How to save tax in India : 20 Steps

· Read time: 6 mins

A man doing his taxes using a calculator and pencil on a white background

There is multiple options and contradictory advice. And a deadline that’s imminent fast. Many taxpayers find themselves in this circumstance at the beginning of the year when they have to make tax-saving investments.

Before you make a option, go through our cover story to make out which is the best option for you. We have ranked the most common investments under Section 80C on basic parameters: returns, safety and taxability.

The Income Tax Act provides many more allowances and incentives, apart from the popular 80C, which could decrease tax liability. Here are some of elegant tips to assist you save more and reduce taxes.

Consuming Section 80C

Section 80C provides a greatest deduction of up to Rs. 1,00,000. Use this section to the fullest by investing in any of the obtainable investment options. A few of the options are as follows:

  • Public Provident Fund
  • Life Insurance Premium
  • National Savings Certificate
  • 5 year fixed deposits with banks and post office
  • Equity Linked Savings Scheme
  • Tuition fees paid for children’s education, up to a maximum of 2 children

Public Provident funds: If you are an employee, you must have noticed a part of your salary going into the Employees’ PF. Your involvement to the EPF is adequate for tax deduction of up to Rs 1 lakh under Section 80C (total tax deduction claimed under Section 80C for eligible investments cannot exceed Rs 1 lakh.) From the current financial year, you can also invest up to Rs 1 lakh in Public Provident Fund for an 8.6 per cent return and a deduction.

Life Insurance Premium

The premium paid for a policy that covers you, your spouse and dependent children is deductible up to Rs 1 lakh under Section 80C. You can purchase both cash-back endowment plans as well as term insurance plans.

National Savings Certificate

Another safe debt option is National Savings Certificates (NSCs). In the latest issue of National Savings Certificates, you have two instruments with maturity of 5 years and 10 years with interest rates of 8.4 per cent and 8.7 per cent, respectively.

Investments up to Rs 1 lakh in NSCs are eligible for tax deductions under 80C but the interest, compounded semi-annually, is taxable. Interest rates are benchmarked to government securities of equivalent maturity periods, with 10-year NSCs offering an additional 50 basis points return.

Fixed Deposits

You can also consider investing in 5-year fixed deposits with banks and post office. The interest accrued is taxable.

Equity-linked savings scheme

Mutual funds that invest in equities and equities-related securities can be utilized to claim tax deduction under Section 80C. The lock-in period for ELSS investments is only 3 years judge against with a minimum five years for other tax-saving instruments. You do not want to pay capital gains tax at redemption.

Tuition fees paid for children’s education

You can claim deduction up to Rs 1 lakh under 80C for tuition fees paid for two children. Only fees paid for full-time courses of Indian institutions are eligible for a claim. Tuition fees paid for children’s education is up to a maximum of 2 children. Expenditure on transportation, development fee, and hostel fees, etc, as well as coaching classes cannot be clubbed for exemption.

Options beyond 80C

If you have exhausted your limit of Rs. 1,00,000 under section 80C, here are a few more options:

Section 80D – Deduction of Rs. 15,000 for medical insurance of self, spouse and dependent children and Rs. 20,000 for medical insurance of parents above 65 years

Section 80G- Donations to specified funds or charitable institutions.

 Salary Restructuring

Restructuring your salary may not always be probable. But if your company allows, or if you are on good terms with your HR department, restructuring a few components could reduce your tax liability. Option for food coupons instead of lunch allowances, they are exempt from tax up to Rs. 50 per meal. Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred for these allowances to reduce tax. Opt for the company car instead of using your own car, to reduce high prerequisite taxation.

Senior citizens’ savings

If you are 60, you can invest in Senior Citizens’ Savings Scheme while gross a higher return. From the next fiscal, SCSS will offer an interest of 1 percentage point more than the five-year government bond. Currently, senior citizens get a 9 per cent annual interest on deposits. You can have multiple accounts but your total investment in SCSS cannot exceed Rs 15 lakh. No withdrawals are allowed but you can close your account after a year. There is a deduction of 1.5 per cent interest if the account is closed between one and two years. If the account is closed after two years, 1 per cent interest is deducted. The investment qualifies for deduction under Section 80C but the interest is taxable.

