How to Save Income Tax: Unlock Tax-Saving Investments
Saving income tax should be a top priority for taxpayers. Although you should not try to evade taxes, you can do it legitimately with a little planning and creativity. The best way to achieve tax benefits and savings is by leveraging deductions for various expenditures, investments, and savings in a particular financial year. The best thing is that these deductions are authorised by the IT department. In this article, we will share a few ideas to help you save taxes.
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Utilize Tax-Saving Investment
As an initiative by the government to encourage citizens to invest in some schemes, there are some tax-saving investments you can take up. According to Section 80C of the Income Tax Act, individuals can claim up to Rs 1.5 lakh on these investments as tax waivers on total income. Here are the tools you can add to your investment portfolio:
Investment Option | Returns | Lock-in Period | Tax Benefits Under Sections |
Unit Linked Insurance Plan (ULIP) | 11%-20% p.a. (according to the chosen plan) | 5 years | Section 80C and 10 (10D) |
Public Provident Fund (PPF) | 7.1% p.a. | 15 years | Section 80C |
Sukanya Samriddhi Yojana (SSY) | 8% p.a. | 21 years | Section 80C and 10 (10D) |
Employee Provident Fund (EPF) | 8.15% p.a. | 5 years | Section 80C |
National Pension Scheme (NPS) | 9% to 12% p.a. | 3 years | Section 80C, 80 CCD(1B), and 80 CCD(2) |
Senior Citizen Saving Scheme (SCSS) | 8.20% p.a. | 5 years | Section 80C |
ELSS Fund | Returns vary according the performance of underlying assets | 3 years | Section 80C |
Tax Saver FDs | 5.5% to 7.75% p.a. | 5 years | Section 80C |
National Savings Certificate (NSC) | 7.7% p.a. | 5 years | Section 80C |
Life Insurance | Returns vary from plan to plan | Varies from plan to plan | Section 80C and 10 (10D) |
Buy a Home Loan
Government-mandated housing programs like PMAY (Pradhan Mantri Awas Yojana) and DDA (Delhi Development Authority) Housing Scheme do more than make housing more accessible. Under Sections 80C and 24(b), they reduce financial liability with lower tax burdens. The entire amount spent for repayment of the principal is eligible for deduction under Section 80C. The deduction limit is 1.5 lakh.
Likewise, Section 24(b) facilitates tax exemption on the interest portion up to Rs 2 lakh per year. People renting the home get an exemption on the entire interest component in the annual income tax computations. Those buying a property for construction can benefit from section 24(b), provided the construction process is completed within 5 years. First-time homeowners can claim an additional reduction in their annual tax liability under Section 80 EEA.
Take Up Life Insurance Plans
Section 80C benefits extend to savings on premium payments on life insurance plans. For insurance bought after 1st April 2012, you can claim tax benefits of up to Rs 1.5 lakh on annual premiums under Section 80C. It should be less than 10% of the sum assured. Claims can be filed for policies purchased before April 1, 2012, if the total premium does not exceed 20% of the sum guaranteed.
Section 10(10D) applies to the sum received at maturity of the policy or early death of the insured, whichever happens first. Additionally, some pension funds under section 23AAB can get exemptions of up to Rs 1.5 lakh under Section 80CCD (1).
Buy Health Insurance
Buying health insurance is another measure to claim a deduction under Section 80D on the premium paid. The deduction limit is up to Rs.1 Lakh. The best part about buying health insurance is that you can reduce out-of-pocket medical expenses during a medical emergency and save income tax. Here are the different subdivisions for the tax deduction limit:
Medical insurance premium for self, spouse, and kids- Rs. 25,000
Medical insurance premium paid by a senior citizen- Rs. 50,000
Premium paid on behalf of your parents- Rs. 25,000
Premium paid on behalf of your parents if they are senior citizens- Rs. 50,000
Premium paid by an individual over 60 years for self, spouse, dependent children, and dependent parents- Rs 1,00,000
Other Tax Saving Alternatives
In addition to the tax benefits under section 80C, you can claim several deductions to reduce your income tax liability. These include:
Earnings from interest on savings accounts are tax-exempt for a maximum of Rs. 10,000 for a total of all savings accounts. The cap is Rs. 50,000 for senior citizens under section 80 TTB.
Indian citizens not residing in India can receive interest on accumulating and fixed deposit amounts as tax-free income.
