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Income tax filing is never that easy. And even if you have hired a professional CA to do your taxes, it is always better to know and understand about the tax planning measures because, at the end of the day, it’s you who should know more about your finances than your CA.
Also if we go by experts’ suggestions, the best time to plan your tax-saving investments is at the beginning of the financial year. But if this sounds difficult or unattainable, believe me you are not alone. Infact, many taxpayers procrastinate till the last quarter of the year and as a result they just end up making hurried decisions.
Remember, tax-saving should be an additional perk and not a goal in itself. Also as someone has rightly said, "The best things in life are free, but sooner or later the government will find a way to tax them." So let’s be prudent and wise when it comes to saving income tax.
To begin with, let’s understand a few concepts about the Income Tax Act prevalent in India, various tax saving instruments and what are the ways to save your hard earned money.
The Income Tax Act came into effect in 1961 and everything pertaining to the imposition, collection, recovery and administration of income tax falls under the purview of the Income Tax Act. So it doesn't matter if you are a salaried individual or an entrepreneur or whether you make a rental income or earn an income from your investments, you have to pay taxes to the government provided you fall in the taxable slab.
But again there are certain sections, such as Sections 80C, 80D, 80G and 80GGA of the Income Tax Act that lists certain ways to save on taxes.
Section 80C of the Income Tax Act 1961, reduces your tax liabilities by allowing deductions from your total taxable income in a financial year. According to Section 80C, taxpayers can claim deduction benefits on any investments, contributions, or payments towards financial products and schemes as stipulated by the Income Tax Law.
Section 80C came into effect on April 1, 2006, as a replacement of the older Section 88.
Deductions allowed under the Income Tax Act help you reduce your taxable income. But you can avail the deductions only if you have made tax-saving investments.
You can claim a deduction of Rs 1.5 lakh on your total income under section 80C, provided you have invested in LIC, PPF, Mediclaim, paid your children’s tuition fees, etc.
Section 80CCC provides a deduction to an individual for any amount paid or deposited in any annuity plan of LIC or any other insurer.
You can claim the amount under Section 80CCD if you deposit it in your pension account. The maximum deduction you can avail is 10% of the salary (in case the taxpayer is an employee) or 20% of gross total income (in case the taxpayer being self-employed) or Rs 1.5 lakh - whichever is less.
Besides, a new section 80CCD (1B) has been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a taxpayer to their National Pension Scheme (NPS) account. Contributions to Atal Pension Yojana are also eligible.
Under this Section you may claim a deduction of maximum Rs 10,000 against interest income from your savings account with a bank, co-operative society, or post office. Do include the interest from savings bank accounts in other income.
However, the deduction is not available on interest income from fixed deposits, recurring deposits, or interest income from corporate bonds.
Deduction under Section 80DD is applicable on expenditure incurred on medical treatment (including nursing), training and rehabilitation of the handicapped dependent relative.
i. Where disability is 40% or more but less than 80% – fixed deduction of Rs 75,000 is applicable.
ii. Where there is a severe disability (disability is 80% or more) – a fixed deduction of Rs 1,25,000 is applicable.
To claim this deduction, a certificate of disability is required from the prescribed medical authority.
Similarly, there are other sections such as Section 80 GG (House Rent paid), Section 80E (Interest on Education Loan) Section 80EE (Interest on Home Loan), Section 80CCG (Rajiv Gandhi Equity Saving Scheme), Section 80DDB (Medical expenditure on self or dependent relative), Section 80G (Donations), Section 80GGC (Contribution to political parties), Section 80TTB (Interest on deposits for senior citizens).
Equity Linked Savings Schemes (ELSS) are a type of mutual funds with a lock-in period of three years. It is the only mutual fund category in India, which qualifies for a tax deduction under Section 80(C) of the Income Tax Act.
You can either choose to invest a lump sum amount or take the SIP (Systematic Investment Plan) route. However, you cannot withdraw your money before the three-year lock-in period is over.
Since these mutual funds invest in the stock markets, they could carry moderately high risk however the risk-factor gets evened out in the long run, making it one of the most profitable tax-saving investments.
If you have already retired or applied for voluntary retirement, the Senior Citizens Savings Scheme (SCSS) can be an option as a risk-free tax-saving investment. It is a long-term savings option backed by the Indian government. The maturity period is five years and investors can seek an extension by an additional three years.
The interest is taxable, and TDS is applicable in case the interest exceeds ₹10,000 per annum. With an SCSS account, you can be assured of a regular income in your post-retirement years.
The National Pension System (NPS) is a retirement benefit plan regulated by the Pension Regulatory Fund Authority of India. If you subscribe to the NPS, your money will be invested primarily in equity and debt instruments, and the value of the investment on maturity will depend on the performance of these asset classes.
If you have bought life insurance policies, the premium can allow you to avail tax deductions under Section 80C. Premiums paid to insure self, spouse and dependent children are eligible.
The Public Provident Fund (PPF) scheme is a long-term investment option through which you can also avail tax benefits. The interest on a PPF account is compounded annually, and the lock-in period is 15 years. This means you have to stay invested for 15 years although partial withdrawals are allowed from the seventh year.
You can open an account with as little as ₹100. The minimum and maximum investments allowed in a financial year are ₹500 and ₹1.5 lakh, respectively. In case your annual investment exceeds ₹1.5 lakh, interest cannot be earned on the excess amount.
The National Savings Certificate is a fixed-income investment offered by the Government of India. You can invest in this scheme by visiting a post office near you. The lock-in is five years. The minimum amount required to purchase an NSC certificate is ₹100.
