Category : New to Investing December 19, 20235 minutes read
Navigating the intricacies of India’s tax landscape can be a daunting task, but with strategic financial planning, you can minimise your tax burden while maximising your savings. This article talks about the best strategies on how to save taxes in India. From exploring various sections of The Income Tax Act of 1961 including Section 80C tax exemption, 80D investment options, and deduction under Section 80E to understanding how to save capital gains tax, this article will provide insights into various avenues available to salaried individuals and entrepreneurs. This article enables readers to make wise financial choices that result in considerable tax savings.
Saving taxes in India involves employing various legal strategies and investments to reduce your taxable income or claim deductions. This is how to save tax on your income: By utilising deductions under Section 80D, Section 80C, Section 24, Section 80G, and Section 115 BAC and exploring tax-saving investments like the NPS tax exemption, charity donation tax deduction and tax-free bonds.
Here’s how to save tax for salary above 10 lakhs income; consider these steps:
Invest in Section 80C: Utilize the ₹1.5 lakhs limit by investing in instruments like PPF, NSC, ELSS, and more.
Home Loan Interest: Claim deductions under Section 24 for home loan interest up to ₹2 lakhs.
Health Insurance Premium: Deduct up to ₹25,000 (₹50,000 for senior citizens) under Section 80D.
NPS Contribution: Invest up to ₹50,000 for an additional NPS tax exemption under Section 80CCD(1B).
Standard Deduction: If salaried, avail of the standard deduction of ₹50,000.
Professional Tax: Deduct any professional tax paid from your income.
Investments for 80CCD(2): If employed, your employer’s contribution to NPS can be claimed as a deduction under Section 80CCD(2).
House Rent Allowance: If applicable, claim HRA exemptions per the rules.
Invest Wisely: Invest in tax-efficient investment options and consult a financial advisor for personalised guidance.
To avoid Tax Deducted at Source (TDS) on your salary, you can provide your employer with investment declarations and proofs for eligible deductions and exemptions such as HRA, investments under Section 80C, 80D, etc. This will help your employer calculate TDS accurately. Additionally, you can submit Form 15G (for individuals below the taxable limit) or Form 15H (for senior citizens) to your bank if applicable. Ensuring your income falls below the taxable threshold and optimizing your investments can also help reduce TDS on your salary
While you can claim deductions under Section 80C for various investments and expenditures, it’s essential to maintain proper documentation as proof of these investments. If you’re audited or asked to provide evidence by the Income Tax Department, you’ll need to show proof of the investments you’ve claimed deductions for. Therefore, keeping records of your investments and expenses is generally advisable to support your Section 80C tax exemption.
The House Rent Allowance (HRA) rules determine the amount of tax-free rent. The least of the following three amounts is the maximum HRA that can be claimed as a deduction:
Actual HRA received.
50% of your basic salary (for metropolitan cities) or 40% (for non-metropolitan cities).
Actual rent paid minus 10% of your salary.
The balance amount of HRA, if any, is taxable
The limit for tax exemption on PPF (Public Provident Fund) is up to ₹1.5 lakhs in one financial year.
Yes, the maturity proceeds from a Public Provident Fund (PPF) account, including both the principal amount and the interest earned, are tax-free after the completion of fifteen years from the end of the financial year in which the account was opened.
To save tax on the sale of property in India, you should utilize exemptions like Section 54 (residential property) or Section 54F (any asset).
One of the best ways on how to save capital gain tax in India is to reinvest in another property (Section 54) or capital gains bonds (Section 54EC) for long-term gains.
Generally, there is no personal loan tax benefit. However, if you use the loan for business purposes, interest might be a deductible business expense.
The interest you earn on FDs is taxable unless interest is less than Rs. 40,000 for individuals or Rs. 50,000 for senior citizens
Introduction
A wise man said, only death and taxes are certain in this world. While we must not skip paying taxes, we may reevaluate our financial decisions and choose wisely in order to pay less in taxes overall.
Every nation’s financial system depends on taxes, and India is no exception. In India, the government levies income taxes on individuals depending on their annual income.
The central and state governments of India levy various taxes to raise money for governance, public services, and infrastructure development. Direct tax and indirect tax are the two main tax types. Indirect taxes include GST, customs duty, and others, whereas direct taxes include income tax, gift taxes, capital gain tax, and corporate tax.
The old tax regime and the new tax regime are the two tax regimes that Indian citizens can select from. The methods used to determine taxable income and the available exemptions and deductions differ between India’s old and new tax systems.
In essence, the old regime allows taxpayers to lower their taxable income through deductions, while the new regime offers reduced tax rates with fewer deductions.
Income Tax Slabs: New vs Old Tax Regime
| Annual Income (INR) | Old Tax Regime | New Tax Regime |
| Up to 2.5 Lakhs | Exempt | Exempt |
| 2.5 – 5 Lakhs | 5% | 5% |
| 5-7.5 Lakhs | 20% | 10% |
| 7.5 – 10 Lakhs | 20% | 15% |
| 10 – 12.5 Lakhs | 30% | 20% |
| 12.5 – 15 Lakhs | 30% | 25% |
| Above 15 Lakhs | 30% | 30% |
Read more about the new vs old tax regime!
