As the famous saying goes ‘A penny saved is a penny earned‘. Tax planning is one of the ways which can help you save on taxes and increase your income. The income tax act provides deductions for various investments, savings and expenditures incurred by the taxpayer in a particular financial year. We will discuss some of the avenues which can help you save taxes.
We have a tendency to invest in various products that improve our quality of life but can also cause considerable financial distress. To significantly alleviate this burden, the government offers income tax exemptions on direct taxes charged on your whole pay.
Numerous government-mandated programmes, such as the PMAY (Pradhan Mantri Awas Yojana) and DDR (Delhi Development Authority) Housing Scheme, aim to make housing more accessible in India, while Sections 80C and 24(b) minimise monetary liability through lower tax burdens.
Whole annual income spent on repayment of the principal borrowed amount is eligible for Section 80C deductions of up to 1.5 lakh. Section 24(b) allows for tax exemption on the interest portion of a house loan up to Rs 2 lakh per year.
Furthermore, if you rent out the newly purchased home, the entire interest component is exempt from annual income tax computations.
Persons who purchase a property for the purpose of building a home can also profit from section 24(b), as long as the construction process is completed within five years.
Section 80EEA allows you to claim an additional reduction in your annual tax liability if you are a first-time homeowner.
People can claim tax deductions under section 80D for the portion of their annual taxable income spent on premium payments. Depending on the age of the covered, different sums are exempt from such income tax computations.
|Eligibility||Deduction under Section 80D|
|Health insurance for individuals, spouse, children (below 60 years)||Up to Rs 25,000|
|For individuals and parents (below 60 years)||Up to Rs 50,000 (Rs 25,000 + Rs 25,000)|
|For individuals (below 60 years) and senior citizen parents||Up to Rs 75,000 (Rs 25,000 + Rs 50,000)|
|For individuals and parents (both above 60 years)||Up to Rs 1,00,000 (Rs 50,000 + Rs 50,000)|
If you are willing to accept the risk, you might choose for stock market investment tools such as ELSS (Equity Linked Savings Scheme).
This tool has a three-year lock-in period, and total investments are eligible for tax breaks of up to Rs 1.5 lakh.
Also, if total capital gains are less than Rs 1 lakh, no tax is due on profits realised.
You can also choose to invest in 5-year fixed deposits to benefit from tax breaks without taking any risks.
Any investments up to Rs 1.5 lakh can also be claimed for tax exemption under Section 80C.
Numerous government-mandated schemes offer high returns on total investments along with tax waivers. Individuals can claim up to Rs 1.5 lakh spent on such investments as tax waivers on total annual income, under Section 80C of the Income Tax Act.
Tax exemptions can be availed by investing in the following tools:
Section 80C of the Income Tax Act provides for premium payments, and Section 10(10D) provides for the sum promised received at maturity or early death of the insured, whichever occurs first.
Yet, if the insurance is bought after 1st April 2012, tax benefits of up to Rs 1.5 lakh paid on annual premiums can be claimed under Section 80C, provided it is less than 10% of the entire sum assured.
If the policy was purchased before to April 1, 2012, claims under Section 80C can be filed as long as the total premium payments do not exceed 20% of the sum guaranteed.
Acquisition or renewal of life insurance coverage, as well as annuity payments on such plans made through monthly salary, are also eligible for tax exemptions of up to Rs 1.5 lakh under Section 80CCC.
Only certain pension funds under section 23AAB are eligible for exemptions of up to Rs 1.5 lakh under section 80CCD(1).
The most popular tax-saving options available to individuals and HUFs in India are under Section 80C of the Income Tax Act, Section 80C includes various investments and expenses you can claim deductions on – up to the limit of Rs. 1.5 lakh in a financial year.
|5-Year Bank Fixed Deposit||6% to 7%||5 years|
|Public Provident Fund (PPF)||7% to 8%||15 years|
|National Savings Certificate||7% to 8%||5 years|
|National Pension System (NPS)||12% to 14%||Till Retirement|
|ELSS Funds||15% to 18%||3 years|
|Unit Linked Insurance Plan (ULIP)||Varies with Plan Chosen||5 years|
|Sukanya Samriddhi Yojana (SSY)||7.60%||N/A|
|Senior Citizen Saving Scheme (SCSS)||7.40%||5 years|
Apart from the 80C deductions, there are various deductions under Section 80 you can use to save on income tax. Tax benefits on health insurance premiums and home loan interest are a few-
The best time to start planning your tax-saving investments is at the beginning of the financial year.
Most taxpayers procrastinate till the last quarter of the year, resulting in hurried decisions. Instead, if you plan at the start of the year, your investments can compound and help you achieve long-term goals. Remember, tax-saving should be an additional perk and not a goal in itself.
Use the following pointers to plan your tax-saving for the year:
This way, you can figure out how to exhaust the 80C limit. It is best to begin investing in the first quarter of the financial year so that you can spread the investments over the year. Doing this won’t burden you at the end of the year and will also allow you to make informed investment decisions.
Given a choice, most of us wouldn’t want to pay tax on the income we earn. But we should. As citizens of India, we are also consumers of the country’s public infrastructure and facilities, and income tax is an important source of revenue for the government. So, it is our duty and responsibility to contribute towards building and maintaining the public infrastructure. Paying income tax and filing income tax returns on time ensure that.
Income tax department allows reducing of the taxable income of the taxpayer in case the taxpayer makes certain investments or eligible expenditures allowed under Chapter VI A. 80C allows deduction for the investment made in PPF , EPF, LIC premium , Equity-linked saving scheme, principal amount payment towards home loan, stamp duty and registration charges for purchase of property, Sukanya smriddhi yojana (SSY) , National saving certificate (NSC) , Senior citizen savings scheme (SCSS), ULIP, tax saving FD for 5 years, Infrastructure bonds etc
Apart from 80C, various other provisions allow deductions to taxpayer as follows :
80CCD is a subsection of 80C which allows a deduction for contributions to national pension schemes as notified by the central government. The deduction is allowed for contributions made by an employee, employer or voluntary self contribution. The overall limit of deduction allowed in section 80C is Rs 1.5 lakh plus an additional deduction of Rs 50,000 u/s 80CCD (1b) for self contribution to NPS or Atal pension yojana
Maximum deduction allowed varies in different scenarios as below:
Section 24 allows a deduction for home loan interest up to Rs 2 lakh if the house property is self-occupied or vacant whereas if the house is rented, the entire interest amount can be deducted from the ‘Income from house property. This deduction gets redacted to Rs 30,000 if the following conditions are not met (i) Home loan should be taken for purchase or construction of the house property (ii) The loan must be taken after 1st April 1999 (iii) In case of construction of house property, the same should be completed within 5 years.
Salaried employees who receive house rent allowance as a part of salary and make a payment towards rent can claim HRA exemption to reduce their taxable salary wholly or partially.
HRA exemption is allowed least of the below :
For the above calculation, the salary would include basic, dearness allowance and fixed percentage of commission.
For more on tax-saving investments and expenses, read our extensive Section 80C guide.