1. Standard deduction
Taxpayers in India have the option to claim a standard deduction, a predetermined amount set by the government, to reduce their taxable income. By utilising the standard deduction, individuals can lower their overall tax burden, as it effectively reduces the portion of their income subject to taxation. This deduction is available regardless of whether they itemise deductions.
2. Retirement savings
Contributing to retirement accounts, such as the Public Provident Fund (PPF) or the National Pension Scheme (NPS), can be an effective tax avoidance strategy in India. These contributions are often tax-deductible under Section 80C of the Income Tax Act, meaning they reduce taxable income in the year they are made. Additionally, the investments within these accounts grow tax-deferred, allowing for greater accumulation over time compared to taxable accounts.
3. Workplace expenses
Certain work-related expenses may be eligible for tax deductions under Indian tax laws. For example, if you are self-employed or have unreimbursed business expenses, you may be able to deduct costs such as office rent, travel expenses, and professional fees. Salaried employees can also claim deductions for certain expenses like rent paid for accommodation and leave travel allowance.
Difference between tax evasion and tax avoidance
A. Tax evasion
Tax evasion: Tax evasion is not just wrong, it is illegal. It involves deliberately hiding income, providing false information to lower your tax bill. Tax evasion might have serious consequences, such as hefty fines, possible imprisonment, and damage to your reputation.
Let us understand this with an example.
A salaried software developer earns Rs. 8,00,000 annually from his primary job. He also undertakes freelance projects on the side, earning Rs. 2,00,000. Some clients propose cash payments at a slightly reduced rate, and the developer agrees. However, he has never reported this additional income and pays taxes only on Rs. 8,00,000. This practice is known as tax evasion, which in this instance, entailed the intentional hiding of income.
B. Tax avoidance
Tax avoidance: Unlike tax evasion, which is illegal tax avoidance is legal and involves strategically using deductions, exemptions, investments, and business structures to minimise your taxes. For example:
A salaried individual with an annual income of Rs. 10,00,000 contributes Rs. 1,50,000 to their PPF and Rs. 50,000 to their NPS. They claim deductions under Section 80C and 80CCD(1B) of the Income Tax Act. And now they will pay tax on Rs, 8,00,000 instead of the original Rs. 10,00,000.
This is a perfect example of legal tax avoidance. Governments frequently incentivise such behaviors by providing tax-favored savings opportunities and deductions designed to support long-term investment and retirement preparation.
Common tax avoidance strategies in India
1. Using deductions
- Section 80C: It offers deductions of up to Rs. 1.5 lakh p.a. for investments in avenues like:
- Public Provident Fund (PPF)
- Life Insurance Premiums
- Equity Linked Savings Schemes (ELSS)
- Employee Provident Fund (EPF)
- Section 80D: Medical insurance premiums for yourself, your family, and your parents qualify for deductions under this section.
- Section 80CCD(1B): Additional contributions you make towards the National Pension System (NPS) are eligible for deduction.
- Home loan interest: You can claim a deduction for the interest paid on your home loan under Section 24(b)
- Section 80G: Deductions on donations made to specified charitable trust or institution and certain approved funds.
2. Structuring your salary
Here are a few key allowances to consider:
- House rent allowance (HRA): If you are a salaried employee living in rented accommodation, you may be eligible for a partial or full tax exemption under Section 10(13A) of the Income Tax Act
- Leave travel allowance (LTA): LTA offers exemptions for travel expenses incurred on domestic trips while on leave or after retirement.
- Update: You cannot claim the leave travel allowance (LTA) tax exemption if you opt for the new tax regime.
- Other allowances: Provisions like transport allowance, food coupons, and certain special allowances might enjoy certain tax benefits under Indian tax laws.
3. Business-specific tax avoidance strategies
- Depreciation: Claiming depreciation on assets over their useful life is a legitimate way to reduce taxable profits.
- Research and development (R&D): Businesses that invest in qualified R&D activities may avail of weighted deductions or other tax benefits.
- Strategic business structuring: Different business structures (sole proprietorship, partnership, or company) come with different tax implications. To optimise your taxes, strategically choose the most favorable structure for your business.
- Special economic zones (SEZs): Companies operating within SEZs may be eligible for tax holidays, exemptions, or special tax rates.
Tip: Apart from investing in tax-saving options, you can consider investing in fixed deposits to diversify your portfolio. FDs offer a reliable source of income with guaranteed returns, as they are not subject to market fluctuations. Bajaj Finance, India's leading NBFC, provides competitive interest rates on their FD, up to 8.85% p.a. for senior citizens and up to 8.60% p.a. for customers below the age of 60. Keep in mind that the interest earned on FDs is taxable as per your income tax slab.
How to control tax avoidance?
Controlling tax avoidance involves a combination of legislative, administrative, and international measures. Governments can close legal loopholes by enacting comprehensive tax reforms and simplifying tax codes. Strengthening the enforcement of tax laws through rigorous audits and penalties can deter aggressive tax planning. Promoting international cooperation and transparency, such as through information-sharing agreements, helps address cross-border tax avoidance. Additionally, educating taxpayers about fair tax practices and the importance of compliance can foster a culture of voluntary adherence to tax laws.
Conclusion
In this complex tax system, it is wise to explore legal ways to minimise your tax burden. Responsible tax planning isn't just about saving money –it is about being a good citizen. Paying your fair share ensures a healthy, thriving, and sustainable society.
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