How to Save Tax: Exploring Key Sections in the Income Tax Act
Wondering how to save tax in the new tax regime or old tax regime?
These sections are just a few examples of the many provisions within the Income Tax Act that offer taxpayers opportunities to reduce their tax burden through specific financial actions.
Section 80C: Under Section 80C tax exemption, taxpayers can claim deductions up to 1.5 lakhs from their gross total income by investing in tax-saving instruments such as Employee Provident Fund (EPF), Fixed Deposits (FDs), Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS), and more. Principal repayment amount of home loans is also eligible under this section.
Section 80D: This section encourages taxpayers to invest and thus deductions for premiums paid. The 80D investment options include health insurance policies.
Section 80E: This section included deductions on interest payments for education loans taken for higher education.
Section 80G: This section includes deductions for donations made to certain charitable institutions and funds.
Section 80TTA: Claim deductions on interest earned from saving accounts up to a maximum ₹ 10,000 under this section.
Section 80CCD(1B): Additional deductions beyond the limit of Section 80C of Rs. 1.5 lakhs.
Section 24(b): Claim deductions on the interest paid on home loans for self-occupied or let-out properties.
Section 10(14): Allowances such as HRA, conveyance allowance, and leave travel allowance up to certain prescribed limits.
Strategies on How to Save Tax for Salaried Individuals
For the salaried class, here is how to save tax for salary above 10 lakhs:
- Invest in 80C Tax Exemptions.
- Maximize HRA Benefits
- Optimize NPS Contributions under Section 80CCD(1B).
- Utilize 80D for Health Insurance.
Strategies on How to Save Tax for Entrepreneurs
Entrepreneurs can also employ various strategies to minimize their tax liability:
- Keep meticulous records of business-related expenses, as you can deduct them from your taxable income.
- Owning business assets gives you the freedom to claim depreciation, which reduces your taxable income.
- The Income Tax Act offers deductions for certain business expenses, like research and development.
- Entrepreneurs have an option to invest in retirement-oriented schemes like the Voluntary Provident Fund (VPF) to save taxes and build a retirement fund.
There are two tax regimes under which citizens can file their taxes, the new tax regime and the old tax regime. Citizens can save tax under exemptions available in Section 80C, 80D, 80E, 80TTA, 80CCD(1B), and 24(b).
Salaried individuals can save tax by investing in 80C tax exemptions, maximising HRA benefits, Optimising NPS contributions and using 80D for health insurance. To save tax, entrepreneurs can keep records of business-related expenses and deduct it from taxable income. They can also invest in retirement-oriented schemes to save taxes.
Section 80C Tax Exemption of the Income Tax Act in India allows individuals and Hindu Undivided Families (HUFs) to claim deductions from their gross total income by investing in certain financial instruments and expenses. The maximum deduction allowed for tax exemption under Section 80C is Rs. 1.5 lakhs in a financial year.
Save tax by investing in Bandhan Tax Advantage (ELSS) Fund Now!
- Public Provident Fund (PPF): With a 15-year lock-in term, the account holder is not allowed to withdraw the entire amount. However, partial withdrawals are allowed after the 7th year. There is also a tax exemption on PPF interest earned.
- National Pension System (NPS): A retirement savings plan called NPS enables citizens to make contributions to their pension fund. Section 80C and Section 80CCD(2), respectively, allow for deductions for contributions made by a person (up to 10% of pay plus dearness allowance) and by an employer (up to 10% of base salary plus dearness allowance). The NPS tax exemption has an additional deduction of up to Rs. 50,000 under Section 80CCD(1B).
- National Savings Certificate (NSC): NSC is a fixed-income savings scheme offered by the government with an appointed maturity period of 5 or 10 years. The interest earned on NSCs is taxable, but when reinvested, it is eligible for deduction under Section 80C. However, the interest accrues yearly and is added to your income.
- Fixed Deposits (FDs): Certain 5-year fixed deposits offered by banks and post offices also qualify for deductions. However, how much FD interest is tax-free? None. The interest earned on these FDs is fully taxable. It’s important to note that only the FDs with a lock in period of 5 years are eligible for this deduction.
- National Savings Scheme (NSS): The amount invested in NSS schemes like SCSS, PPF, Sukanya Samriddhi Yojana, NSC, etc., is eligible for deduction in the investment year. However, the NSS tax benefit does not apply to the interest earned.
- Life Insurance Plans: Premiums provided for life insurance policies, whether for yourself, your spouse, or your children, are eligible for tax deductions. The Life insurance tax benefits should not exceed the limit 10% of the sum assured for policies issued after April 1st, 2012.
