Paying Income tax at the end of financial years becomes challenging for most of the people. Most of the hassle bustle is based on the submission of various insurances and rent receipt. But if you want to save on taxes and safe yourself from unnecessary financial stress than it is important to check out all the instruments for tax-saving.
In order to know that how much you can actually save on taxes it is important to understand the slabs. Based on the annual income of an individual, the tax payers are categorized in income tax slab. So, if you are really looking for a way to save on taxes, which eventually everyone does then you can either, invest your finance in markets and insurance or put them in saving instruments for future. Moreover, you can also use the different allowances to save your taxes. Below we have given some insight on ways to save taxes.
Best Ways to Save Tax
Buying insurance policies have many benefits but one of its major benefits is that it helps you to save on taxes. Let us discuss how insurance helps one save income tax.
Life insurance policies not only provide life coverage to an individual but are also an excellent way to save on taxes. In life insurance policy one need pay premiums every year which in return is paid back in large lump-sum amount in case of demise of the insured person. The premium paid for life insurance policies are liable of tax deduction under section 80C of Income Tax Act.
Unit Linked Insurance Plan are insurance plans are market linked plan. Under this plan the investors are offered the benefit of both investment and protection under single plan. Financial investments done under this scheme are also eligible for tax deduction plus it also provides an opportunity to help your money grow.
As the cost of medical treatment and medical care is accelerating rapidly; buying a health insurance policy has much become a necessity. Health insurance policies ensured that you have enough finances to take care of your medical expenses. If you pay premiums for your health insurance, then you can save your taxes up to Rs15,000 to Rs20,000.
Investments are financial instruments where you invest today and reap benefits later. Besides this, investments also help you to save on taxes. Some of the common investment options are-
Equity Linked saving schemes (ELSS) can be used to gain tax benefit. ELSS comes with a lock-in period of 3 years. The lock-in period of mutual fund is less as compared to fixed deposit and PPF’s. One of the major benefits of this scheme is that it offers a huge return on investment.
Tax Saving Fixed Deposit:
Fixed deposit offered by different banks is used as a tax saving instruments. One can put an amount Rs1lakh to Rs1.5lakh in these deposits and can gain an attractive interest along with the benefit of tax saving for that year. The fixed deposit comes with a lock in period of 5 years.
Post Office Time Deposit-
Post office time deposit is same as fixed deposit provided that the person has no limits on how much amount he/she can put in it. The minimum amount that is required to put in post office time deposit is Rs200 and has a compelling interest rate as 8.5% per annum. With a lock in period of 5 years an individual can avail tax benefit under section 80C of Income Tax Act.
National Saving Certificates-
National Saving Certificate can be availed from the post office. One just need to do a minimum investment of Rs100. NSC comes with a lock in period of 5 years and 10 years and the investments made in NSC’s are eligible for tax exemption.
Provident Funds also known as Pension Fund as they are created with a goal of long term return. Deposits made in provident fund are eligible for tax deduction under section 80C of Income Tax Act.
Home Loans for Construction or Buying a House:Home loans are also an effective way to save taxes. The principal and interest paid each year up to Rs1,00,000 are eligible for tax benefit under section 80C and Rs1.5 lakh for the interest under section 24 of Income Tax Act.
Home Loan for Renovation:While many people know about the advantage of declaring home loan for tax exemption, very less people knows that home loan taken for reconstruction and renovation is also eligible for tax deduction.
|You may like to Read: How to efile Income Tax|
Income Tax Saving Tips for Salaried & Non-salaried Taxpayers
Every one of us is looking for options to save some extra money and saving on taxes is one way to do it. Tax liability is usually a heavy burden on all the taxpayers - be it the salaried class or the non-salaried class.
The Indian Income Tax Department allows taxpayers to save on their taxes via different media. However, to save on taxes, you need to start your tax planning well in advance.
Apart from your tax-planning, you also need to pay attention to how you receive your tax returns. This is because it you might reduce your tax liability this year but the interest earned on your savings will convert into a tax liability at the end of the next financial year.
There are several tax saving instruments to help you with your tax-planning – some of them come with an E-E-E (i.e. investment, accumulation and withdrawal are all tax exempted) status while some others allow tax deduction claims and are open to all the taxpayer classes such as salaried, business people, professionals etc. The zero tax liability incomes are found Under Section 10 of the Indian Tax Act of 1961 and tax deductions are available under the Section 80C.
Most of us have this tendency to remain relaxed at the beginning of a financial year with no hurry to plan our finances and taxes. This kind of mentality continues almost until the end of the financial year and that’s when the panic and rush begins.
Here are some ways that will give you a practical know-how on how to save tax in India. Every tax paying class is eligible to use these tax saving tools; however, investing in these instruments should be based on your requirements and needs.
