Everybody loves saving on the tax they have to pay, and every year, there is a frantic scramble to find the best ways to reduce tax liability. Here are some of the best solutions available to help you save tax at the end of this financial year.
Toward the end of every financial year, most salaried Indians with a taxable income rush to find a way to lower their tax liability. It’s an annual event, with financial institutions competing heavily for your money. It’s just how it always is, no matter how earnestly you commit to investing earlier in the next year. Whatever the case, always make sure to invest the money. For a person earning, say, Rs. 5 lakh, investments under Section 80C alone would lead to tax savings of Rs. 15,000, a person earning Rs. 9 lakh would save Rs. 30,000, and a person earning Rs. 15 lakh could save a whopping Rs. 45,000 in tax! Let’s find out the various tax-saving avenues available to you.
Tax deductions under Section 80C
Under Section 80C of the Income Tax Act, there are various deductions available, allowing you to lower your taxable income by Rs. 1.5 lakh. For those in the highest tax bracket, this counts for a saving of around Rs. 45,000. The deductions mentioned here are available on investments, and, in some cases, on the returns on investment too. Let’s see how they work:
Public Provident Fund
This is the most popular option under the aforementioned section, as one can invest the entire Rs. 1.5 lakh tax-free, and enjoy tax-free returns too. Available to any Indian citizen, the current rate of interest on a PPF is 8.8 %. Keep in mind, however, that the money will be locked away for 15 years (a portion can, however, be withdrawn in certain cases after five years).
Employees’ Provident Fund
With many organisations, you can’t opt out of the Employees’ Provident Fund (EPF). But it’s not a bad scheme to be stuck with either. The sum you invest is tax-deductible, and the returns are tax-free. If you opt for the scheme, you contribute 12 % of your basic salary, and your employer matches the contribution. However, you can voluntarily contribute more to the scheme if you wish as well (you’ll get a deduction on a maximum of Rs. 1.5 lakh, though).
Senior Citizens’ Savings Scheme
The Senior Citizen’s Savings Scheme provides senior citizens (60 years+, but if you’ve retired under a voluntary scheme or with superannuation, 55 years+) with regular income. The SCSS gives fixed returns of 9 %. There’s a lock-in period of five years, but you can withdraw your money after the first year on payment of a penalty. However, all returns are taxed. If the amount is over Rs. 5,000, it will be deducted at source.
Equity-linked Saving Schemes
When the stock market performed well, equity-linked saving schemes (ELSS) were very popular. Currently, ELSS, and in fact the entire mutual fund market, are being shunned. Whatever your opinion is of their volatility, ELSS has the potential to give good returns.
Endowment and Unit-Linked Insurance Plans
Endowment and unit-linked insurance plans (ULIPs) should not be preferred. Sold by insurance companies, endowment policies and ULIPs come with high charges, are inflexible, and provide inadequate cover. They do offer a lot of tax benefits. But again, they should not be foremost amongst your tax saving ways.
The interest you earn on, say, a 5-term deposit, is taxable, and churns out a less effective yield than a PPF. This is a good option if you’re looking to avoid the long lock-in period of the PPF since in such a deposit, the lock-in is five years.
This insurance is absolutely necessary if you have a family that is dependent on your future earnings.
Tax Deductions Beyond 80C
There are times when we’re so used to and accustomed to 80C that we don’t look over at section 80D. Let’s move our focus beyond 80C and see more avenues below:
Buy medical insurance, and rest assured, you can lower your tax liability by up to Rs. 35,000. However, the maximum premium to insure yourself, or your spouse or kids, is Rs. 15,000. However, if you’re paying your parents’ insurance premium, you get an additional deduction of Rs. 20,000 (if they’re over 60 years), or Rs. 15,000 (if they’re under 60 years).
Interest Repayment on Education Loan
Under Section 80E, one can claim a full deduction on the interest you pay on your child’s education loan. If you’re in the 30 % tax bracket, on a loan of Rs. 5 lakh, and interest rate of 13.5 % for five years, you’ll reduce your tax liability by Rs. 20,500 each year.
Premium Paid for Medical Treatment of Disabled
According to the Income Tax Act, if you are paying a premium to LIC or any other insurance company (approved by the Income Tax board) for the medical treatment of a dependent who is a physically-disabled person, you can avail of an exemption under section 80DD. Here, the dependent should be your spouse, children, parents or sibling. If the person is suffering from 40 % disability, then it’s a flat exemption of Rs. 50,000. If the disability goes up to 80 %, you can claim a fixed sum that goes up to Rs. 1,00,000.
