What is a Tax Shelter?

A tax shelter is known as a vehicle that organizations and individuals use to decrease or minimize their taxable incomes; thus, tax liabilities.

These are legal and can go from investments or investment accounts that offer favourable tax treatment to transactions or activities that decrease taxable Income through credits or deductions.

Explaining Tax Shelters

Whether permanently or temporarily, there is already an array of provisions available to decrease the tax burden of a corporation or an individual. When such resources and provisions are implemented to decrease the Taxes, it is said that the entity is sheltering the taxes.

The route of a tax shelter that is taken to decrease or completely eradicate the Tax Liability could be either illegal or legal. Thus, it is quite essential that the corporation or individual assess the tax decrease strategies to avoid getting a penalty.

There is a variety of tax shelters that the government is Offering to decrease the tax burden. One of the most popular tax shelters is:

Tax Deduction

A tax Deduction is referred to a decrease of income that is taxable and is a common outcome of expenses, especially the ones incurred to generate extra income. These are a type of tax incentives. Some of the examples are student loan interest deduction, charitable contributions, Home Loan interest deduction, medical expenses deduction, and more.

Why is Tax Shelter Allowed?

Despite creating a loss for India, why has the government allowed tax shelter? If you have been asking the same question, the answer is with the Double Tax Avoidance Agreement (DTAA). This is applied in such situations where a taxpayer is residing in one country and earning income in the other.

DTAA is referred to a Tax Treaty that is signed between two or multiple nations with an objective to avoid taxing taxpayers twice for one income. Let’s understand more with an example. Assume that an Indian is working in Canada but brings his income back to India to settle down here.

Now, since he has already paid his taxes in Canada, why would he pay again in India? That is where DTAA comes into the picture. Therefore, a DTAA could be either comprehensive enough to cover all of the income sources or be limited to specific areas, like taxing income from Inheritance, air transport, shipping and more.

Currently, India has done this agreement with more than 80 countries that include the US, the UK, UAE, Singapore, Mauritius, Germany, Canada, and Australia.