Direct Taxes: How to Avoid Being Overtaxed?

Written by : Knowledge Centre Team

2024-08-02

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Every person who earns an income from a job, property, business, profession, investments, etc. has to pay a direct tax to the government. The Indian Government takes direct tax from the taxpayers in three different forms— income tax, corporate tax, and capital gains tax.

However, without efficient tax planning, you might end up paying more in taxes than you need to. For better tax planning, you must first know the meaning of direct taxes.

What is the Meaning of Direct Taxes?

Before we learn how you can save taxes, first let us look at the meaning of direct taxes.

Direct taxes are the taxes that the government receives directly from individuals or entities. Thus, as a taxpayer, you can’t pass on the responsibility of paying direct taxes to another person or entity.

Different Types of Direct Taxes in India

There are broadly 3 types of direct taxes levied by the government:

1. Income Tax

It is the tax that the Government of India levies on the taxpayers whose income during the previous financial year falls under the income tax slab.

2. Corporate Tax

The income tax which is paid by the domestic and foreign companies on their income to the Indian government is referred to as the Corporate Tax.

3. Capital Gains Tax

Capital gains occur when you sell a long-term capital asset, like a property, jewellery, paintings etc. Such gains attract capital gains tax. You can have two types of capital gains – long-term and short-term, based on the holding period of the asset.

You may end up paying taxes under any one or more of these heads. The basis of division is the rate of tax which could differ based on the type of direct tax.

Why you Might be Paying More Taxes than you Should?

Bad tax planning is a single term that can sufficiently define excess outflows under direct taxes. Bad tax-planning may arise out of any or all of the following:

a) Lack of knowledge of Indian tax laws and tax saving options
b) No tax saving or lack of long-term investing
c) Bad investments, i.e., investing only for higher returns

Double Taxation & Direct Tax for NRIs

Double taxation is a situation where you pay income tax twice on the same source of income. The problem of double taxation may occur when your place of residence and receipt of income is different. In such a scenario, the income tax of the place of accrual plus the place of residence may apply.

Since NRIs are more likely to have two tax jurisdictions, the problem of double taxation is common with NRI income tax.

You avoid the problem of double taxation with the help of Double Taxation Avoidance Agreement (DTAA) provisions.

a) DTAA is signed between India and another country(s).
b) It allows non-resident taxpayers to avoid paying tax on their incomes in two jurisdictions.
c) Currently, India has signed double tax avoidance treaties (DTAAs) with more than 80 countries of the world.
d) Apart from that, the different ways of tax-saving are the same for the residents as well as non-residents.

How to Save Tax Legally?

Efficient tax planning is very important so that you can avoid overpaying taxes. Overpayment of taxes can put a huge burden on your savings and may hamper your savings growth. Here are the different ways you can avoid being overtaxed:

1. Tax Saving Investments

Tax-saving investments are an effective way to reduce your tax liability while building assets with your savings. You can invest in various instruments on which you can claim deductions on your taxable income.

Here are some types of tax-saving investments:

You can claim deduction under section 80C of the Income Tax Act for your contribution to the following schemes and investments:

a) Life insurance policy

b) PPF, EPF, and superannuation funds

c) Equity-linked saving scheme (ELSS)

d) Sukanya Samriddhi Yojana (SSY)

e) National Saving Certificate (NSC)

f) Senior Citizen Savings Scheme (SCSS)

g) Unit Linked Insurance Plan (ULIP)

h) Tax saving Term Fixed Deposit for at least 5 years

i) Infrastructural bonds (e.g., NABARD bonds)

j) National Pension Scheme (NPS) Tier I account

The maximum limit of deduction available under this section is Rs 1.5 lakhs. However, for NPS and Atal Pension Yojana, you can claim an additional deduction of up to Rs 50,000.

2. Tax Saving Expenses

Apart from the investments, the following expenses also qualify for the deduction under section 80C:

a) The principal amount paid towards a home loan

b) Stamp duty and registration charges for the purchase of house property

c) Tuition fees

d) Subscription to an IPO of a Public Limited Company

The maximum limit of deduction available under section 80C is Rs 1.5 lakhs including the investments. However, if you are a senior citizen, you can claim up to Rs 2 lakh for repayment of home loan principal under this section.

3. Medical Insurance for Family & Parents

The premiums that you pay for a medical insurance policy are eligible for deduction u/s 80D of the Income Tax Act. You can buy a health insurance for your family and parents.

Your parents will be considered a separate family for this deduction. Thus, you can claim deductions for two policies under this section.

Also, the section allows senior citizens to claim the expenses incurred for medical expenses if they do not have health insurance cover.

The limit of deduction is as follows:

If the insured are below 60 years of age: Rs 25,000
If the insured are 60 years of age or above: Rs 50,000

This limit also includes a preventive health check-up expense of up to Rs 5000.

How to Reduce Future Taxes?

A smart way to do efficient tax saving is to invest in those instruments that give you EEE tax benefits. EEE refers to Exempt Exempt Exempt.

Such investments are eligible for the following 3 Tax-exemptions:

a) Exemption 1: The amount you have invested is eligible for a deduction from your taxable income.
b) Exemption 2: The interest that has accrued to your savings corpus during the compounding phase is tax-exempt.
c) Exemption 3: The maturity value you have earned from your investment is also tax-exempt at the time of withdrawal.

EEE benefit applies to mainly long-term investment instruments, e.g. the EPF and PPF, ULIP - Life Insurance Policies, and equity-linked savings schemes (ELSS).

EEE Investments with Canara HSBC Life Insurance

The majority of the investment plans with Canara HSBC Life Insurance offer EEE efficiency with taxes. So, if you are looking for a long-term investment you can choose one of the following investment plans as per your goals:

1. Invest 4G

Versatile and suitable for both aggressive and safe investors
Invest in a mix of equity and debt funds with the same tax benefits
Bonus additions for long-term investors
Tax-free partial withdrawals after just five-year lock-in

Know more about Invest 4G.

2. Guaranteed Savings Plan

Guaranteed maturity benefits
Higher bonuses for long-term investments
Premium funding benefit for goal protection

Know more about Guaranteed Savings Plan.

3. Guaranteed Income4Life Plans

Secure a regular lifetime income
Guaranteed benefits
Invest regularly or one time
Start income at your preferred time

Know more about Guaranteed Income4Life Plan.

How to Save Tax on Capital Gains?

Short-term capital gains add to your annual taxable income and are taxed at the applicable slab rates. Thus, to save tax on short-term capital gains you need to use the tax-saving investments and expenses. However, long-term capital gains are a different matter.

You do get the indexation benefit on most long-term capital gains. However, in the following situations you can claim exemption on capital gains tax as well:

a) You buy a new house one year before or within two years of selling your present house
b) You invest the entire capital gain from the sale of an existing house in constructing a new house within three years of sale
c) In the case of the sale of other long-term capital assets, you will need to invest the entire sale proceed into the new property
d) You did not own more than one house property at the time of sale
e) The new property is situated within India
f) You do not buy a second house property 2 years before and within 3 years after the sale.

In this case, the amount of capital gain you use for the new house property will be exempt.

You may need to deposit the capital gains in the capital gains account scheme to defer the tax until you have bought the new property.

Invest in Capital Gains Bond

The following bonds will allow you to claim an exemption u/s 54EC of Income Tax Act if you do not want to buy a new property:

Rural Electrification Corporation Limited (REC) bonds
NHAI bonds

These deductions and tax-saving methods should be enough to reduce your additional tax burden. However, the exemptions may vary as per your unique situation. So, do remember to seek professional help in case you feel overwhelmed with the laws.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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