In this article, we will talk about different ways via which you can save income tax legally with various options & investments.
At the time of filing the Income Tax return, the Indian Income Tax Act, 1961, provides certain deductions. These deductions can be used by the taxpayers of all slabs to save their tax. As a taxpayer, if you have done proper tax planning, then you can easily avail deductions and save yourself from paying taxes.
Tax Avoidance Is Legal; Tax Evasion Is Criminal
If you plan everything properly with an aim to save tax, then the deductions that are available in the Indian Contract Act, 1961, would be subtracted from the total gross income. This would reduce the total income & hence, the tax that has to be levied would be done on a lesser amount, thereby saving your taxes.
How to Save Income Tax Legally in India
#1 Save tax under Section 80C, Section 80CC, and Section 80CCD
To promote savings and to make sure that the savings of common people do not go in vain, the Government has allowed a certain number of deductions. These deductions are to channelize the savings of people into rightful resources. If the amount saved by the taxpayer is invested in the specified instruments under the above mentioned three sections, then he can save tax easily.
The maximum amount up to which you can save or deduct is Rs. 1,50,000 when all three sections are combined. The other instruments that are available to invest and save income tax are specified by the government –
- PPF Accounts
- 5-year Tax Saving Fixed Deposit
- Equity oriented Mutual Fund
- Pension Plans
- Life Insurance Policy, etc.
You can get an additional deduction if you invest in the National Pension Scheme, which is again introduced by the Government, w.e.f. The financial year 2015-16.
#2 Saving tax under the Sections 80D, Section 80DD, Section 80DDB
You can also save income tax by taking insurance for your own health or the health of any of your relatives. As per the Income Tax Act, deductions are available for such kind of expenditures. Each of these sections has a different amount of deductions, which only depends on the type of policy that you are investing in. The policies that are covered under different sections could be as follows-
- Under Section 80D, Medical Insurance Premium of Self or children will do the work for you.
- If we consider Section 80DD, then you can save your tax through the Medical Treatment of Handicapped Dependents.
- Under Section 80DDB, the treatment of specified diseases would allow your deductions on your income & thereby, you can save tax.
#3 Home loans
The people who have a home loan to be repaid are again at an advantage in this case. The amount that they have to pay as a principal amount can be deducted from their income as specified under Section 80C. This would reduce their total income and hence, the tax to be paid.
Secondly, Section 24 specifies that the interest that one pays on home loans can also be deducted to save income taxes. You can save up to huge amounts if you use home loans for claiming deductions with an aim to save taxes. This is because of the fact that this liability of home loan can be claimed under different sections. Collectively it becomes a huge saving.
#4 Saving Tax through Education Loan as per Section 80E
Section 80E states that a person can claim deductions if he has taken an educational loan. This loan can either be for himself, spouse, his children, or any other student of whom he takes care. But, the downside here is that this deduction is only for the interest on the loan, and the principal amount of the loan cannot be claimed for deduction.
There is no upper limit on the amount of interest paid on an educational loan that can be deducted as an expense. Only the individual taxpayers can claim deductions & not the HUF.
#5 RGESS: For the Tax Planning done under Section 80CCG to save tax.
If a taxpayer has an annual income of less than Rs.12,00,000, then he is eligible for the deductions allowed under Section 80CCG. This deduction is on a condition that the person must invest in the stocks or mutual funds of companies that are mentioned beforehand.
Due to a major role of Rajiv Gandhi in launching this scheme, it is named as ‘Rajiv Gandhi Equity Saving Scheme.’ Under this scheme, only the people who are investing for the first time in history are eligible to claim deductions. Otherwise, all those who have already done so can’t make use of this scheme to save their tax.
#6 Planning for tax saving on Long Term Capital Gains that arise on Sale of a property
It is very common that some sort of long-term capital gain arises for a person when he sells his/her property that he/she held as a long-term capital asset. He can be eligible for claiming the exemption from paying taxes on this gain if, this long-term gain is further again invested in some of the specified instruments under the act.
To be specific and clear, a long-term capital asset is considered a long-term asset when a person holds that asset for more than two years.
#7 Tax Deductions for Donations made under the Section 80G
A taxpayer can easily reduce his total income by deducting the number of donations made by him, as is mentioned under Section 80G. These donations can be for different purposes, such as charity, social, or philanthropic purposes. If he has donated something for a National Relief Fund, then also he can claim the deductions.
