1(B)]
3. Where your employer contributes a part of your salary towards NPS, you can claim an amount up to 10% of basic salary + Dearness Allowance as a deduction. [Section 80CCD (2)]

• For Companies

1. Expenses made on the preparation of MoA, AoA.
2. Expenses incurred for the issue of securities or debentures.
3. Expenses made on the prospectus.
4. Incorporation expenses.

• For Persons Other Than Companies

1. Expenses incurred on the preparation of a feasibility report for business.
2. Expenses incurred on the preparation of a project report or market survey for starting a business.
3. Expenditures on agreement with other person/persons for starting a business.

1. Underreporting of Income.
2. Failure to maintain accounts related to business.
3. Fake or omitted entry in accounts.
4. Concealment of income.
5. Concealment of international transactions.
6. Failure to comply with directions issued by the competent person.
7. Failure to comply with any notice issued.
8. Failure to file a return on time.

1. Choose the Appropriate Tax Scheme The Budget 2020 has introduced a new optional tax regime where tax slabs have been rearranged, and tax rates have been brought down. The finance minister has also allowed the taxpayers to choose between the old scheme and the new scheme.However, if you select the new scheme of tax, you will be required to give up all the exemptions that were allowed to you under the previous scheme. Salaried employees have the flexibility to switch the schemes every year. Some exemptions that you will not be allowed to take if you opt for the new tax regime are;
2. Thus, for a person who claims high deductions, the old scheme may be more beneficial as against a person who claims low deductions.
3. Choose Your Investments Wisely Section 80C of the Income Tax Act allows for certain exemptions on investments made by you in a financial year. The overall ceiling limit on exemptions is Rs. 1,50,000 and to make the most of this, you need to make wise investment decisions. Below mentioned are some of the best investment options under this section.
4. Utilise the Benefit Of Preliminary Expenses Preliminary expenses are the expenses incurred to bring a business into existence or for diversifying business operations. Section 35D, of the income tax act, allows for amortisation of such preliminary expenses. This deduction is available to an Indian company or a person resident in India. However, only certain preliminary expenses are allowed to be claimed as a deduction.
5. You can claim 5% of the cost of the project or 5% of the employed capital as an exemption under this section.
6. Avoid Direct Tax Penalties Every year you are required to file your income tax return on or before a date that is notified by the income tax department. The return should be in a specified format and should contain authentic information about earnings in a particular financial year. Generally, the following actions by taxpayers invite financial penalties:
7. Any compliance error with respect to the mentioned rules and procedures may result in hefty financial penalties that may considerably increase the cash outflow. Therefore, it is in the best interest to avoid errors and penalties that follow.

Be Smart, Save Tax While it is mandated by law to pay a part of your income as Direct tax , proper management and planning can reduce your burden substantially. Avoid being overtaxed by utilising the benefits provided by tax authorities.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.