8 Ways of Saving Income Tax
Updated: Oct 11, 2021
The government of India provides various options and places where one save tax. There are various avenues where a person can invest and claim deductions to reduces the taxable income.
There is a huge difference between Tax planning and Tax evasion. The ways mentioned in this blog to save tax, are legal, legitimate and are ways of saving tax and not evading tax.
1) Deductions under section 80C- The most commonly used method of saving tax is to invest a particular sum of money in government-approved investment options. These options will provide you with returns on your investments and also help you save tax. You can claim deductions up to ₹1,50,000. Some of the approved investment options are-
Tax-Saver FDs: They carry a fixed rate of interest currently between 7-8%. The interest on these FDs is taxable. The tenure is around 5 years.
PPF (Public Provident Fund): Public Provident Fund is a government established savings scheme with a tenure of 15 years available at most banks and post offices in India. Its rate changes every quarter but is currently 8%. The interest on PPF is tax-free.
ELSS Funds: These are mutual funds that invest a minimum of 80% of their assets in equity. They have a lock-in of 3 years. The returns on ELSS funds are subject to Long Term Capital Gains Tax (LTCG) at 10%
NSC (National Saving Certificate): With a Tenure of 5 years, the rate of interest is 8%. The interest on NSC is also automatically counted towards the Rs 1.5 lakh 80C limit and is tax-deductible.
EPF: Under the EPF Act. 12% of the pay of employees in the organised sector is deducted from Employees Provident Fund.
Senior Citizens Savings Scheme: SCSS has a tenure of 5 years and is available to those above 60. The rate for SCSS is higher than prevailing FD rates and is currently 8.7% (it is taxable).
Sukanya Samriddhi Yojana: Parents of a girl child below the age of 10 can get this deduction. This account has a tenure of 21 years or until the girl marries after turning 18. It has an interest above prevailing rates (currently 8.5%) and the interest is tax-free.
2) Buy Health & Life Insurance- A deduction up to Rs 25,000 is available for health insurance premiums under Section 80D. This is over and above the deductions listed above. For senior citizens, this limit is increased to Rs 50,000. A person contributing health insurance for himself and senior citizen parents can avail of the combined deduction up to Rs 75,000 per annum. Purchase or renewal of life insurance cover, along with annuity payments on such policies through yearly salary is eligible for tax waivers of up to ₹1.5 Lakh under Section 80CCC as well.
3) Claim deductions for House Rent Allowance- Tax exemptions under House rent allowance (HRA) are granted under Section 10(13A). Your salary break-up must include an HRA component to avail compensation against the same. If you do not get HRA but pay rent, you can claim a deduction under Section 80GG up to Rs 60,000 per annum.
4) Get deductions for home loan interest- Total annual income spent towards repayment of the principal borrowed amount is eligible for deductions of up to ₹1.5 Lakh under Section 80C. If you have a home loan, the interest payable on it is tax-deductible under Section 24 of the Income Tax Act up to Rs 2 lakh per annum.
5) Education Loan- Section 80E of the Income Tax act provides for Deduction on Interest on Education Loan. Complete tax exemption is available on the repayment of the interest of an education loan. There is no limit to the deductible amount.
6) Invest in National Pension Scheme (NPS)- This deduction under Section 80CCD(1B) up to Rs 50,000 is only available for contributions to the NPS. The NPS allows you to invest in equity and debt pension funds and build a retirement corpus. You can withdraw it at age 60.
7) Make donations to charity- Government encourages you to make donations and help the poor & needy. Donations to the PM relief fund or notified NGOs or to political parties can give you 100% tax deductions under Section 80G.
8) Deductions for Electric Vehicle loan- A Deduction in respect of interest paid on loan taken for the purchase of an electric vehicle is allowed to Individuals. Deduction for interest payments up to ₹1,50,000 is available under Section 80EEB. An individual taxpayer may have an electric vehicle for personal use or business use. Only an individual can claim this deduction, no business/Huf/company/partnership can claim this.
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