Paying taxes may be essentially for the economy’s growth, but it can surely feel a little heavy on the pocket. However, with careful planning and an excellent understanding of how to save income tax in India, you lessen the pressure.
And if you’re wondering how to save income tax in India, we can help. There is a lack of knowledge among people on how to save income tax. In this article, we will shed some light on this topic and discuss how one can ease the burden of taxes. Keep reading if you want the answer to the question—How to save income tax in India?
How to Save Tax on Salary in India?
Every penny you save is essentially a penny earned. And learning how to save income tax in India can lead to a significant increase in your income. That is why tax planning is crucial. The Income Tax Act of India provides deductions and exemptions on returns made from various investment tools such as insurance plans.
Different financial instruments provide tax deductions under sections 80C, 80D, and 80EE. Making an investment of ₹1.5 lakh under section 80C can help you reduce your taxable income. You can even claim a deduction of ₹50,000 if you invest in NPS (National Pension Scheme) under section 800CCD (1b).
Other ways to save on income tax include buying medical insurance, where the maximum deduction allowed is ₹1,00,000 under section 80D. However, it is ₹50,000 for self & family and ₹50,000 for senior citizen parents. Taking our discussion forward, let us see what the different ways that can answer the question—How to save income tax?
1. Tax Saving and the Income Tax Act
In 1961, the Income Tax Act became law, governing all aspects of the imposition, collection, recovery, and administration of income tax.
As a taxpayer, you may be earning money from various sources during your life. These earnings or gains in a given financial year are subject to taxes, per the Income Tax Act of 1961. And it is important for you to duly pay taxes to the government whether you are an employee, an entrepreneur, earn revenue from rentals, or generating income from your investments.
Sections 80C, 80D, and 80G of the Income Tax Act are your answer to ‘how can I save income tax’. These sections provide you with a list of tax-saving options to assist you with how to save income tax in India. Here are some suggestions based on your level of risk tolerance if you’re unsure how to organise your funds for the most tax advantages:
- High risk appetite – if you are a risk-taking investor seeking high returns in addition to Section 80C tax benefits, you may want to think about investing in equity linked savings schemes (ELSS). This mutual fund can potentially provide double-digit returns while saving taxes.
- Moderate risk appetite – if you have a moderate appetite for risk, you can invest some of your money in ELSS and the remainder in tax-saving fixed deposits or the Public Provident Fund (PPF). This tactic lets you balance your risk and returns while providing the tax benefits required by Section 80C.
- Low risk appetite – if you have a zero tolerance for risk, you should invest in PPFs or fixed deposits. The risk exposure on these avenues is low, and you can take the same tax deduction of ₹1.5 lakh under Section 80C in this case.
Your answer to how can I save income tax relies a lot on your risk appetite. Although low risk options provide you with fixed returns, the rate of return may only be between 6 and 8%. If you take inflation into account, this could be an issue. For instance, annual education inflation ranges between 10 and 12 percent. This means that you might not be able to reach your goals if you invest in PPF for long-term objectives like your child’s schooling.
Additional Benefits Beyond Section 80C
You can invest in the National Pension Scheme or the Atal Pension Yojana if you want deductions that go beyond the maximum allowed by Section 80C. The Income Tax Act’s Section 80CCD (1B) allows for deductions of up to ₹50,000 for contributions made to these plans. Under this clause, as a taxpayer, you may save up to ₹15,600.
You can also claim tax benefits for premiums paid towards health insurance for self, spouse, children and parents and term insurance plans. This benefit comes under Section 80D of the Income Tax Act. Every year, you can save up to ₹15,600 on these health insurance payments.
Overall, the combination of these options can help you save up to ₹78,000 every year, which is a considerable amount of money.
2. Section 80C
The Income Tax Act of 1961’s Section 80C lowers your tax liabilities by providing deductions from your annual total taxable income.
Taxpayers may deduct any investments, contributions, or payments made to financial products and schemes that are allowed by the Income Tax Act of 1961 under Section 80C of that statute. On April 1, 2006, Section 80C took the place of the previous Section 88. Currently, a financial year may only deduct up to ₹1,50,00 under Section 80C. Previously, up to FY 2014–15, the cap stood at ₹1,000,000.
Equity Linked Savings Scheme
ELS schemes are a short-term investment scheme with a three-year lock-in period. In India, it is the only type of mutual fund that is eligible for a tax deduction under Section 80(C) of the Income Tax Act.
Senior Citizen Savings Scheme
If you are wondering ‘how to save income tax on your investment in your retirement years, the Senior Citizen Savings Scheme is the way to go. It is a long-term savings option that also offers tax benefits to retirees. The scheme has a five-year maturity period and an extension for three years.