 Infrastructure bonds

Invest in infrastructure bonds for additional deduction of Rs 20,000 under Section 80CCF. Taxpayers in the highest bracket of 30 per cent tax rate can save up to Rs 6,180 in taxes (including 3 per cent education cess on income tax). The maturity proceeds of infrastructure bonds are taxable.

House Rent Allowance

Most employers include HRA in your salary. The HRA exemption limit is the least of the following:

a) Actual HRA received

b) 40 per cent of the basic salary (50 per cent in metros) or

c) Rent paid in excess of 10 per cent of basic salary.

If your salary does not include HRA, you can claim a deduction of up to Rs 2,000 per month for rent paid. However, you or your family should not have a house in the place of accommodation. You should also not have a self-occupied house. In this case, the least of the following can be claimed: under Section 80GG:

  • Rs. 2,000 per month or
  • 25 per cent of the total income or
  • Excess of rent paid over 10 per cent of total income

If you have let out a property, you can claim a 30 per cent deduction of the rental income for maintenance. You can also deduct municipal taxes paid for the property.

Home Loans helps Tax Saving

Use your home loan competently to save additional tax. The principal component of your loan, is incorporated under Section 80C, offering a deduction up to Rs. 1,00,000. The interest portion provides a deduction up to Rs. 1,50,000 separately under Section 24.

Pension funds

Building a retirement quantity will lower tax liability as contributions up to Rs 1 lakh are deductible under Section 80C. Anyone between 18 and 55 years can invest in the National Pension System (NPS), unit-linked pension plans or mutual funds. Tax deductions are allowed only for assistance to a tier-I NPS account with a minimum annual investment of Rs 6,000 without any premature withdrawals until the age of 60. Your employer’s involvement towards your NPS account is also deductible.

Leave Travel Allowance

Make use of your Leave Travel Allowance for your holidays, which is obtainable twice in a block of four years. In case you have been incapable to claim the benefit in a particular four- year block, you could now take forward one trip to the successive block and claim it in the first calendar year of that block. Thus, you may be entitled for three exemptions in that block.

Expense account

When it approaches to saving taxes, most of us mix up to invest in insurance policies we don’t need or NSCs that do not fit into our financial portfolio. So, do not forget to consider your expenses as well.

Tax on Bonus

A bonus from your employer is completely taxable in the year in which you obtain it. However ask for your employer for the following:

If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year

Produce your tax investment details well before, to stop your employer from deducting tax on bonus before handing it over

Health insurance

Expenditure on health insurance allows a deduction up to Rs 15,000 under Section 80D for premium paid. An additional deduction of up to Rs 15,000 can be availed if you buy health cover for your parents (below 60 years). For senior citizens, the deduction limit is Rs 20,000.

Education loan

An education loan for you, your spouse or children gets you a deduction under Section 80E for the interest paid. There is no cap on the deduction amount. The principal amount repayment does not qualify for the deduction.

Diseases

Treatment of certain diseases is eligible for deduction up to Rs 40,000 under Section 80DDB (Rs 60,000 for the treatment of a dependent over 65 years). You can claim the deduction for yourself or your dependent being treated. These include kidney failure, neurological diseases, AIDS, malignant cancers and hematological disorders. The deduction cannot be claimed if the employer or an insurance company has reimbursed you.

Disability

An individual suffering from a disability can claim a deduction of Rs 50,000 under section 80U (Rs 1 lakh for severe disability). If you have a disabled dependent, a deduction of Rs 50,000 is available (Rs 1 lakh for severe disability).

Donations

You can avail of deduction up to 50-100 per cent of the donations complete to charitable institutions under Section 80G. Deduction for donations made cannot exceed 10 per cent of gross total income. Donations to scientific research or rural development institutions qualify for deduction under Section 80GGA and to political parties for full deduction under Section 80GGC.

Losses

Losses acquired due to short-term equity investments or equities-based mutual funds can be offset against short-term capital gains from gold, real estate and debt funds. You can also offset such losses against long-term gains from gold and property. These losses can be carried forward up to 8 years.

The points to be remain in mind to avoid the hassles of last minute tax planning.

Give your employer particulars of loans and tax saving investments beforehand, to stop any excess deduction

Check the Form 16 acknowledged at the end of each year from your employer thoroughly

It is important to start your tax planning well before 31st March, and to file your returns before the 31st of July each year