The deductions depend on two major factors that are- the purpose of donating & the organizations to which donation is being made. The names of the organizations that are covered under this are already specified by the Finance Ministry. In some cases, it happens that all the amount that has been donated can be deducted, but, unfortunately, sometimes only half the donation is allowed to be deducted.
If a person donates more than Rs.10,000 then, this donation has to be by cheque if he wants to get the whole donation deducted. This is because it is pre-specified that donations only up to Rs.10,000 would be deducted if they are made through cash. Above Rs.10,000, a cheque is a must.
#8 Tax-saving fixed deposits
There are some types of 5-year Tax-saving Fixed deposits. These can allow up to Rs.1,50,000 deduction. These special FDs’ interest rate is generally fixed. This rate is currently moving around 7-8%. However, the FD allows the deduction of a huge amount; the interest that is received on it is a taxable income.
#9 National Saving Certificate
This certificate has a fixed interest rate. The tenure up to which these certificates work is five years, and the current interest rate of the National Saving Certificate (NSC) is 8%. The interest on NSC is tax-deductible.
#10 Sukanya Samriddhi Yojana
This scheme is useful for the parents of a girl child who is still below the age of 10 years. Here, the tenure of the scheme can be understood in two ways- either until she is 21 years old or till the time when the girl gets married. The interest in this is tax-free, which is 8.5% now.
#11 Tax saving on the money kept in a savings account
If the interest earned is up to Rs.10,000, then no tax is to be paid on the money that you have in your savings account. This is specified under Section 80TTA of the Income Tax Act. You can say that you won’t find an easier way to save tax than this. This limit of Rs.10,000 increases to Rs.50,000 when it comes to senior citizens. For them, this amount is the limit for both FD & the savings account they have.
#12 Payment of tuition fees of your children
If you are paying a tuition fee of Rs. 1,50,000 or lesser for your children’s education, then you are easily exempted from paying the taxes on this amount. But, you will have to pay tax if the tuition fee is more than Rs.1,50,000 for a year. This is another way to save income tax legally if your children are still studying.
#13 Deduction on rent paid (without HRA)
If HRA is not given to you in your salary, then also there is a way through which you can save tax. There are certain provisions under section 80GG of the Income Tax Act, which enables you to get tax benefits under it.
#14 Pension funds
For the best retirement, you should start thinking about your retirement from the beginning when you start earning. And for this, it is rightly said that you need to go for some pension funds. These funds also help you save taxes to a good extent if you choose the right one. Under section 80C, 80CCC, 80CCD (1), 80CCD(1B), and 80CCD (2), there are provisions to reduce taxes through pension funds.
#15 Medical insurance and health check-up
According to the laws, if you spend some amount on your medical insurance or regular health check-ups. Obviously, these expenses are the ones that you spend frequently and are a must in everyone’s life. Under the section 80D of the Income Tax Act, there is a provision to get tax deductions of up to Rs.60,000. But, here you should ensure that you are not paying your insurance premiums through cash.
#16 Medical expenses of disabled dependent
If unfortunately, there is a person in your family who is dependent on you because of his/her disability, then you can get tax benefits. The amount that you spend to take care of that person enables you to get tax exemption. You can save a big amount of up to Rs.1,25,000 from the taxable income.
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#17 Medical expenses of a disabled individual
A person who spends something on himself due to his own disability can get tax benefits under section 80DD. Here also, the maximum amount up to which tax deduction is available is Rs.1,25,000.
#18 Treatment of specified diseases
There are certain diseases that are specified by the law. The expenses that you incur on the treatment of such pre-specified diseases let you get tax deductions. Such deduction is available under section 80DDB. Diseases like cancer and AIDS require huge amounts of money for treatment and are too dangerous also. Hence, the IT Department offers tax benefits for such diseases.
#19 VPF (Voluntary Provident Fund)
If you invest a bigger part of your salary voluntarily towards EPF, then it is known as VPF. This VPF helps you get an interest rate of 8.40 percent, which is tax-free. Hence if you contribute more towards VPF, you save your taxes.
The postal department of India offers a risk-free saving scheme named NPS. It is written under section 80C that if you invest in this scheme, you become eligible for the deductions under it. The interest earned through such investment also comes under deductions for tax.
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#21 HRA Deduction for rent paid
If you live in a rented place and you are a salaried person, then you can save your taxes by claiming the HRA allowance. HRA is a component that can be seen in your salary. You would get tax deductions for such allowance.
