What is Income Tax?
Income tax is a portion of your income that you pay to the government. This tax is collected on an annual basis. The authorities use this money to perform administrative tasks.
Guide To Save Income Tax In India:
There are two ways to save tax in India:
By Claiming Expenses:
You will have to claim the expenses you have made to save income tax.
By Investing in Tax-Saving Instruments:
The government encourages people to save tax by investing their money in tax-saving instruments listed under section 80C of the Income Tax Act. This way, you can ensure that you have some form of investment and not worry about too much money spent on paying taxes.
1. Tax Deduction In Case of Availing A Home Loan:
You can save tax if you plan your home loan wisely in accordance with section 80C. For the principal amount, the limit is Rs. 1.5 lakhs as per section 80C and for the interest amount the limit is Rs. 2 lakhs as per section 24.
Tax Saving Options under Sections 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80CCG, 80G
Here’s a list of tax-saving options for different sections.
2. Income Through Savings Account Interest:
Overall, interest earned on a savings account is exempt for taxation purposes for a limit of Rs. 10000. This amount is cumulative of all saving bank accounts. This limit extends to Rs. 50000 in the case of senior citizens.
3. Income Through NRE Account Interest:
Non-resident Indians have NRE accounts in India. They earn interest on the accumulated amount and the amount deposited as a fixed deposit. Due to the generous nature of the Indian government towards the NRIs, such an amount is not taxable. The interest amount is known as tax-free income.
4. Money Received from Life Insurance Policy:
Money from a life insurance policy can be received on maturity or on receiving the claim amount. The amount received is exempt from tax if the premium doesn’t exceed 20% of the sum insured. This applies to policies issued before 1 April 2012. In case of policies issued after 1 April 2012, the percentage drops to 15.
5. Scholarship for Education:
Such an amount is tax-free under Section 10(16). There are no limits in such a scenario as the entire amount received under private or public scholarship is tax-free.
6. Amount Received From Sold Shares or Sold Equity Mutual Funds:
If the amount of long-term capital gain is more than Rs. 1 lakh, then a 10% tax is applicable.
7. Amount Received as Dividends on Shares or Equity Mutual Funds:
Such an amount is tax-free.
8. Wedding Gift:
A wedding is an eventful occasion for the entire family, especially for the individual getting married. In India, it is a humongous event where the bride and groom are showered with gifts. Under Section 56(2), such gifts are non-taxable. Be it a gift, cash, or cheque, gifts received on getting married do not attract tax. Such gifts can be from your relatives or friends.
9. Income from Agriculture:
Any kind of income from agricultural land defined as per section 10(1) is exempted from tax. Such an income can be related to rent from land, revenue from land, the amount generated through agriculture products, and the amount through a farm building.
10. HUF and Extra Income:
If you are someone who earns secondary income apart from your primary salary income, then you can save money paid as tax for the income apart from salary. For example, money earned from freelancing will constitute a secondary income. You will have to open a separate HUF account for the secondary income. And then you can invest that amount under section 80C to avail tax benefits for that amount.
11. Amount Received Through Inheritance:
The amount received through inheritance in the form of a Will is not taxable in India. Therefore, the amount you receive as per a Will shall not be taxed in India.
12. Provisions Under Section 80C:
In order to encourage savings, the government of India offers a provision to invest Rs. 1,50,000 as per section 80C of the Income Tax Act. Therefore, by investing in tax-saving options under 80C, you end up saving money on income tax as well as make investments for a secure future. Here’s a list of popular investment options to save tax under section 80C.
Public Provident Fund
National Pension Scheme
Premium Paid for Life Insurance policy
National Savings Certificate
13. Extra Contribution to National Pension Scheme:
Usually, contributions to the National Pension Scheme fall under Section 80C, where there is a limit of Rs. 150000. However, you can opt to invest Rs. 50000 more in the National Pension Scheme, as this amount will be tax-free.
14. Amount from Provident Funds:
Interest received on the provident fund is not taxable. Wait for five years before you withdraw the amount from your Provident Fund.
