Every time you see your paycheck, you feel the pinch of income tax being deducted from your hard-earned money. Although money is required to grease the wheels of the Indian economy, nobody wants to lose out on an opportunity to save more!
The ethical way to save tax is by being aware of the provisions laid down by the government to avail of the benefits stated. A system has been worked out to ensure you can save tax by claiming deductions based on your investments throughout the year.
Let us take a look at how to save income tax legally and consequently save more money. These are a few easy and highly beneficial ways to do so.
Income Tax slabs
To understand the deductions of tax, you must first identify how much tax you are supposed to pay and what is the limit of tax deductions for you. You can engage your finances accordingly.
|Income Tax slabs||Taxable income|
|Up to 2.5 lakh rupees||Nil|
|Between 2,50,001 rupees to 5 lakh rupees||5% of your total income that exceeds 2.5 lakh rupees|
|Between 5,00,001 rupees to 10 lakh rupees||12,500 rupees + 20% of your total income that exceeds 5 Lakh rupees|
|Above 10 lakh rupees||1,12,500 rupees + 30% of your total income that exceeds 10 Lakh rupees|
There is a health and education cess at 4% of the total tax payable in addition to this. A surcharge of 10% has to be paid by people who earn more than 50 lakh rupees annually. The surcharge becomes 15% when the annual income is more than 1 crore rupees.
Also Read – Latest Income Tax Slabs & Rates For 2021
Save tax by acting on these points
There are multiple ways to save tax and most importantly these are ways you can ensure your financial portfolio becomes stronger. Few ways pay off in the long term and these should be considered carefully.
- Home Loan – A home loan is the perfect example of a long-term goal. Investing in a house is more than saving tax, it is about taking steps towards making a home. According to section 80C of Income Tax Act, repayment towards the principal amount of the home loan is deductible up to 1.5 lakh rupees. Under section 24b, the repayment on the interest part of your home loan is also eligible for tax exemptions. The highest limit for tax exemption on interest is 2 lakh rupees. It is important to know that if it is the first time a house is in your name, then you can claim an additional reduction on the tax.
Also Read – Top 5 Ways to Enhance Your Credit Score for Home Loan
- Health insurance – The importance of health insurance cannot be emphasized enough. A health insurance policy is the perfect way to streamline the processes beforehand and ensure protection in case of an emergency. The benefits of health insurance are many, and one of them is that you don’t have to spend the entire amount of medical bills from your pocket. Depending on the premium you pay and the type of policy, the tax exemptions on this can go up to 1 lakh rupees. Under section 80D, there is a margin for health check-ups as well.
- Life insurance – Life insurance is mainly for loved ones and securing their future. In case of death of the insured, the insurer is expected to give the sum assured to the name appointed in the insurance policy. This is to ensure that the family has enough time to get back up on their feet and they have no dearth of financial resources. Under the section 80C of Income Tax Act, the premium paid as well as the amount disbursed on maturity are both tax-saving aspects.
- Investments – Various investments that are promoted by the government are The National Pension Scheme, Senior Citizen Savings Scheme, Sukanya Samriddhi Yojana. These government schemes are curated to promote economic growth as well as social stability. These schemes by the government make the amount paid eligible for tax exemptions under the section 80CCD of Income Tax.
If you are willing to take risks, you can even invest in the Equity Linked Savings Scheme as it is eligible for tax deductions under section 80C. The minimum lock-in period of this is 3 years and maximum limit for claiming tax exemption is 1.5 lakh rupees. Starting a Public Provident Fund is also a long-term investment for which the lock-in period is 15 years and maximum limit is 1.5 lakh rupees. PPF provides tax deduction under section 80C, here are few investment options:
|5 year bank deposit||6% to 7%||5 years|
|Public Provident Fund||7% to 8%||15 years|
|National Savings Certificate||7% to 8%||5 years|
|National Pension System||12% to 14%||Till retirement|
|ELSS Funds||15% to 18%||3 years|
|Unit Linked Insurance Plan||Varies with plan chosen||5 years|
|Sukanya Samriddhi Yojana||7.60%||NA|
|Senior Citizen Saving Scheme||7.40%||5 years|
Also Read – 5 reasons why ULIPs can help you save for the long term
- House Rent Allowance – You can save tax on House Rent Allowance under section 80GG, provided it is a part of your salary structure.
- Charity – If you have made donations to an organization that assists rural development or scientific research, you are eligible for tax exemptions under the section 80G of Income Tax. Cash donations enjoy partial exemptions while bank transfers and cash deposits are fully exempt from taxes.
- Education loans – Education loans are becoming increasingly common. The interest aspect of the loan is eligible for a tax deduction under section 80E for the first 8 years of the loan repayment.
- Differently-abled dependant – If you are the guardian or parent of a specially-abled person, you can declare the same and claim an exemption on the funds of the livelihood of that person. If you are sponsoring the finances of such a person, you can claim a deduction on tax under section 80DD. If you are a person who has a certificate from the government stating you are differently-abled, then you are eligible for tax benefits under section 80U. You cannot claim tax rebate under both sections simultaneously.
- Tax structure for senior citizens – Senior citizens enjoy a different tax structure and they have more relaxations when it comes to tax payment.
These are a few ways to successfully save tax. It is important to read and under the terms carefully while enjoying these privileges. It is also important to have proper documentation in place to prove the condition for exemption.
Also Read – Basic Ideas About Commercial Property Tax