If you were to think of things that you dread but can’t escape, we’re sure that monthly bills and taxes would top the list. But wait, what if we told you that you could cut down your taxes in half? Okay, that might be a bit too much, considering we don’t know the specifics of your financial matters; however, it is definitely possible.
Are you wondering how? By investing in tax-saving instruments and drawing up a financial plan. Additionally, you even claim deductions on taxes, especially income tax, which can help you save a few extra bucks and achieve your financial goals.
Does all of this sound way too complicated? Don’t worry, it really isn’t. If you stick with us till the end, we promise you’ll know everything about how to save tax in India. And if you’re a salaried professional, we have some great tips for you too. Let’s get started!
- In India, you can claim tax deductions of up to INR 1.5 lakh as per Section 80C of the Income Tax Act.
- If you wish to save on taxes, you can invest in some tax-saving instruments like PPF, FDs, Mutual Funds, ULIP, National Saving Certificates, and more.
- It is possible to claim tax exemptions for premiums paid towards life insurance and health insurance policies.
- Most tax-saving instruments in India have a minimum 5-year lock-in period.
The ABCs of Tax Saving: Learn How to Save Tax in India
While most people in India start taking tax-saving seriously in their middle age, it is best to start as early as possible. Doing so will not just maximize your savings but will also help you achieve your monetary goals, be it short-term or long-term.
So, what is the ideal way to save on tax? The first and most popular method is to claim deductions/exemptions while filing your taxes. The second is to invest in tax-saving schemes and instruments, some of which are also offered by the Indian government.
But before we get into the details of how to save in India, let’s look at the various sections of the Income Tax Act, 1961 and the tax-saving benefits they offer:
|Section of the Income Tax Act||Tax Saving Benefit||Total Savings|
|Section 80C||Tax exemption on investments and schemes like FDs, PPFs, and ULIPs||Up to INR 1.5 lakhs|
|Section 80D||Tax exemption on premiums paid toward medical insurance plans||Up to INR 25 thousand|
|Section 80DD||Exemption for medical treatment or maintenance of a disabled dependent||Up to INR 20 thousand|
|Section 80E||Tax deduction for repayment of education loan interest||Full interest amount for up to 8 years|
|Section 80G||Tax exemption on donations ||Up to 100%|
|Section 80GG||Tax exemption on the amount paid towards house rent ||INR 2 thousand per month or 25% of total income|
|Section 80GGC||Exemption on funds contributed to political parties||Up to 100%|
|Section 80U||Tax exemption for disabled taxpayers ||Up to INR 1.25 lakhs|
Now that you’re familiar with the different sections of the Indian Income Tax Act and their tax-saving benefits, it’s time to discuss tax-saving options.
As highlighted in the table, you can claim tax exemptions under Sections 80C, 80D, 80DD, 80E, 80G, 80GG, 80GGC, and 80U. However, it completely depends on whether you meet the criteria specified under the specific section of the Income Tax Act of India.
For example, if you pay an annual medical insurance premium of INR 50 thousand, you can claim it as a deductible while filing your income tax return. Similarly, if you pay a yearly premium of INR 1 lakh for your life insurance policy, you can claim it as a deductible.
The same applies to several other tax-saving schemes and instruments, such as Public Provident Fund (PPF), Fixed Deposit (FD), Mutual Funds, Unit Linked Insurance Plan (ULIP), Infrastructure Bonds, and more.
Don’t know how these investment instruments work? Make sure you keep reading, as we’re going to give you an overview of the best tax-saving options in India later. This will surely help you pick an option that is right for you.
However, you should know that there is a maximum limit that can be exempted, which depends on the type of tax-saving instrument. Additionally, there is typically a minimum lock-in period of 5 years.
So, in short, there are two ways for how to save tax in India: claiming deductions on your income tax and investing in tax-saving instruments.
Tips on How to Save Tax on Salary for Salaried Professional
If you’re a salaried professional, you’d agree that some months it gets nearly impossible to save money. And on top of that, you have to pay taxes each year. But while you can’t always minimize your expenses, you can save on taxes. Wondering how? Here are a few tips to help you get started:
Expand Your Investments
One of the best ways for how to save tax on salary is to expand your investments. For instance, if you invest in a Fixed Deposit (FD), Public Provident Fund (PPF), or Mutual Fund, you can claim income tax exemptions of up to INR 1.5 lakh under Section 80C of the Income Tax Act. By doing this, you will not just expand your investments, but you will also be able to save on taxes.
Pay Your Insurance Premiums
If you have a health/medical insurance policy and you pay an annual premium of INR 20 thousand, you can claim the amount as a deductible while filing your ITR. This exemption falls under Section 80D, and there is an upper limit of INR 25 thousand. Similarly, if you pay a yearly premium of INR 1 lakh towards a life insurance plan, you can claim it as a deductible. This exemption falls under Section 80C, and the upper limit is INR 1.5 lakhs.