Certificates are available in denominations of ₹10,000, ₹5,000, ₹1,000, ₹500 and ₹100. Premature withdrawals are only allowed if the certificate holder has passed away, or if the certificates have been forfeited.
You can invest in tax-saving fixed deposits and claim maximum tax deductions of up to ₹1.5 lakh. The lock-in period is five years which means you can't take out the money before five years. You can only make a one-time lump sum deposit, while premature withdrawals are not allowed. The minimum investment amount varies depending on your bank, but the maximum amount is capped at the 80C limit i.e. ₹150,000.
TDS is applicable on the interest earned on your FD, but you can avoid it by submitting Form 15G or Form 15H (in case you are a senior citizen) to the bank.
If you have taken a home loan, the part of EMI that goes towards repaying the principal amount is eligible for tax deductions under Section 80C. The amount you pay as interest does not qualify for tax deductions in this section.
You can claim tax deductions up to ₹1.5 lakh on tuition fees paid for your child's education. This benefit is only available to individual parents or guardians and a maximum of two children per individual.
While most people think of tax planning as a process that helps in reducing their tax liabilities; it is also about investing in the right instruments, at the right time, so that you can achieve your short, medium and long-term financial goals.
Fundamentally, there are four varied methods of tax planning. They are as under:
This is a term used in reference to tax planning that is executed when the financial year comes to an end. Investors resort to this planning on the heels of the end of the fiscal year, attempting to find ways to reduce their tax liabilities legally. Short-range tax planning does not involve long-term commitments, while it still can promote substantial tax savings.
The long-range tax plan is chalked out when the financial year begins, and which the taxpayer follows throughout the year. Such an arrangement may not provide immediate tax-relief benefits as short-range plans do but can prove to be beneficial in the long run.
As the term suggests, it means planning investments under various provisions of the taxation laws of India. In India, there are many provisions of law, offering exemptions, deductions, incentives and contributions. Section 80C of the Income Tax Act of 1961, for instance, offers several different types of exemptions (on the amount invested, interest earned and the amount at maturity) on tax-savings investments.
Purposive tax planning refers to the act of planning investments with specific purposes in mind, thereby ensuring that you can avail maximum benefits from your investments. It involves the accurate selection of investment instruments and diversification of income.
So before you plan your taxes, it’s advisable that you analyse your financial situation and build a strategy from a tax perspective. Generally speaking, tax planning and management can be done easily if you know how.
Here are some methods of tax planning that can help you do it on your own:
A recap of basic steps that you can take to plan taxes well in advance:
1. Understand your gross annual income
The primary step is to understand your total income that comes from all sources. If you are employed, it will be your annual salary and if you are an entrepreneur, your business or professional income would be the major source of your income.
2. Reduce your taxable income
If you are an employee, you can restructure your salary to optimise tax-saving through proper tax planning. There are some components in your salary structure that can be used to lower your taxable income. These are:
3. Use tax-saving investments
There are various tax-saving investments under Section 80C of the Income Tax Act. Investing in these funds can get you tax exemption of up to Rs 1.5 lakh. You can invest in the following funds:
Also, you get an additional exemption of Rs 50,000 if you:
Furthermore, your saving account interest can be claimed as an exemption up to Rs 10,000.
4. Take help of your family members to save tax
There are certain ways to reduce your taxable income. These include:
Opt for a monthly investment like an SIP in Equity Linked Saving Scheme (ELSS) - Well, there are many advantages linked with equity investments. Equity investments are basically tax-free investments. Equity market comprises of shares, futures and derivatives. Equity investment offers great tax benefits such as:
ELSS are completely tax-free: You must be wondering as to how shares are completely tax-free investments. The explanation to this point is: Let’s assume you hold shares of ABC company that wants to share a portion of profits with its shareholders or equity holders. These are also known as dividends.
Quite a lot of companies pay dividends to shareholders on a regular or on a periodic basis. Hence, dividends become a regular source of income for shareholders. However, the best part is whatever income you generate in the form of dividends is 100% tax-free.
In other words, you do not have to pay taxes on the income accruing through dividends. You just have to declare the statement in Form 16 under the section meant for furnishing the required particulars.
Under Section 80C, income from salaries, business or real-estate can save taxes when the investment is made via an Equity Linked Saving Scheme. This is to the tune of 1.5 lakhs per annum. You can invest through ELSS (Equity Linked Savings Scheme) and save taxes as high as Rs 46,000.
Rajiv Gandhi Equity Savings Scheme: This option is more viable for investors who are new to the stock or the equity market. You can earn tax benefits as high as Rs 50,000 when you invest your money via the Rajiv Gandhi Equity Saving Scheme.
Now that you know that taxes can eat into your annual income, we would suggest you take these above mentioned steps to ensure you don’t pay more than what’s required. All that’s needed is a little bit of tax planning because an effective plan will ensure you invest to maximise your wealth and save taxes.
Well, this is where FinLearnClub services can be critical.
At Fin Learn Club, we offer a high quality, interactive, consistent and regular updated platform to learn about various financial topics such as Financial Planning.
FLC Learning Private Limited is not a one-time e-learning course; it is a club of fellow learners. At FLC, we believe that financial learning is certainly not a one time thing because it requires constant learning as things change very fast in the world of personal finance.
Financial Planning course at FLC includes:
To know more about the course on financial planning, check the website here.
So, these are some of the ways to save your income tax in India. And if you are choosing tax saving investment options, make sure you select the one that aligns the best with your financial objectives and liquidity needs.
{{Team FLC}}