If you have income only from salary tax filing is relatively simple. But if you have income from other sources, filing and managing your taxes is more complex.
An assessee can have multiple income streams such as rental from real estate investments, dividend and capital gains from stocks, and/or establishing businesses. It is imperative to understand and comply with all tax obligations associated with each income stream to avoid penalties and ensure proper compliance.
Below are key considerations for effectively managing the taxes associated with these income sources and assets.
Understanding Key Tax Deductions Under The Income Tax Act To Optimize Disposable Income
It is essential to understand the fundamentals of tax laws, as the Income Tax Act, 1961 provides various benefits in the form of deductions related to various sources of income. By gaining a comprehensive understanding of these provisions, taxpayers can effectively minimize their tax liabilities. The following are key instances where such benefits may be applicable:
Business Expenses
All the expenses that are incurred in the process of earning business income can be claimed as deductions under the relevant provisions of the Act, provided the stipulated conditions are met.
Rental Property Expenses
Expenses incurred by the assessee such as municipal taxes, 30 per cent standard deduction on rental income, interest paid on home loans, etc. shall be eligible for deduction, subject to the applicable tax regulations and requirements.
Investment Deductions
If borrowed funds are deployed to invest in dividend-generating stocks, the interest deduction of up to 20 per cent on the income generated from such investments shall be allowable, subject to specific conditions and regulations.
Deductions for Expenses Related to the Transfer of Capital Assets
When transferring certain capital assets, various expenses may be incurred. The Income Tax Act allows for deductions related to these expenses, including the cost of improvements and indexation benefits. “However, it is important to note that indexation benefits have been withdrawn effective from 23 July 2024. However, for land and buildings acquired prior to this date, taxpayers still have the option to avail the benefits of indexation,” says Suresh Surana, a Mumbai-based chartered accountant.
Advance Tax Obligations
If an assessee receives passive income, such as rental income, investment returns in the form of dividends or capital gains, or earnings from any additional business, they are required to estimate their earnings and make advance tax payments on a quarterly basis if the income tax payable on these sources exceeds the specified limits mentioned under the act. Failure to remit the required advance tax may result in the imposition of interest under provisions of the Income Tax Act.
It is important to note that no penalties will be levied if the estimated income arises from sources such as gains on the transfer of a capital asset, dividend income, or income from lotteries, gambling, betting, and racing, including horse racing.
Stay Updated On Tax Changes To Avoid Unnecessary Tax Burdens
“Taxpayers should remain informed about changes to tax obligations related to various forms of income. Notably, the Finance (No. 2) Act, 2024, introduced by the central government, has amended several provisions of the act, some of the instances of which are as follows,” says Khurana.
Changes to the tax rates for long-term and short-term capital gains, period of holding of short-term capital assets, and elimination of the indexation benefit
Changes to the provisions concerning the buy-back of shares
Changes in provisions related to family pension
Changes in provisions related to contribution to the pension scheme of the Central Government.
In the absence of awareness regarding these changes, taxpayers may inadvertently incur an excessive tax burden.
Other Points To Remember
“Properly maintaining records and documents related to receipts and payments related to different income sources is essential for ensuring effective tax compliance. This practice not only facilitates accurate tracking of profits and financial performance but also serves as a critical safeguard against potential legal disputes and unwanted litigation,” says Surana.
Consulting accounting professionals or tax advisors is important for effective tax planning. They can help taxpayers keep accurate records, manage financial documents, and understand allowable deductions to reduce tax liabilities. Their expertise can also minimize mistakes that might lead to legal issues or disputes with tax authorities.
By considering the aforementioned points, taxpayers can effectively reduce their taxable income, thereby resulting in lower tax liabilities, all while ensuring compliance with applicable income tax provisions.