Any scholarship awarded to deserving students is exempt from income tax under section 10(16) of the Income Tax Act.
Long-term capital gains (LTCG) from shares or Equity Mutual Funds up to Rs. 1 lakh are exempt if these securities are sold after being retained for one year or longer.
Wedding gifts received from direct relatives are tax-exempt. Friends and unrelated individuals can spend up to Rs. 50,000 on gifts, beyond which the amount is subject to the applicable tax slab.
Members of a Hindu Undivided Family (HUF) can claim separate tax exemptions for and a basic exemption of Rs. 2.50 lakh.
Money received through a will or by being a legal heir is tax-free in India because the country has no inheritance tax.
No income tax is to be paid on income from agriculture. However, an indirect taxation method applies to this income with a partial integration of agricultural and non-agricultural incomes.
The amount of interest on a student loan is not taxable under Section 80E.
Medical costs incurred for the treatment of a specific disease may be eligible for a deduction under Section 80DDB, depending on some conditions and subject to a limit.
Expenses to treat disabled dependents get a deduction from gross income at an upper limit of Rs. 75,000 for 40% disability and Rs. 1,25,000 for 80% or above disability.
Charity donations to particular relief funds and charity organisations can get deductions under Section 80G of the Income Tax Act.
Tax deductions are available for donations to political parties under Section 80GGC. There is no upper limit for these deductions.
Total rent paid during a year is tax-exempt under Section 80GG up to a limit of Rs 5000 monthly or 25% of your annual salary.
Tax Planning Tips for Tax-Saving Investments
The beginning of the financial year is the ideal time to start planning your tax-saving investments. However, taxpayers often wait till the last quarter of the year, leading to hurried decisions. The sooner you plan, the more likely you are to achieve your tax-saving goals. Here are the steps for a viable tax-saving plan:
Check the current tax-saving expenses you own, such as insurance premiums, EPF contribution, home loan repayment, children’s tuition fees, etc
Deduct this amount from Rs 1.5 lakh to determine the amount you should invest to cover the deduction limit
Choose tax-saving investments according to your financial goals and risk profile
Consider investing in the first quarter of the financial year to get a head start and diversify your investments over the year. You will feel less burdened and make better investment decisions with timely planning.
FAQ
Q1. How does Income Tax work in India?
Income tax is a critical revenue source for the government. At the same time, it is a legal and ethical responsibility for citizens as paying taxes is a way to contribute to public infrastructure and services in the country. Every taxpayer should file income tax returns and pay taxes on time.
Q2. What is the 80C deduction under Chapter VI A of the IT Act?
Taxpayers can legally reduce their taxable income by making certain investments or eligible expenditures Chapter VI A. Section 80C allows a deduction for investments such as PPF, EPF, LIC premium, principal amount payment towards home loan, Equity-linked saving scheme, stamp duty and registration charges for property purchase, Senior citizen savings scheme (SCSS), Sukanya Samriddhi Yojana (SSY), ULIP, National saving certificate (NSC), and tax saving FD for 5 years.
Q3. How can you save tax other than section 80C?
You can use several other measures to save tax apart from the benefits of Section 80C. These include:
Section 80D- Medical insurance premium for self, spouse, children, and dependent parents
Section 80EE- Interest payment of home loan for first-time homeowners
Section 80EEB- Interest deduction for vehicle loan for electric vehicle purchase
Section 80G- Donations to charitable institutions
Section 80GG- Rent deduction if your income does not include the HRA component
Section 80TTA- Interest received in savings bank accounts up to Rs 10,000
Section 24- Interest for housing loan up to Rs 2 lakh
Section 54 -54F – Capital gain exemption
Q4. How can I save more tax on my salary?
You can save tax on your salary by utilizing deductions and exemptions such as the Standard Deduction, HRA, and LTA. Additionally, you can claim deductions up to the limit of Rs 1.5 lakh for expenses and investments under Section 80C. The NPS scheme provides an extra Rs.50,000 deduction. You can also avail of tax-saving opportunities like health insurance premiums under Section 80D and education loan interest paid under Section 80E.
Q5. Who can claim HRA exemption?
HRA exemption is available to salaried employees receiving house rent allowance as a part of their salary and making a payment towards rent.
Q6. How to calculate HRA?
HRA exemption is the least of the following:
Actual HRA received
Actual rent paid less than 10% of salary
40 % of the salary for a rental property in a non-metro city and 50 % of the salary in a Metro city
