5 Best Income Tax Saving Tips of this Year 2018
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Updated date : 17 February 2020
Income tax paid by individuals and firms is an important source of income for the central government. The government needs funds to work for the welfare of citizens, to provide services, and to undertake various kinds of infrastructural projects. Every citizen should contribute to nation-building projects by paying income tax. Income tax calculations should be done accurately and they should be filed before the deadline by using the right kind of ITR form. As per the figures of AY 2014-15, taxpayers are just 1.5% of the total population.
Any income earned from agricultural activities is 100% exempt from taxation. Most taxpayers people are employees of state and central governments and private companies. There is no tax liability, if an individual or HUF’s income per annum is less than Rs. 2.5 lakh. For senior citizens, a total income of up to Rs. 3 lakhs is exempted from the tax. For very senior citizens, there is no tax for a total income of Rs. 5 lakhs.
The income above the minimum threshold will be taxed under various slabs. However, there are other means through which tax deductions are permitted. You should be aware of the financial instruments which will help you save tax. The income tax saving tips shared by experts can be implemented to maximize your capital appreciation and minimize your tax liability.
1. Section 80C
There are various financial products which help you get tax exemption under Section 80C.
- Life insurance premium
- Annuity plan
- EPF/VPF/PPF/Superannuation funds
- 5-year tax saving fixed/term deposits in banks/post offices
- ELSS of a mutual fund
- Principal of home loan
The contribution made to pension schemes can be deduced under Section 80CCD of Income Tax Act. You should fulfill certain conditions to get an exemption. The deduction is applicable for contributions towards pension schemes notified by the government.
- For employees, the contribution to pension funds should not exceed 10% of the salary
- For self-employed professional, the contribution should not exceed 20% of the gross total income
The total deduction under 80C and 80CCD will not exceed Rs. 1.5 lakh per annum.
The section permits an additional deduction of Rs. 50,000 from gross total income for investments made in notified pension schemes.
- Atal Pension Yojana
The employer’s contribution of up to 10% of the basic salary is exempted from income tax liabilities. As per the terms of the employment, the salary may include a dearness allowance as well.
Employee’s Provident Fund (PF) or Voluntary Provident Fund (VPF) contribution will be deducted from the monthly salary of the employee. An employer can contribute up to 12% of the salary. The excess contribution will be taxable in the taxpayer’s hands. If the rate of interest on the PF account is up to 9.5%, there will not be a tax on the return. If the interest is higher than 9.5%, the additional income earned will be taxable.
The applicable rules for the EPF and PPF are the same. If an employee contributes an additional amount beyond the minimum contribution stipulated by law, the additional contribution is called VPF. The additional contribution is also eligible for tax deduction under Section 80C.
The interest earned on the EPF/PPF is exempted from the tax. The maturity proceeds are also tax exempted. Instead of investing in other financial products, an employee can increase his/her contribution up to INR 1.5 lakh per year, so that the money will be deducted automatically and it is possible to get tax exemption as well.
2. Home loan
The principal amount paid towards your home loan will be exempted from income tax under Section 80C. You can claim an exemption of up to Rs. 1.5 lakh per annum on the principal amount.
The interest paid on the home loan will be exempted from income tax under Section 24 and Section 80EE. An interest amount of up to Rs. 2 lakhs will be exempted from the income tax.
You should go for a home loan as per your eligibility, so that you can get income tax exemption on the principal as well as the interest amount. It is also possible to achieve capital appreciation in the long run. You can take one or more home loans as per the interest-repayment capability.
3. Section 80D
If you are aged below 60 years, you can claim an income deduction of up to Rs. 25,000 under Section 80D towards your health insurance premium. If you are aged above 60 years, you may claim a deduction of up to Rs. 30,000. As per the budget of 2018, a deduction is permitted up to Rs. 50,000 for senior citizens. Hence, from AY 2019-20, you can claim a deduction of up to Rs. 50,000 in a financial year. It is also possible to make claim of up to Rs. 5000 towards preventive health check-ups.
You can save up to Rs. 50,000 in a financial year by contributing to the National Pension Scheme. The NPS contribution of over and above Rs. 1.5 lakh was exempted under Section 80C. You will get an additional exemption under Section 80 (CCD). The retirement scheme, NPS, will come with many benefits and you can make the most of your investment. At least 40% of the NPS maturity fund should be invested in an annuity plan to get a monthly or annual pension.
For central/state government employees who joined after 2004, NPS is mandatory. The NPS tier-I account is mandatory and the NPS tier-II account is voluntary. If you subscribe to an NPS account, PRAN (Permanent Retirement Account Number) will be allotted to you. The account can be monitored online. You can opt for your favorite fund and allocate funds as per your needs. The NPS tier-II account will be similar to your bank’s savings account.
5. Section 80E
The interest amount on an educational loan for self, spouse, or dependent children will be exempted from the income tax. There is no limit on the amount that can be claimed towards the exemption.
However, you should take a loan from recognized banks and financial institutions to be eligible for the tax exemption. You can also take a loan from approved charitable institutions.
The loan amount can be used for higher studies. It can be used to bear the educational expenses in India or abroad. To get an exemption from the tax, you should obtain a certificate from the bank. There is no tax benefit for the principal amount.
The deduction on the loan will start from the year of repayment of interest. If the loan is repaid in less than four years, the tax exemption is available for four years only.
Other Tax-saving Instruments
The gains made through investment in equities and mutual funds will be exempt from income tax up to Rs. 1 lakh per year. The limit of Rs. 1 lakh per year is applicable from AY 2019-20. For previous financial years, there was no limit on the gains earned in the equity market.
The equity-linked savings scheme will deliver good returns as there will be a lock-in period of 3 years. You can also claim an exemption on the principal amount of up to Rs. 1.5 lakh per year.
Senior Citizen Savings Scheme is available for individuals who are above 60 years of age. It is a long-term saving option. You can open one or more SCSS accounts at the post office or bank. The deposits made in SCSS are exempted from income tax up to Rs. 1.5 lakh per year. The interest on the account will be announced by the government. The maximum investment limit is Rs. 15 lakhs. The account can be held for up to 5 years and it can be extended for another 3 years.
Sukanya Samriddhi Yojana (SSY)
The account is exclusively designed to offer financial benefits to the girl child. An account can be opened by a parent or guardian of a girl child whose age is up to 10 years old. The current interest rate on SSY is 8.6%. However, it will be revised by the government on a regular basis. The deposits can be made into the account until the girl child attains the age of 15 years. Partial withdrawals can be made on account of girl child’s education or marriage after attaining 18 years of age. The account can be closed by the girl after attaining 21 years of age. If the account is not closed, it will continue to earn the interest.
To Sum Up
There are various kinds of investment options. These tax saving tips will help you choose right kind of financial products as per your needs. You should optimize your savings for a secure future. By investing in different kinds of products, you can optimize your tax-saving potential and your returns. The investment should fulfill your current as well as future needs. You should choose short-term as well as long-term financial products. Happy tax saving to you!
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