The process of tax savings usually includes showing your income as part of an investment or expenditure that is taxed at a low rate, or not at all, or because only a part of the investment is taxable. This can prove to be very beneficial as if you play by the rules and take advantage of whatever sections of the IT act that you can, you could potentially end up saving tons of money in taxes.
Let’s start with the most popular section of the IT Act.
Savings under Section 80C
Section 80C, within itself, offers a host of situations in which you can avail tax benefits. These depend on the type of expenditure, such as investments, healthcare expenditure, home loans and others as explained below.
Investments – When showing your income as part of some investment, you have quite a few options.
Studies have shown that the Equity Linked Savings Schemes are the most beneficial ways to save tax under section 80C. They’ve averaged about 13.6% returns over the last three years, and even their long-term performance is considerably good. It is smart to invest in ELSS using SIPs, as investors should avoid putting large amounts of ELSS at one go. All ELSS funds offer the same tax benefits, but caution should be exercised in choosing which fund to go for.
Public Provident Funds are one of the most popular tax-saving financial instruments, albeit being one-upped by ELSS funds in the past few years. The PPF rate was cut recently by 20 basis points and can be further reduced, but it remains a good tax saving option, as the interest earned is tax-free. They also are beneficial in terms of safety, flexibility, and comfort.
Sukanya Samriddhi Yojna
For employees having daughters younger than 10 years, the Sukanya Samriddhi Yojana offers great tax benefits, with the interest rate at currently 8.1%. The interest earned is tax free, similar to PPFs. Accounts for maximum 2 daughters can be opened, and the combined annual investment must be capped at Rs. 1.5 Lakh.
Bank FDs and Insurance
Due to the rising prominence of other instruments, bank FDs and insurances rank lower as compared to other tax saving methods. Simply put, the interest rates have fallen over the years, and when bank FDs are under consideration, the income is fully taxable. Thus these are not very efficient methods when it comes to saving tax.
House Rent Allowance (HRA) is a component of an employee’s basic salary. Unlike the basic component, it is not fully taxable. Self-employed professionals and those living in a house to their name cannot avail tax benefits under the HRA schemes.
The HRA tax benefit is the minimum of the three following criteria-
- Actual HRA received
- Excess of rent paid over 10% of annual salary
- 50% of salary if living in metro cities, 40% of non-metro cities
While claiming tax benefits under this, the individual must ensure that neither he/she nor the spouse/child owns any accommodation.
When it comes to home loans, you can avail multiple tax benefits depending on the situation. If you are paying EMIs, you can obtain tax benefits on the principal repayment up to Rs. 1.5 lakhs. For let out property, the maximum tax benefit has been capped at Rs. 2 lakh from the financial year 2017-18.
Additional deduction up to Rs. 50000 for first time home buyers is available under section 80EE, where the value of the property must be less than Rs. 50 lakh and the loan amount must not be more than 35 lakh INR.
Under section 80C of the IT act, schoolgoing children can now help their parents in saving tax! Exemptions under tuition fees can be obtained by parents for a maximum amount of 1.5 lakh INR annually. Any tuition fees paid at the time of admission, or anytime in the financial year, to a registered institution, is eligible for this tax benefit. The institution can be either private or government, and the education must be full time. The benefit applies to up to two children per parent, i.e. each parent can claim tax benefit for two of his/her children.
Senior citizens saving scheme and NPS
Taxpayers over 60 years of age can avail tax benefits under the Senior Citizens savings scheme. Any individual above 60 or early retirees between 55 and 60 can avail tax benefits underinvestment in this scheme. It offers an interest rate of 8.3% per annum, with the tenure of the scheme being 5 years, extendable up to 8 years. The overall tax benefit maximum amount is INR 1.5 lakh per annum.
The National Pension Scheme is another retirement savings scheme, with returns being linked to the market. Investing up to INR 1.5 lakh is considered for tax exemption under this scheme if a person invests over 1.5 lakh, the budget 2016 announced that the further amount invested would also be considered for deduction. Over and above this scale, the contribution from the employer up to 10% of the Basic salary + DA is eligible for deduction under section 80CCD.
Savings under sections other than 80C
The most popular tax deduction that comes in mind is indeed section 80C. But taxpayers should not confine themselves to this section when they look to claim deductions, as other sections of the IT act offer various tax benefits which can be claimed easily.
Health insurance and expenditure
Under section 80D, payment of medical insurance premium is now eligible for tax benefit. One can claim a maximum of INR 60000 under this section, but it includes various sub-limits, such as the maximum deduction of INR 25000 when a premium is paid for oneself, spouse or children, with the limit for senior citizens rising up to INR 30000. A preventive health care checkup claim can also be made for a maximum amount of INR 5000.
Under section 80DD, if the taxpayer is paying for the treatment of a disabled family member, a maximum of INR 75000 can be claimed as a deduction amount, with severe disability cases allowing for a maximum of INR 125000 as the deduction amount. Severe disability means that a person suffers from 80% or more of any of the disabilities.
Payment of interest on loans
Under section 80E, if you have taken an educational loan from a bank or financial body, be it for yourself, children or spouse, the amount paid as interest is eligible for tax deduction without any upper limit. However, the loan must be taken for completion of higher studies, i.e. after 12th standard.
Under section 80EE, payment of interest on home loans is also eligible for deduction, in cases where the loan amount is less than INR 35 lakh, the property value is less than INR 50 lakh, and the maximum amount available for deduction is INR 50000.
A deduction of 10% (not exceeding adjusted gross income) can be applied for under section 80G of the IT Act, if you have donated some amount to a central government-notified fund. Recently, in the 2017 budget, it was announced that a maximum deduction of only INR 2000 can be availed if you have donated in cash.
Section 80GGA and 80GGC give information on donations to specified institutions and political parties. Donations to educational and scientific institutions and political parties are eligible for full amount tax deductions under these sections.
There you go! You now have extensive knowledge of all popular tax saving methods, both under section 80C and outside it. Considering a situation where you might not have been able to prepare for tax filing, we give you some last minute tips to save your tax.
Some last minute tax saving tips
- Buy health insurance policies online. Due to the fact that insurance buyers under the age of 45 do not need to undergo medical tests, health insurance can be bought online easily within a few minutes. This allows for tax benefits of up to INR 15000 under section 80D, and INR 20000 for senior citizens.
- PPFs and NPS. As discussed before, both PPFs and NPS are great instruments to save tax. Another advantage of these schemes is that they can be opted for at a quick pace, with PPF accounts usually opened through online facilities of banks. Under section 80C, a tax benefit of INR 150000 can be availed through these schemes.
- Buy term policies online. Due to the nature of term policies, they cover large amounts at a minor cost. Buying them online reduces the part of the premium directed towards commissions, which would have been far greater, had you purchased this through an agent. Under section 80C, they offer a maximum of INR 1.5 lakh tax benefit.
- Start next year’s tax planning. To avoid a similar situation and scouring for last minute tax saving tips last year, you can start planning for next year’s tax management as early as a year before. This could allow you to make significant financial gains from instruments as well because you would have a lot of time to understand terms and conditions for each investment and familiarize yourself with tax management.
Save tax, don’t evade it 🙂