Individuals can save tax under Section 80C through:
- Public Provident Fund (PPF)
- National Pension System (NPS)
- National Savings Certificate (NSC)
- Fixed Deposits (FDs)
- National Savings Scheme (NSS)
- Life Insurance Plans
How to Save Tax under 80D Investment Options?
Deduction under Section 80D of the Income Tax Act in India provides individuals with deductions on premiums given towards health insurance policies for themselves, their families, and dependent parents. The deductions are available for both individual and Hindu Undivided Family (HUF) taxpayers. The maximum deduction limit varies based on the age and composition of the insured individuals.
Here’s a detailed explanation of how to save tax and get deduction under Section 80D:
1.Individual and Family Coverage:
- Taxpayers can claim deductions for premiums paid on health insurance policies covering themselves, their spouse, children, and dependent parents.
- If both the taxpayer and their parents fall among the senior citizens (60 years or above) category, the maximum deduction limit is higher.
2. Deduction Limits (for non-senior citizens):
- For self, spouse, and the children: Up to Rs. 25,000
- For parents (not senior citizens): Up to Rs. 25,000
- Total deduction limit: Up to Rs. 50,000
3. Deduction Limits (for senior citizens):
- For self, spouse, children, and parents: Up to Rs. 50,000
- Total deduction limit: Up to Rs. 1,00,000
4. Additional Deduction:
- An additional deduction of up to Rs. 5,000 is available for preventive health check-ups within the above mentioned limits.
Section 80E Deduction: How to Save Tax on Education Loan Interest
Deduction under Section 80E allows to claim deductions on the interest paid on loans taken for higher education from any financial institution or approved charitable institution, including for the taxpayer, their spouse, children, or a student they’re the legal guardian of. The Section 80E deduction is available for up to 8 years, starting from the year the interest payment begins.
Section 80EE Deduction: How to Save Tax on Home Loan Interest (First-Time Home Buyers)
Section 80EE Deduction provides an additional deduction on interest payments for first-time homebuyers over and above the benefits available under Section 24(b) of the Income Tax Act.
While deductions available under the Income Tax Act, such as those under Section 80C, can provide significant tax benefits, there are also certain risks and considerations that individuals should keep in mind when utilizing these deductions:
- Lock-In Periods: Many tax-saving investments have lock-in periods, restricting access to funds for a specific duration. This is one of the disadvantages of PPF.
- Market Risks: Investments linked to the stock market are subject to volatility and potential losses, such as the risk in ELSS is higher.
- Liquidity Constraints: Lock-ins limit your ability to access funds in emergencies.
- Inflation Impact: Fixed returns might not keep pace with inflation, eroding real value.
- Opportunity Costs: Funds invested for tax benefits could be used elsewhere for better returns, such as charity donation tax deduction.
Looking for a tax-saving investment that may help you create wealth in the long-term?
Long-Term Outcomes of Saving Tax Through These Methods
Saving tax through the methods mentioned earlier, such as investments under Section 80C, can have several long-term outcomes:
- Wealth Accumulation: These tax-saving investments encourage consistent savings, contributing to long-term wealth accumulation. Over time, the compounding effect can significantly increase the value of your assets.
- Retirement Planning: Investments like the NPS and PPF help you build a substantial corpus that provides financial security during retirement.
- Goal Achievement: Tax-saving investments can be aligned with specific financial goals, such as education, buying a house, or travel. The disciplined approach fosters goal-oriented savings.
- Diversification: You can diversify the investment portfolio, by spreading risk and potentially enhancing returns over the long term.
- Financial Discipline: Committing to tax-saving investments fosters financial discipline, promoting consistent savings habits beyond tax benefits.
In a Nutshell:
Although 80C investment options can help save tax, all investments are associated with some risks. Lock-in periods, market risks, liquidity constraints, impact of inflation and opportunity costs are some of the risks associated with using investment options for tax deductions. However, long-term use of tax-saving can have several benefits including:
- Wealth Accumulation
- Retirement Planning
- Goal Achievement
- Diversification of Investment Portfolio
- Financial Discipline
In conclusion, it is vital to remember that while employing tax-saving tricks is important, concentrating on the big picture is equally important. Both individuals or businesses in India have various possibilities for tax savings.
The standard approach on how to save tax is to avail section 80C tax exemption, which includes investments in instruments such as PFs, NSCs, and ELSS.
Additionally, you can also use deductions for medical insurance premiums (under Section 80D), home loan interest payments (under Section 24), and donations to charitable organizations (under Section 80G).
As a taxpayer, you can also consider the optional tax regime introduced under Section 115 BAC which offers reduced tax rates with certain conditions.
Furthermore, you can explore exemptions on specific allowances, like House Rent Allowance (HRA), and make use of tax-saving investment opportunities like the National Pension System (NPS) and tax-free bonds.
Tax savings require careful planning, wise investments, and a thorough knowledge of tax regulations. You can drastically lower your taxable income by leveraging the deductions, exemptions, and investment opportunities offered by the Indian tax system. The ultimate objective is to reduce your tax burden while maintaining your financial stability.