National Pension Scheme
NPS is a retirement benefit scheme that is managed and governed by the Pension Regulatory Fund Authority of India. After the age of 60, investors can withdraw 60% of the maturity amount and use the other 40% to buy an annuity that will help get a pension.
Term Life Insurance Premium
If you’ve purchased life insurance, your premiums can qualify for Section 80C tax deductions. Paying insurance premiums for oneself, a spouse, dependent children, and any other members of the Hindu Undivided Family are eligible.
Public Provident Fund
PPF is a long-term investment scheme that offers tax benefits and low risk returns. At present, the annual interest on a PPF account is 7.9%, with a lock-in period of 15 years.
National Savings Certificate
The Indian government offers a fixed-income investment called the National Savings Certificate. The current interest rate is 7.9% per year, and the lock-in period is five years.
Tax Saving FDs
You can invest in tax-saving fixed deposits and save up to ₹1.5 lakh in tax deductions. They have a minimum lock-in period of five years.
Home Loan Repayment
If you have a home loan, the portion of your EMI that goes toward repaying the principle is eligible for tax deductions under Section 80C. However, the amount of interest you pay is not deductible for tax purposes under this provision.
Tax deductions for tuition for your child’s schooling are allowed up to ₹1.5 lakh rupees. Only single parents or guardians and a maximum of two kids per person are eligible for this benefit.
3. Section 80CCD
Once you have understood how to save income tax in India with Section 80C, it is time to move on to understanding how to save income tax in India with Section 80CCD. The tax deductions available to taxpayers with regard to investments in the National Pension System are covered by Section 80CCD (NPS). Two subsections are:
Section 80CCD (1)
Under this clause, tax deductions for investments in NPS are permitted. Any citizen of India between the ages of 18 and 60 may invest in NPS and take advantage of this tax break. NRIs can also make use of this benefit.
Section 80CCD (1B)
An additional deduction of ₹50,000 is offered on investments in NPS under this paragraph. This is in addition to the ₹1.5 lakh dollars offered under Section 80CCD (1). In conclusion, you can invest in NPS each year and receive a total tax deduction of ₹2 lakh.
4. Section 80D
You may deduct up to one lakh rupees (₹1 lakh) from your taxable income if you contribute to the cost of medical insurance for you, your spouse, your children, and your parents. Over and beyond the exemptions you can claim under Section 80C, the deductions under 80D apply. Individuals as well as Hindu Undivided Families are eligible to receive this benefit (HUFs).
5. Section 80E
The amount you pay to repay the interest on your student loan is deductible from your overall income under Section 80E of the Income Tax Act. The loan should be taken from a bank or other authorised financial institution and used to pay for the education of the borrower, their spouse, their children, or a student over whom they have legal custody.
6. Section 80EE
The Income Tax Act of 1961’s Section 80EE permits a tax deduction for the interest paid on home loans taken by first-time buyers. If you fit this description, section 80EE allows you to deduct up to ₹50,000 off your taxes. This deduction cap is higher than the ones stipulated in sections 80C and 24 of the 1961 IT Act.
7. Section 80G
You can claim tax deductions for donations made to charitable organisations under Section 80G of the Income Tax Act. However, only contributions provided to organisations registered under Section 12A are eligible for deductions. The contributions must originate from taxable income sources and are acceptable only when made with cash, a cheque, or a demand draft.
Paying taxes is important as it helps the government run the country. But what many people don’t realize is that they need not pay any more than they have to. The government itself has made provisions for certain investment tools that not only offer tax benefits but also provide high returns. We have discussed how to save income tax in India, and what are the best ways to do the same. At this point, you should have enough knowledge of how to save income tax in India to start making your tax-saving plans.
FAQs on How to Save Income Tax
Yes, you can file an ITR online through their e-filing portal.
Under section 80TTA of the Income Tax Act, interest earned on a savings bank account is tax-free up to ₹10,000. If the interest exceeds ₹10,000, it will be taxable.
If your annual income is below ₹5 lakhs, you are eligible to get a tax rebate of up to ₹12,500 as per the recently modified section 87A of the Income Tax Act.
You can claim tax deductions on the interest earned on your savings account, given that your total interest amount is less than ₹10,000.
Yes, the interests earned on tax-saving FDs are taxable.
No, a self-employed individual cannot claim HRA benefit but they can save tax on the rent paid under section 80GG if they satisfy the eligibility criteria.
Yes, you can avail of the tax deductions for the principal repayment of a home loan under section 80C. The overall limit under section 80C is ₹1.5 lakh.
If a home loan is taken out jointly, each borrower can deduct the interest paid on the loan up to a maximum of ₹2 lakh under Section 24(b) and the principal repayment up to a maximum of ₹1.5 lakh under Section 80C.
Under the latest provisions of Section 87A, any individual with an annual taxable income of up to ₹5 lakhs is eligible for an income tax rebate of ₹12,500.