#22 Leave Travel Allowance (LTA) deduction for travel expenses
Within 4 years, you can get tax benefits for 2 of your journeys through LTA. LTA is also found in your salary that helps you get tax deductions. If your employer gives LTA for the travel expenses that you incur, then you can claim such amount to get tax benefits.
#23 Tax benefit on gratuity
The gratuity that you receive on your retirement or in other cases can fetch you tax deductions of up to Rs.10,00,000. This deduction is based on some pre-specified conditions.
#24 Meal coupons
Another great way to save income tax are Meal coupons. The meal coupons that are given by employers to their employees are exempted from tax. This exemption is up to Rs.2600 per month.
#25 Medical bills
If you spend money on yourself or your family members or dependents for medical treatment, then you should ensure that you keep the receipts received as much as possible. Through these receipts, you can claim tax deductions of up to Rs.15,000.
#26 Daily travel allowance
You can get tax deductions on the daily travel expenses that you incur. The expenses up to Rs.1600 per month are tax-free, and you can get such tax benefits from your employer. If we calculate, through such benefit, an employee would be able to save Rs.19,200 in one year.
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#27 Car leased by the employer
If an employee drives the car on lease provided by his employer, then he can save tax. He can do so for the amount of EMI of the car because he does not need to buy a car now.
#28 Expenses related to internet or phone
It happens a lot of times that the employers give their employees a phone or other internet devices so that the work efficiency is not hampered. Hence, the expenses that are incurred on such devices in daily usage are tax exempted, and the benefits can be claimed.
#29 Money under VRS
When the government employees get the amount under the voluntary retirement scheme (VRS), this amount is non-taxable up to a limit. This limit is Rs.5,00,000.
#30 Distributed profit to partners in partnership firms
If the partners of a firm decision to distribute the profits of the firm among themselves rather than using it for other purposes, then this amount is tax-free for the partners. This is because the firm has already paid the tax for the whole profit that it earned.
#31 Travel or hotel expenses
The business people need to move or travel to different places because of their work. They often do so. But, most of them do not spend the travel expenses from their own pockets. If they do so, they would be eligible to get tax benefits on such expenses. This is because these are business expenses.
#32 Salary restructuring
When you switch jobs, your main focus is on the pay, which you want to be higher and higher. But, the higher the pay, the higher would be the taxes for you. Hence, you need to ensure that your salary is structured in such a manner that your tax liability is less, and the amount that is left for you is more. This is one of the main points to remember when you switch jobs that can help you save income tax.
#33 Interest income on Saving account
The interest that you earn from the amount in your savings account is non-taxable up to Rs.10000.
#34 Interest income on NRE Account
The people who have NRE accounts are not required to pay taxes for the amount of interest that they earn from their savings and FDs.
#35 Maturity or claim amount received on Life Insurance
If the premium that you paid till the maturity of the insurance policy is not more than 20 percent of the total sum assured, then you can get tax benefits on the amount that you receive on the maturity of the policy. This is applicable if the policy was issued before 1st April 2012. But, if the policy is issued after such date, then the premium should not be more than only 10 percent of the total sum assured.
#36 Profit from selling shares or equity mutual funds
If your investment in some stocks or any mutual fund is a considerable amount, then the profits from such investments can be exempted from tax up to 100 percent up to Rs.1,00,000.
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#37 Food expenses in Business
It can be seen often that during business meetings or discussions, the businessmen arrange for some food or drinks for the other party. The amount thus spent can be claimed for tax deductions if they show such expenses as being business expenses for the owner.
#38 Dividends received on shares or equity mutual funds
People who have invested in mutual funds & stocks are often rewarded by dividends for being shareholders. These people are not asked to pay the taxes on the amount that they receive in such a manner. The tax is already paid by the Company on such dividends, as dividends are a part of Profit (on which the company has already paid tax).
#39 Tax savings on additional contribution to NPS
The regular deduction for NPS contribution is Rs.1,50,000. If you contribute more above the regular contribution, then you would get tax benefits. You can save around Rs.50,000 on contributing additional amounts to NPS.
#40 Standard deductions
Now, the standard deductions allow an individual to avail of the tax deductions of a maximum Rs.40,000. The earlier medical expenses and travel allowance that were exempted are now replaced by standard deductions.
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Other than the ways that are mentioned above, we have a lot more ways to escape or actually save the taxes. If we seriously look for them, they are not at all difficult & may prove to be helpful in most of the cases. There are different schemes for the people of different age-groups that would help to save income tax legally in India. This will help you to save your money to a great extent.