How to Save Tax: A Complete Guide to Income Tax Deductions

Investments

How to Save Tax: A Complete Guide to Income Tax Deductions

By Jupiter Team · · 6 min read

All working professionals, salaried or self-employed, are obligated to pay a specific portion of their money to the government once they reach the minimum income threshold.

Tax planning plays an instrumental role in deciding how much you pay to the government. If you fail to plan your taxes, you might end up paying more than you actually should.

This article will give you insights on how to save tax and take advantage of the several tax deductions to lower your tax burden.

What Is Income Tax?

Income tax is one of the significant sources of revenue for the government. It is a type of charge that you pay on the income you earn in a financial year. The money is collected to improve the infrastructure of the country and the well-being of the citizens in general.

In India, you must pay your taxes according to specific income slabs. For instance, the income tax paid by a person who earns INR 6,00,000 per annum would be different from someone who pulls in about INR 50,00,000.

The Income Tax Department has decided the tax rates for each income slab as shown below:

Income Slab

Tax Rate

< INR 2,50,000

0%

INR 2,50,000 – INR 5,00,000

5%

INR 5,00,000 – INR 7,50,000

10%

INR 7,50,000 – INR 10,00,000

15%

INR 10,00,000 – INR 12,50,000

20%

INR 12,50,000 – INR 15,00,000

25%

> INR 15,00,000

30%

These tax slabs have been defined under the new tax regime and implemented from FY 2020-21. While calculating your tax amount, make sure that you consider any professional tax deductions that can be availed.

Difference Between Old and New Tax Regime

Under the old tax regime, there were only three income slabs. Even the rate of tax was higher compared to the new tax system.

Income Slab

Tax Rate

< INR 2,50,000

0%

INR 2,50,000 – INR 5,00,000

5%

INR 5,00,000 – INR 10,00,000

INR 12,500 + 20% of the income above INR 5,00,000

> INR 10,00,000

INR 1,12,500 + 30% of the income above INR 10,00,000

You can move forward with the old system if you wish to do so, as you can claim most income tax deductions, including house rent allowances (HRA) and leave travel concessions. You can also claim deductions for tax-saving investments under section 80C to 80U.

However, these tax deductions are not available for people who opt to pay taxes in lines with the new regime. Some income tax deductions that you can avail under the new regime include:

  1. Transport allowances for differently-abled people.
  2. Conveyance allowance received for the money spent in a conveyance that forms the part of the employment.
  3. Daily allowances to meet the regular charges incurred on the place of duty.

Ways to Save Tax in India

There are several tax-saving schemes that you can utilise to save some additional tax money. To understand how to reduce income tax, take a look at the options given below:

  1. Buy Life Insurance: When you buy a life insurance policy, you are obligated to pay monthly or yearly premiums. Under Section 80C, these premiums are eligible for tax deductions, i.e., you will not have to pay any taxes on the amount of premium you pay.
  2. Public Provident Fund (PPF): PPF is a saving scheme where you can keep some money aside for a tenure of 15 years. You can opt for this scheme from any bank or post office in India. The rate of interest earned on these savings changes every quarter, and the interest earned via this scheme is tax-free.
  3. Tuition Fees: The amount of money you pay as tuition fees for your kids is eligible for a tax deduction of up to INR 1,50,000 every year.
  4. Rent Receipts: If you are stationed in rental accommodation and receive HRA as part of your compensation, you can claim tax deductions on the same under Section 10 (13A).
  5. Charity: If you donate a specific part of your income to some charitable organisation or a relief fund, you can claim a tax deduction under Section 80G.
  6. Higher Education: If you take a loan to sponsor your higher education, the interest paid would be available for a tax deduction under section 80E. However, you can claim this deduction for a maximum period of 8 years.
  7. Buy a House: Buying a home not only gives you stability but also saves your tax money. If you have a taxable property and pay your home loan, you can claim a tax deduction on the interest. Also, if you are a first-time house buyer, you get an additional deduction from the taxable income of INR 50,000 on the home loan interest.

Tax Saving Investment Options Under Section 80C

Section 80C provides you with several investment options with which you can claim income tax deductions and save money. Under this section, you are eligible for deductions up to INR 1.5 lakhs in a financial year.

The investment options are as follows:

Investment

Returns

Lock-in Period

5-Year Bank fixed deposit

6% - 7%

5 Years

National Savings Certificate

7% - 8%

5 Years

Public Provident Fund (PPF)

7% - 8%

15 Years

National Pension Scheme

12% - 14%

Till Retirement

ELSS Funds

15% to 18%

3 Years

Sukanya Samriddhi Yojna

7.6%

Not Applicable

Senior Citizen Saving Scheme

7.4%

5 Years

You can avail of these investment options to get professional tax deductions on the amount invested.

Tax Saving Investment Options in India Other Than Sec 80C

There are tax saving options other than 80C that you can avail of. These generally include health insurance premiums, home loan interest, etc.

  1. Medical Insurance Premium: Under Section 80D, you can claim up to INR 1,00,000 per annum for deduction if your insurance policy covers any senior citizen. If a senior citizen is not a part of the policy, you can claim medical expenditure up to INR 50,000.
  2. Interest on Home Loan: A tax deduction can be claimed for up to INR 2,00,000 per annum under Section 24.
  3. Home Loan: If you take a home loan, your taxable income is reduced as you can claim the principal loan amount up to INR 1.5 lakhs.
  4. Charity: Any charity or donation made to a relief fund or an NGO can be claimed as a deduction under 80G.
  5. Interest on Education Loan: You can get a deduction for this under section 80E.

How to Plan Your Tax Saving Investments for the Year

There are several ways in which you can start planning your tax-saving investments. It's best to start small and then gradually increase the number of investments.

  1. Check all your expenses and identify where you can save up some tax money like your child’s tuition fees, interest paid on education loan, home loan repayment, etc.
  2. Now, total the amount and deduct it from INR 1.5 lakhs to figure out how much can you invest.
  3. Choose an investment option that fits your appetite. For instance, you can open a PPF account to start saving. If you're not sure which investment vehicle is most suitable for you, it's wise to consult a financial planner.

Tax Planning for Salaried Employees

If you are a salaried employee and want to know how to save tax on your salary, follow these tips:

  1. Look into HRA exemption and submit your rent receipts in time to your employer.
  2. Check if your company can reimburse you for medical bills.
  3. Another tax benefit worth looking into is Leave Travel Allowance (LTA). Your employer can cover all travel expenses related to work, which might be included in your salary.

Salaried employees need to trace these areas at the beginning of the year and start saving. Speak to your employer about restructuring your pay so that you are eligible for these tax deductions.

FAQs

Q. How can I save capital gain tax under Section 54?

This deduction is available for long term capital assets. You are eligible for this tax break if you buy a house within one year before the date of transfer of ownership of your home or within two years after that.

Q. Can I claim a deduction if I contribute to the PM Care Fund?

Yes, you can claim deductions under section 80G for any charitable donation that you make.

Q. Can a self-employed person claim HRA exemption?

No, self-employed individuals cannot avail the HRA exemption. Only salaried employees that opt for the old tax regime are eligible for this deduction.

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