Income Tax Saving Tips:
- Equity-Linked Saving Schemes
The Equity-Linked Saving Schemes (ELSS) are diversified mutual funds. Under Section 80C, one can get a tax benefit of up to Rs 1.5 lakh per year. You can get your returns in two ways: either in dividends (if one is looking for regular income), or growth option (if one wants a long-term savings scheme).
ELSS is an equity oriented scheme with 65% fund allocation in equities. Dividends in this schemes are not taxed. This makes it tax-free for both, the dividends-pay-out investors and the long-term investors. However, it is advised to diversify your investments across several ELSS so as to mitigate your risks because their returns are based on market performance.
- Long-Term Capital Gains from Sale of Long-term assets
These are long-term capital gains made from the sale of long-term capital assets. It is either sale of equity shares or equity-linked mutual funds that tax has been charged on sold trades. It is considered a long-term asset if the taxpayer has held it for 3 or more years. Any sale gains from such an asset used to be tax-free under Section 10(38). However, according to the new budget, effective 1st April 2018, there will be taxes levied on your long-term capital gains.
But, it’s not all bad news, existing investors have got an exemption for the capital gains they have made up to 31st Jan 2018. For instance, you bought a share in the year 2017 and sold it in July 2018 at a price of Rs 120. If your stock value was Rs 110 on January 31st 2018, out of your capital gains of INR 20 rupees, you will not be taxed for the INR 10 rupees.
- Agricultural Income
Any income generated from agricultural activities is exempted from tax under the Indian Income Tax Act. This is done to boost the agricultural sector. Any rent from agricultural land, income from products or from farm buildings is not taxed.
- Public Provident Fund
Under section 80C, the government has introduced the PPF Accounts to save on taxes. The investment returns on PPF accounts are tax free. PPF rate of interest is subject to change on a quarterly basis. For example, if someone is in the highest tax slab (30.9%) one gets a tax return amounting to 11.28% saving a huge amount. A PPF account can be opened by an individual in an authorized post office or bank branch. It is open to all ages, even minors. It suits investors who like low risk investments and do not want to deal with volatile equities or mutual funds
- Education Loans
Under section 80E, the interest paid on loans for higher education be it for self, spouse or children is tax free. No limit is set on this amount. One can only claim deduction for the amount of interest paid and not the principal amount.
- Educational Scholarships
As per the Income Tax Act Section 10(16), scholarships or awards granted to students are to be exempted from tax. No ceiling is placed on the amount and the total sum is received for the scholarship purpose.
- Voluntary Donations
A donation made for charity or philanthropic commitments can be claimed for tax deductions. This includes contributions to the National Relief Funds which can also be claimed as per Section 80G. Some donations get 100% deduction while others can get up to 50%, depending on the reason the donation was made. Only donations made in cash or cheque can be claimed for deductions. The Ministry of Finance has specified some organizations that one can make donations to and claim tax deductions for.
- Home Loans
A home loan shows you how to save tax in India – 5 times. There are 3 ways through which one can save on taxes using home loans. This provides a huge financial saving for a taxpayer. Section 80C allows you to claim a deduction on the principal amount repaid in the current financial year. The deduction is up to Rs. 1,50,000. Section 24 allows you to claim a deduction of up to Rs. 2, 00,000 on the interest paid on the home loan. Under Section 80EE, first time home buyers can claim a benefit of up to Rs. 50,000. One can also get a second home loan if they are residing in the residence they took their first home loan on. The second home loan has got no limit set on tax deduction.
- Interest Income on saving accounts
Under Section 80TTA, interests earned under saving accounts up to a maximum of Rs 10,000 can be claimed as a deduction. It is not totally tax exempted as anything above the cap of Rs 10,000, is counted as your taxable income. On your ITR, it is marked as income from other sources and is later on deducted as per Section 80TTA.
- HUF Receipts
Hindu Undivided Family status is given to the Hindu, Sikh and Jain families. According to the Income-tax department, HUF is a separate tax entity, with a different PAN and bank account that is exempted from tax. This is as per Section 10(2) that clearly states that any amount received from these families’ income or family estate is exempted from tax obligations. A person is allowed to pay tax from their salary under their name and deposit their secondary income in a HUF account that is not liable to tax.
- Unit-linked Insurance Plan
This investment product not only provides life insurance but also channels your savings into market-linked assets. The asset allocation varies between debt and equity offering around 5-9 fund options. On exiting the policy (allowed only after a minimum of 5 years) or at maturity, the amount given is tax free. This is a long-term investment (of 15-20 years) and an investor should remember that the longer the investment, higher the returns.
- Traditional Insurance
This plans come with a fixed period of investment and a sum assured. These are either whole life or money back plans. The premiums get a tax benefit under Section 80C but in case of death, or the maturity of the plan, the value is tax-free. It is however key to note that they are inflexible and the return rates are low.