15. Loan for Education Purposes:
This comes under section 80E of the Income Tax Act. The interest amount paid against an education loan is not taxable. There is no specified limit for such a category.
16. Health Insurance Premium:
Section 80D is a dedicated section for health insurance tax deductions. A certain portion of the money paid as health insurance premium is not tax-deductible. This amount keeps changing on an annual basis. Premium paid for buying health insurance for senior citizens can help you save more tax.
17. Expenses to treat Disabled Dependent:
Such deductions are a part of Section 80DD. Fixed deductions of Rs. 75000 are allocated for a person with 40 to 80% disability and Rs. 125000 for more than 80% disability. Such expenses should be for treating a disease, rehabilitation or training. You will have to furnish a certificate of disability to avail of the benefit of such deduction.
18. Expenses for Treating Specific Diseases:
This deduction is part of Section 80DDB. Tax benefits are applicable for expenses incurred towards treating specific diseases such as Dementia, Cancer, Aids, etc. For such diseases, tax deductions up to Rs. 40000 are applicable. In case the expenses are for a dependent senior citizen, then the amount increases to Rs. 1 lakh.
19. Money Spent on Donation to Charity:
You can save money given as tax by donating money to certified charities. This deduction falls under Section 80G. To avail the benefit, you will have to source a valid certificate from the charity organization.
20. Money Spent on Donation to Political Party:
There is no upper limit to tax deductions on money spent on giving a donation to a political party. Such deductions are a part of Section 80GGC. Such a donation amount equals to 100% deduction.
Tax-Saving Tips for Business Persons:
Here’s a list of tax-saving options for a business person.
21. Distribution of Profit in Partnership Firm:
No tax shall be deducted from partners in the case where the partnership firm is making profits and the business holders decide to share the profit among themselves.
22. Expenses Made for Travelling:
Business owners can show expenses made for travel as business expenses to save tax.
23. Expenses Made for Food:
Business owners can show expenses made for food as business expenses to save tax.
Tax-Saving Tips for Salaried Individuals:
Here’s a list of tax-saving options for salaried employees.
24. Leave Travel Allowance:
Employees can make use of this feature to cover travel tickets of spouse, children, and parents. Siblings are covered only if they are dependent on the salaried person. This falls under section 10(5).
25. When HRA is Part of Salary:
You should reside in a rented place to avail of this feature and you should possess relevant receipts. It falls under Section 10(13).
26. When HRA is Not a Part of Salary:
When HRA is not a part of the salary, the tax benefit can be availed in the following ways: 1) subtracting rent from 10% of income, 2) a flat rate of Rs. 5000 on a monthly basis, 3) 1/4th of total income. These deductions are a part of Section 80GG.
27. Amount Received from Gratuity:
Money received as gratuity is tax-free up to a limit. The limit for tax-free gratuity is Rs. 20 lakhs.
28. Coupons for Food:
Food coupons or meal coupons as they are commonly known are not taxable to a limit. They are non-taxable up till Rs. 2600.
29. Standard Deduction:
There is a standard deduction of Rs. 40000. This is the maximum amount.
30. Company Leased Car:
The company leased car can be utilised to save tax.
31. Expenses for Telephone and Internet:
Expenses for Telephone and Internet can be utilized to gain tax benefits.
32. Amount Received as per Voluntary Retirement Scheme:
A lot of people choose to opt for Voluntary Retirement and take a pay-out. The amount received as per the Voluntary Retirement Scheme is not taxable till the limit of Rs. 5 lakhs.
Equity Linked Savings Scheme
Home loan’s principal amount
Fixed deposit for a duration of five years
Sukanya Samariddhi account
Children’s tuition fees
Here’s a table that showcases which type of investment will fetch you how much returns with the respective lock-in period.
|5-Year Bank Fixed Deposit||6% to 7%||5 years|
|Public Provident Fund (PPF)||7% to 8%||15 years|
|National Savings Certificate||7% to 8%||5 years|
|National Pension System (NPS)||12% to 14%||Till Retirement|
|ELSS Funds||15% to 18%||3 years|