How to Save Tax in India?
We often complain about the fact that we have to pay taxes for nearly every single transaction there is – be it purchase of a vehicle or construction of a new house. We even have to pay tax on income! But are you aware that you can save significant sums of money on your income tax as well?
In India, one can legitimately save a portion of his or her income taxes by making sound investments that qualify for exemptions and deductions under the Income Tax Act, 1961. Interested to know more? Read on to find out!
Top Ways to Save Tax
Listed below are some of the most used and efficient methods of saving one’s income tax –
1. Tax Deduction While Buying a Home Loan
A taxpayer can save a significant sum on his or her home loan – a maximum of INR 1,50,000 for the principle (as per Section 80C) and a maximum of INR 2,00,000 for the interest (as per Section 24). Additionally, if the taxpayer lets out the newly acquired property on rent, the entire interest component is exempt from annual income tax calculations.
2. Income through Savings Account Interest
The interest earned on savings account is exempt to a maximum limit of INR 10,000 and extends to INR 50000 in the case of senior citizens. This amount is cumulative of all saving bank accounts.
3. Income through NRE Account Interest
Non-resident Indians have NRE accounts in India and earn interest for the amount deposited. This interest is not taxable.
Money from Life Insurance Policy
Money from a life insurance policy is exempt from tax if the premium does not exceed 15% of the sum insured.
Amount Received on Sale of Equity Mutual Funds or Shares
A 10% tax is available on the amount received on the sale of equity mutual funds or shares if the long-term capital gains tax is more than INR 1,00,000.
1. Amounts Received as Dividends on Equity Mutual Funds or Shares
Amounts received as dividends on equity mutual funds or shares are tax free.
2. Hindu Undivided Family and Extra Income
An extra income that is earned beyond your primary salary will be considered as secondary income. It must be put in a separate HUF account for you to avail the benefits under Section 80C.
3. Provisions Under Section 80C
a maximum of INR 1,50,000 (cumulatively) can be claimed under Section 80C of the Income Tax Act.
| Investment Option | Description | Tax Treatment | Returns |
|---|---|---|---|
| Tax Saving Fixed Deposits | These are similar to regular fixed deposits but have a predetermined lock in a period of five years. | The interest earned is taxable. | 6% to 7% |
| PPF – Public Provident Fund | These are long term investments that are backed by the central government. | The interest earned is tax free. | 7% to 8% |
| EPF – Employee Provident Fund | This is a retirement benefit scheme that is available to salaried persons. | The PF balance and the interest is tax free if withdrawn after 5 years of continuous service. | 8% to 9% |
NPS - National Pension Scheme
| This is a pension scheme started by the central government to give the unorganised sector and working professionals a chance to get pension after employment. | The employer’s contribution is tax free. | 12% to 14% |
| NSC – National Savings Certificate | This is a fixed income investment scheme that can be opened at any post office. | The interest is taxable. | 7% to 8% |
| Insurance - term, ULIP, Life Insurance | These are arrangements entered into to protect the insured individual from some risk. In the case of ULIP, it is both an investment as well as an investment. | Investment, withdrawals and maturity amount are tax free. | 12% to 14% |
4. Provident Fund
Interest received on the provident fund is not taxable provided you wait for a period of five years before withdrawing the amount.
Health Insurance Premium
A taxpayer can avail deductions under Section 80D of the Act for health insurance premiums. A certain portion of the money paid as health insurance premium is not tax-deductible. The savings that the taxpayer has is of a higher sum if the person in question is a senior citizen or a super senior citizen.
1. Money Spent on Donation to Charity & Money Spent on Donation to Political Party
Section 80G provides for deductions when one donates money to certified charities and institutions. This deduction can only be claimed after submitting a valid certificate from the charitable institution. Donations made to specific organisations in cash are eligible for tax waiver amounting to Rs. 2,000. All donations given to recognised or unrecognised political parties or contribution to electoral trusts entitles the taxpayer to tax waivers under Section 80GGC.
2. Miscellaneous
A taxpayer can save on his or her tax using any of the following claims too - Educational scholarship, Wedding gift, Income from agriculture, Inherited money, Extra contribution to NPS, Educational loan, Expenses related to treating disabled dependent, and Expenses related to treating specific diseases. These are all separately covered under the provisions of the income tax act.
If You are Running a Business, Then Here are the Best Tips to Save Tax
Listed below are some of the most used and efficient methods of saving one’s income tax if you are into business –
1. Distribution of Profit in Partnership Firm
No tax will be levied on the profits that have been distributed among various partners of the firm.
2. Travel Expenses
Expenses that business owners incur for travelling can be used to save on tax as travel expenses are exempt from taxation.
3. Food Expenses
Like how business owners can save on travel expenses, they can save on food expenses too. Adequate documents have to be furnished to claim the same.
If You are a Salaried Individual, then Here are a Few Tips to Save Tax
Listed below are some of the most used and efficient methods of saving one’s income tax if you are salaried individuals –
1. Leave Travel Allowance (LTA)
Section 10(5) of the Income Tax Act states that an employee can make use of this exemption for leave travel allowance to cover for tickets of one’s spouse, children and parents. Please note that this can be availed by only dependent children and not those who are married or pay tax themselves.
2. If House Rent Allowance (HRA) is a Part of Salary and If not
Section 10(3) of the Act states that one can avail tax benefits if HRA is part of the salary and there are receipts to prove that you reside in a rented building. In cases where HRA is not a part of the salary, then the tax benefit can be availed by firstly, subtracting rent from 10% of income, secondly, a flat rate of INR 5000 on a monthly basis, and thirdly, 1/4th of total income. These deductions are a part of Section 80GG.
3. Gratuity Amount
The taxpayer is exempt from paying taxes on gratuity for a maximum sum of INR 20,00,000.
4. Food or Meal Coupons
Meal coupons are not taxable to a limit of INR 2,600.
5. Standard Deduction
There is a standard deduction of a maximum amount of INR 40,000 that can be availed by the taxpayer.
6. Company Leased Car
The company leased car can be declared to save tax.
7. Telephone and Internet Expenses
The expenses for Telephone and Internet can be utilized to gain tax benefits.
8. Voluntary Retirement Scheme Amount
The pay-outs received from a VRS is not taxable up to a limit of INR 5,00,000.
Conclusion
Most of us are averse to the idea of paying taxes and view it as a financial burden that is best done away with. No one wants to miss out on saving money.
Different people prefer different ways of doing so. Understand the implications of each of the means and methods stated above and use them intelligently to save on your income tax.