4 tax secrets hidden in plain sight in the Income Tax Act

Did you know that the Income Tax Act, 1961, has 23 chapters and 298 sections? Among its many, many pages, there are just as many open secrets that taxpayers can take advantage of. But very few people are aware of these benefits.

Today might just be your lucky day, because by the end of this article, you can rest assured that you’ll find out about a few such strategies that are hidden in plain sight in the IT Act. Here are 4 such secrets that you probably didn’t know (but absolutely should) about taxes in India.

1. The choice between the old and new tax regime matters a lot

There are two kinds of people — those who are loyal to the old tax regime, and those who believe the new tax regime is better. Neither of them may be right though, because the choice between the two tax regimes is very subjective. Here’s what you should know about these two options.

• The old tax regime has higher tax rates but offers more deductions
• The new tax regime has lower tax rates but offers fewer deductions

So, making a choice depends entirely on your financial situation during the year. If you have invested in a lot of tax-saving schemes and have maximized your deduction benefits, the old regime may be better for you. But if you have little to no deductions, the new regime may be a better choice. It is important to note that where an individual who has income from business or profession opts for the new regime, they can only opt out once and subsequently will not be eligible to opt in for new regime in any financial year in future. That being said, it is always a good idea to work out your tax liability under each regime and choose the one where your tax dues are lower.

2. You can set off some future profits with past losses

Incurring a loss on your investments can hurt, but there may still be a silver lining. Some losses can be carried forward for a specific number of assessment years and set off against certain other profits. So, your tax liability in that future assessment year will be reduced.

One such example is a capital loss, which can be carried forward for 8 assessment years. Long-term capital losses can be set off only against long-term capital gains, but short-term capital losses can be adjusted against both long-term and short-term capital gains.

So, let’s say you booked a short-term capital loss of Rs. 50,000 in AY 2016-17. And in AY 2020-21, you earned long-term capital gains of Rs. 1,70,000. Since this is within the 8-year timeframe, you can adjust the loss against the profit for AY 2020-21, thus bringing down the taxable capital gains to just Rs. 1,20,000.

3. Strategic redemption of mutual funds can save you a lot of tax

Okay, this is another secret about capital gains. More specifically, about long-term capital gains on the sale of equity shares or equity oriented mutual funds. These gains are exempt from tax to the extent of Rs. 1 lakh per financial year.

So, if you need to redeem your mutual funds or direct equity investments, but you have no financial emergency per se, you can draw up a strategic withdrawal plan and book gains limited to just Rs. 1 lakh per year. This way, you can continue to claim the exemption while still redeeming your investments.

On the contrary, if you book long term capital gains on equity shares or equity oriented mutual funds exceeding Rs. 1 lakh in a particular year, you will end up paying tax at 10% (plus applicable surcharge and cess) on all gains exceeding Rs. 1 lakh.

4. Exemption for Capital Gain on Sale of Residential property

If you’ve just sold a residential house property held as a long term capital asset at a decent price, or if you’re planning the same for significant gains, you may be concerned about the looming prospect of paying a huge amount of long-term capital gains tax.

But here’s a secret — these capital gains are exempt if you use the funds to purchase or construct a new residential property. You can do this in any one of the following two ways:

• Purchase a residential house either 1 year before or 2 years after the date of sale, or
• Construct a new house within 3 years from the date of sale

If you fulfill any of these conditions, the lower of the following two amounts will be eligible for the exemption:

• The actual capital gains from your sale, or
• The cost of buying or building the new house

Conclusion

These are all useful strategies that you can take advantage of in the right scenarios. Which of these do you think will be useful to you in the coming assessment year? And which of these have you already made use of?