How to Save Income Tax in India

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.

Income Tax Act

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

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 on Section 80C, 80CCC, 80CCD & 80D

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.

1. Section 80C

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.

2. Section 80CCC - Insurance Premium

Section 80CCC provides a deduction to an individual for any amount paid or deposited in any annuity plan of LIC or any other insurer.

3. Section 80CCD - Pension Contribution

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.

4. Section 80 TTA - Interest on Savings Account

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.

5. Section 80D - Medical Insurance

  • You can claim a deduction of Rs.25,000 under this Section on insurance for self, spouse and dependent children. 
  • An additional deduction for insurance of parents is available up to Rs 25,000, if they are less than 60 years of age. 
  • If the parents are aged above 60 years, the deduction amount is Rs 50,000.

6. Section 80DD - Disabled Dependent

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).

List of Tax Saving Instruments

Equity Linked Savings Scheme

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.

Senior Citizen Savings Scheme

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.

National Pension System

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.

Term Life Insurance Premium

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.

Public Provident Fund

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.

National Savings Certificates

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.

Tax-saving FDs

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.

Home Loan Repayment

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.

Tuition Fees

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.

Tax Saving Methods

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:

Short-range tax planning

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.

Long-range tax planning

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.

Permissive tax planning

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

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:

  • House Rent Allowance (HRA)
  • Leave Travel Allowance (LTA)
  • Medical reimbursement
  • Meal allowance, etc.

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:

  • Public Provident Fund (PPF)
  • Life insurance
  • Equity-linked savings scheme (ELSS)
  • Fixed deposits
  • National Savings Certificate (NSC)

Also, you get an additional exemption of Rs 50,000 if you:

  • Invest in National Pension Scheme (NPS)
  • Have a home loan.

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:

  • If you are living in a property owned by your parents, give them rent and claim the HRA and even if you don’t have an HRA component, you can still claim exemption on the rent paid under Section 80GG of the Income Tax Act.
  • You can invest in a tax-free instrument in your spouse’s name. This can earn you tax-free income.
  • Pay health insurance premiums for your family and parents.

Important points you shouldn’t forget:

  1. School tuition fees of first two children are eligible for tax deduction under Section 80C.
  2. Mandatory contribution towards your Employees Provident Fund is also a part of Section 80C investments.
  3. Plan your taxes with reference to your goals and tax bracket. If you are in a higher tax bracket, choose investments which will give you maximum tax relief. For instance, if you are in the 30% tax bracket, investing in equity can help you save tax if you plan to sell them within 12 months. That’s because there’s a flat 15% short-term capital gains (STCG) tax on selling your equity within 12 months. Thus, this can be a better idea because you end up getting taxed 15% and not 30%.

Smart Tip for Tax-Saving Investment

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.

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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}}