Income tax is basically a direct tax levied by the government at a certain rate on the annual income of individuals and business entities. Typically, the tax collected serves as a source of revenue for the government and is subsequently used to fund public services, build infrastructure, and pay for debt.
Notably, the income tax rate depends on the income tax slab an entity falls under. However, regardless of the rate, this tax provision can erode one’s annual income and subsequently lower their capability to mobilize greater savings. This is why individuals are always trying to figure out how to save taxes. Fortunately, the Income Tax Act of India, 1961, has created multiple provisions that help taxpayers save taxes on their earnings by availing applicable deductions, rebates, and exemptions. By planning their taxes and investments wisely taxpayers can lower their liability and promote savings.
Read along to learn more about a few handy tips on how to save income taxes
Tips To Save Income Tax Money
Here are some effective tips on how to save income tax –
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Took out a home loan? You are eligible for these deductions
Home loan owners are entitled to tax deductions under the provision of Section 80C of the Income Tax Act, 1961. They can claim applicable deductions on the borrowed amount or principal amount they repay and also the loan interest they pay on it. Under Section 80C of ITA, home loan borrowers can claim a tax deduction of a maximum of Rs. 1.5 lakhs on the repaid principal amount, annually. Notably, Section 24(b) entitles them to claim up to Rs.2 lakh as a deduction on the interest they pay yearly. Additionally, Section 80EE entitles them to claim an extra Rs.50,000 on the interest they pay annually.
Home buyers should note that if they rent a new property the entire interest paid is exempted from taxation. However, those who purchase land to build a house can claim tax benefits under Section 24(b) if their property construction is wrapped in 5 years. Section 80EEA further allows first-timers to claim an additional deduction on taxable income according to their tax slab.
As for homebuyers, who qualify for popular government-backed affordable housing schemes like Pradhan Mantri Awas Yojana or PMAY can claim extra deductions. This makes the process of purchasing one’s first house easier.
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Invest in tax-saving instruments to build a corpus and avail of tax benefits
Multiple government-backed investment schemes offer lucrative returns along with tax benefits. For instance, deduction under Section 80C of the Income Tax Act, 1961, entitles taxpayers to claim a maximum of Rs.1.5 lakh on their investments in these schemes. This means the invested principal won’t be taxed. Individuals can save taxes by investing in schemes like – the National Pension Scheme (NPS), Equity-linked Savings Scheme (ELSS), Senior Citizen Savings Scheme (SCC), Sukanya Samriddhi Yojana, Public Provident Fund (PPF), National Savings Certificate (NSC), and Unit Linked Insurance Plan (ULIP).
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Health insurance will help you sustain emergencies and save taxes
Section 80D entitles taxpayers to claim a deduction on their yearly taxable earnings spent on health insurance premiums. The deductibles will tend to vary as per age. For instance, under Section 80D taxpayer can claim a premium amount of Rs. 50,000, while Rs. 50,000 can be claimed for their spouse and kids. Notably, dependent parents below 60 can claim Rs. 25,000.
Policyholders who are senior citizens can claim a premium of a maximum of Rs. 1,000,000 as deductible annually. However, uninsured individuals can claim a maximum of Rs. 50,000 spent on medical expenditures yearly.
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A life insurance policy extends tax benefits to policybuyers
Section 80C allows taxpayers to claim exemption on their life insurance premium payment, and Section 10 (10D) lays down provisions for the insurance’s sum guaranteed, particularly, the sudden death of the insured or policy maturity whichever occurs first. However, these exemptions depend on the date the policy was purchased.
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Provision for the insurance policy obtained after April 1, 2012
Life insurance premiums that policyholders paid for after 1st April 2012 are entitled to a tax deduction of a maximum of Rs. 1.5 lakh under Section 80C of ITA. However, the total insurance premium paid must not exceed 10% of the specified sum assured. Note that the deduction is for premiums that were paid in a financial year. Additionally, the insurance policy has to be in the name of the taxpaying individual or their spouse or kids.
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Provision for the insurance policy obtained before April 1, 2012
The life insurance premiums individuals paid before April 1, 2012, are entitled to deductions under the provision of Section 80C of the Income Tax Act. However, the deduction is capped at 20% of the policy’s actual sum assured. The same will be applicable if the insurance policy was obtained in the name of the taxpaying individual, their spouse, or kids. Note that the policy should also be non-linked and non-participating.
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Renewal of insurance policy
Section 80CCC allows taxpayers to claim a tax deduction of a maximum of Rs. 1.5 lakh on the insurance premiums they paid annually, including their annuity plans. This tax deduction is accessible to both new insurance policies and renewals. The tax deduction has been available on contributions towards specific pension funds. However such pension funds have to be notified by the government and must meet key requirements like being registered under the regulatory body Securities and Exchange Board of India.
Notably, the discussed tax benefits apply to taxpayers under the old income tax regime of India. The new income tax regime simplified the existing tax slabs but there are no deductions or exemptions, so some tax benefits may not apply to those taxpaying entities. However, to be sure, individuals must do thorough research to find out which tax regime suits their needs and financial goals the best. Based on that insight they can develop an effective tax plan strategize how to save income tax, and make effective investments and purchases accordingly.