Some Additional Income Tax Saving Tips -
1. The interest paid on education loan in the country comes under the section 80E of the tax deduction.
2. Under section 80RRB, the tax deduction is applicable on the income earned by way of royalties and patents. For the patent registered under the patent act,1970 up to the amount of Rs3,00,000 income tax can be saved.
3. Under section 80U of Income Tax Act, tax deduction is applicable for disable people. To avail the tax benefit under this section one need to show their disability certificate. Depending on the severity of disability up to Rs1,00,000 can be non-taxed.
By choosing the most suitable tax saving investment plans in your agenda you are save a lot and can ultimately achieve your financial goal at the end of the year.
There are many more ways that can help you to save taxes in India. Amounts of gifts on marriage or inheritance from a will are tax exempted. Acquiring a medical insurance is beneficial to you, your spouse and/or child and at the same time, a tax deduction can be claimed from it. For business people, travel and food expenses can be filed to save on tax in addition to the ways mentioned above.
The salaried taxpayers can use their leave travel allowances and house rent allowances to save on tax. Medical bills and Gratuity can also be filed to save on Income tax. Some employers permit restructuring your salary so as to decrease your tax liability. The government has measures and instruments in place to reduce the financial burden on taxpayers when it comes to paying taxes.
It is important to note not all tax savers are the same in terms of asset-class, so one should choose to use the instrument that best suits their individual needs. The safety, liquidity, and returns of the tax saving instrument should be taken consideration. No financial decision should be made based solely on the returns to be gained from the product. Your goal is not only to save on taxes, but to also achieve different goals you have set for yourself. Hence, one should always have clear-cut objectives and should link their tax instruments to the desired goal.
Income Tax Saving Tips – FAQs
1. What is the best ways to save tax?
Below enlisted are few of the best ways to save taxes in India:
- Investments made under Section 80 C for an amount of up to Rs 1.5 lakhs against PPF, home loan, etc.
- Investments made under Section 80D for medical insurance. Can claim a deduction of up to Rs 25,000
- Investments made under Section 80EE against home loan interest and claim a deduction of up to Rs 50,000.
2. Why do we save tax?
We save on taxes to make sure that our hard-earned money remains with us and we don’t end up paying a major part of it to the government.
3. Where should I invest to save income tax?
Below enlisted is the best and top 10 investment avenues in India:
- PPF (Public Provident Fund)
- Life Insurance Plans
- Health Insurance Plans
- ELSS (Equity Linked Savings Scheme)
- Bank FD (Fixed Deposit)
- National Pension Scheme (NPS)
- Senior Citizen Savings Scheme
- EPF (Employee Provident Fund)
4. How can I save tax other than 80c?
While investments made under section 80C are undoubtedly the best to help you achieve your tax saving purposes, there are still many other investment options that can help you save on taxes.
Below-enlisted are the 7 best tax saving options other than Sec 80C.
- National Pension Scheme (NPS)
- Interest on education loan (Section 80E)
- Rajiv Gandhi Equity Savings Scheme (Section 80CG)
- Home Loans
- House rent allowance (Section 80GG)
- Health Insurance (Section 80D)
- Medical treatment under Sec 80DDB
- Donations (Section 80G)
5. How can I save income tax?
Here are few deductions that can help you save income tax in India:
- Deduction on rent
- Deduction on higher education loan
- Deduction on donations
- Deduction for physical disability
- Deduction on kids’ tuition fees
- Deduction on expenses incurred on specified diseases’ treatment such as AIDS, Cancer, etc.
- Deduction on bank savings account’s interest
- Deduction on personal loan interest (taken for the purpose of house purchase)
- Deduction on interest paid on the loan for revamp/reconstruction of home
- Deduction on Long-term Capital Gains (LTCG) investments under Section 54 and 54F
6. What are the taxes saving instruments?
Tax-saving instruments are great financial avenues that effectively participate in various financial needs of an individual’s life. The role of tax-saving instruments is not limited to saving taxes only; rather they do much more than that.
Besides some tax-free expenses, these instruments majorly consist of tax-saving investments which range from pure equity to pure debt instruments.
7. How much money can save on taxes?
The Income-tax Act of India has a number of sections that taxpayers can use to reduce their taxes. The most common sections in Income Tax Act are 80C, 80CCD (1B), 24 (b) and 80D.
However, every section amongst these has a pre-set maximum investment amount. This maximum investment amount is decided by the government. Based on the income tax slab an individual falls into, they do their maximum tax saving.
For instance, an individual paying 20% of her/his income as tax will save around Rs 20,000 on an investment of Rs 1 lakh; whereas an individual in the 30% bracket will save Rs 30,000 on the same investment.