Interest on Loan
Any interest paid on a loan taken for pursuing higher education, for either yourself or a dependent, is exempted from tax under section 80E. An education loan can be taken for your wife and children, and minors for whom you are the legal guardian. This deduction is applicable for a period of eight years, or till the interest is paid, whichever is earlier. No exemption is applicable for part-time courses.
Donations to Charity
Philanthropic activities are exempted from tax. An amount which has been donated to charitable institutions and approved educational institutions qualifies for deduction under Section 80G. The exemptions can be up to 50 % or 100 % of the donations made.
If a salaried or self-employed person stays in a rented facility without any house rent allowance, they can claim a deduction. The claim stands redundant if you, your spouse, and/or your child owns any residential accommodation in India or abroad. You can claim either 25 % of the total income, or Rs. 2,000 per month, or excess of rent paid over 10 % of total income, whichever of the three is the least.
Any contribution that you make in monetary terms to any political party or electoral trust is eligible for tax exemption.
A resident of India suffering from any kind of specified disability is eligible to claim tax deduction under section 80U. As we mentioned earlier, to be able to benefit from this exemption, which is a flat Rs. 50,000, irrespective of the expense incurred, the person must be suffering from at least 40 % of any of the following—blindness, low vision, mental illness, mental retardation, and/or hearing impairment. If the disability is severe, the deduction can be up to Rs. 1 lakh.
Stock Market Investment
A 50 % tax break to new investors who invest up to Rs. 50,000, and whose taxable income is less than or equal to Rs. 10 lakh, is offered under this section.
National Pension Scheme
The scheme comes with the condition of registration of your company. If your company is registered, you can reduce your tax liability by 10 % of your basic salary. The deduction is available under Section 80 CCD (2). With a minimum contribution of Rs. 6,000 each year, the NPS provides market-based returns. It is, in a lot of ways, a pension plan, but with the end result of only 60 % of the money available for withdrawal when you retire.
There are various companies in the infrastructure industry that issue bonds towards the end of the year. If one invests in infrastructure bonds, one can get an additional deduction of Rs. 20,000 under Section 80 CCF.
Gain from losses in stocks
Lets understand this with an example. Suppose you made a long-term capital gain of Rs. 6 lakh by selling gold ETFs. The tax thus payable on this amount is Rs. 60,000. Additionally, if you sold some stocks within a year of buying and made a short-term loss of Rs. 3,00,000, you can off-set this against the gains from gold ETFs. So, the gain from gold will be reduced to only Rs. 3,00,00, and the tax that you have to pay will be Rs. 30,000.
The losses that have not been adjusted can be carried forward for up to eight years. Besides, only short-term capital losses from stocks can be adjusted against other gains or carried forward.
Long Term Capital Gains
A capital asset includes any property, excluding jewellery, drawings, and paintings. It, therefore, includes shares, mutual funds, and immovable property. Income tax on capital gains depends on the length of time you hold the asset for.
Now, how can you save tax on the income you earn from such an asset? For long-term capital assets, you can take into account indexation benefits. You will save more if the profit is greater. It is, however, imperative to note that if the indexation method is used, the tax levied stands at 20 %. The tax levied will be 10 % if the value is not adjusted for inflation.
Leave Travel Allowance (LTA)
Use your LTA for your holidays, which is available twice in a block of four years. You can also claim the benefit of one journey in a succeeding block.
It is not easy to restructure your salary. But if you can, there are certain things that one can do to save on tax this way.
A. Opt for food coupons instead of lunch allowances, as they are exempt from tax up to Rs. 60,000 per annum.
B. Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred.
C. Choose the company car instead of using your own transportation to reduce high perquisite taxation.
There are also certain perquisites which fall under the Income Tax Act that help in tax savings.
Parts of the income you receive as perquisites are tax-deductible. Now, what is a perquisite? It’s a benefit provided by your employer in addition to your salary. This might be payment of school fees by the employer, rent-free or concessional accommodation, or a car loan. Some perquisites are taxed along with your salary, while others are exempt, up to a certain limit. For example, school fees up to Rs. 12,000 per year are exempt from tax. A car owned by you is exempt for up to Rs. 1,200 per month if its engine capacity is less than 1,600 cc, and for Rs. 1,600 if its capacity is more than 1,600 cc.
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