Contribute to the National Pension Scheme
A great method for how to save tax income tax is to contribute to the National Pension Scheme (NPS). Although there is a tax deduction limit of INR 1.5 lakh, you can invest a considerable amount in the scheme. This will ensure you have a retirement fund for when you retire, and the best part? The entire amount will be tax-free; however, you can only withdraw it after you turn 60 years old.
Claim a Deduction on Your House Rent
Salaried professionals who live in rented houses can claim a tax deduction on their house rent if they receive a House Rent Allowance (HRA) from their employer. But the upper limit for this exemption depends on several factors. However, if you don’t get an HRA and still pay house rent, you might be eligible to claim a deduction of up to INR 60 thousand under Section 80GG.
Claim a Deduction on Your Home Loan
If you are a salaried professional who doesn’t live on rent but pays a monthly home loan EMI, you can claim tax deductions too. As per Section 80C, the upper limit for the principal amount is INR 1.5 lakhs, whereas the maximum limit for the interest amount is INR 2 lakhs. However, it is best to check your eligibility before you claim your home loan as an income tax deductible.
Did You Know?
In India, mutual fund investments are gaining traction each day. In 2021, the total asset base for mutual funds stood at INR 37.92 trillion and the Association of Mutual Funds in India (AMFI) is expected to witness a five-fold growth in the coming years.
An Overview of the Best Tax Saving Options
Now that you know the basics of tax saving in India let’s discuss some options you can consider. We have highlighted some of the most popular instruments, most of which fall under Section 80C, so let’s take a look:
Do you immediately get bored when you hear someone talk about fixed deposits or FDs? Us too, but it turns out that fixed deposits are a great tax-saving instrument. As per Section 80C of the IT Act, you can claim a tax deduction of up to INR 1.5 lakhs if you invest in a tax-saving FD.
However, you should know that tax-saving fixed deposits usually have a 5-year lock-in period, and the interest you earn through them is taxable. While the interest rate varies, currently, you can get up to 7.5% interest on tax-saving fixed deposits.
ULIP: Unit Linked Insurance Plan
If you’ve been searching the web for information on how to save tax in India, you would’ve come across ULIP. Unit Linked Insurance Plan or ULIP is a popular long-term investment instrument in India. It allows you to switch between debt and equity depending on your monetary goals.
In simple terms, the premium for ULIP is invested in the debt and equity market, and you can switch between the two. ULIP provides excellent tax-free returns in the long run, but it is best to invest in one for at least 1o to 12 years.
Mutual funds, also known as Equity-Linked Savings Schemes (ELSS), are a great option if you are looking for long-term tax-saving instruments. If you buy into a mutual fund, your money is invested in securities, such as bonds, equities, and other such assets.
Although mutual funds are typically a high-risk investment and have a lock-in year period of 3 to 5 years, you can claim tax benefits of up to INR 1.5 lakhs. Plus, you can also get excellent returns in the long run.
Public Provident Fund (PPF)
Today, most people prefer investing in a Public Provident Fund (PFF). This is because not only is a PPF account a great tax-saving instrument, but it is also quite flexible. Although the investment limit for a Public Provident Fund is INR 1.5 lakhs, you can even choose to invest an amount as low as INR 1 thousand.
However, it is best to know the PPFs have a lock-in period of 15 years. But you can extend it by another 5 years if you wish. Additionally, you can open a PPF account by visiting a nearby post office or bank.
National Savings Certificates
If you’re on the lookout for tax-saving instruments offered by the Indian government, National Savings Certificates (NSCs) are an excellent option. NSCs are quite similar to fixed deposits, but they offer comparatively lower returns. However, you can claim tax benefits for NSCs under Section 80C of the IT Act.
NSCs can be bought by visiting a post office or by purchasing online certificates, provided you have an existing account. Moreover, NSCs have a lock-in period ranging between 5 to 10 years, which you must always check.
Word to Remember
An insurance premium is an amount you pay to avail of the benefits of a health insurance policy or medical insurance policy. As per sections 80C and 80D of the Income Tax Act, you can claim tax deductions for the premiums paid towards these insurance policies.
We told you you’d learn everything about how to save tax in India if you stuck with us, didn’t we? Well, there you go! You can now start investing in tax-saving instruments and claiming deductions while filing your ITR.
However, it’s always crucial to check if you meet the criteria for the tax exemption before claiming a deductible. Also, choose a tax-saving option suitable for your financial goals, and it’s best to not go overboard. See you later!
No, there is no such limit. You can invest in as many tax-saving instruments as you like. However, it is important to remember that there are certain limits to the tax deductions you can claim.
As per Section 80D of the Income Tax Act, you can claim the premiums for medical insurance policies as a deductible. The upper limit, however, is INR 25 thousand.
While the interest rate varies from one bank to another, you can receive up to 7.5% interest on tax-saving fixed deposits.
Some of the best tax-saving instruments include Public Provident Fund (PPF), Fixed Deposit (FD), Mutual Funds, ULIP, National Savings Certificates (NSC), and National Pension Scheme (NPS).
Yes, as per Section 80G of the Indian Income Tax Act, all charitable donations are exempt from taxes.
Also Read: Benefits of Investing in Tax Saving SIP