For most of us, the word “Tax” or “Income Tax” is a source of much fear. Probably because taxes drill a deep hole in our income.
However, such people fail to realize that with proper tax planning much of the tax burden can be laid off easily. You can save taxes by using tax saving instruments.
So, there is no need to fear taxes.
Rather you should know, How to Save Income Tax Legally.
Yes, it is possible to save Income Tax legally in India.
As a matter of fact, the Indian Income Tax Act provides certain deductions on the overall income which can be claimed by all classes of taxpayers (professionals, businessmen, salaried individuals) at the time of filing Income Tax Return.
These deductions help taxpayers to save tax on their income in a year.
With proper Tax Planning, the deductions can be subtracted from the gross total income and the income tax is levied on the balance income according to the prevailing income tax slabs.
So, let us look at the ways of saving income tax legally.
Ways to Save Income Tax
However, you should remember that saving income tax legally demands a proper tax planning and it should begin in the early quarters of a financial year.
Save Tax under Section 80C, Section 80CCC
The Government of India allows a maximum deduction of Rs. 1, 50,000 under Section 80C and Section 80CCC which a taxpayer can claim on the total income if he invests in certain specified tax saving instruments by the Govt.
The Section 80C and Section 80CCC has allowed certain investments and expenditures to be tax-exempt. To avail maximum tax benefit, one should spread out the investments under various instruments specified in this section.
The most popular instruments for the purpose of saving tax under Section 80C and Section 80CCC are as follows:
Provident Fund (PF) & Voluntary Provident Fund (VPF)
The Provident Fund (PF) is automatically deducted from the salary. It is made up of both employer and employee contribution.
The employer’s contribution in PF is exempted from tax while the employee’s contribution is eligible for tax deductions under Section 80C.
Additional Contributions can be made through Voluntary Provident Fund. The current rate of interest payable is 8.6% p.a. and is tax-free.
Public Provident Fund (PPF)
Contributions made towards Public Provident Fund (PPF) are deductible under Section 80C. The rate of interest is 8.1% compounded yearly and the maturity period is 15 years.
Interest earned on PPF Account is tax-free. The minimum contribution is kept at Rs.500, and the maximum limit is Rs.150000.
Life Insurance Premiums + Unit Linked Insurance Plan
The life insurance premium that is paid towards yourself, your spouse, or your children is eligible for deduction under 80C. The deductions under 80C can be availed towards an insurance policy from LIC or any other private life insurance providers.
ULIP stands for Unit Linked Insurance Plans. ULIPs provide insurance cover as well as benefits of equity investments. ULIP Premiums provide tax benefit under Section 80C which stands at Rs. 150000. The premium should be less than 10% of the sum assured under a ULIP Plan.
Equity Linked Savings Scheme (ELSS)
There are certain mutual fund schemes which offer tax benefits. These are called Equity Linked Savings Scheme.
The investments done in ELSS are eligible for deduction under Section 80C. The maximum deduction is same as other of Rs. 150000 per year.
Sukanya Samriddhi Account
Sukanya Samriddhi Account is a Girl Child Prosperity Scheme launched by Prime Minister Narendra Modi on 22 January 2015 for the girl child.
The Account can be opened at any time from the birth of a girl child till she attains ten years of age. The Scheme allows you to deposit a minimum of Rs.1000 up to Rs. 150000 during a financial year.
Interest is compounded yearly and is fully exempt from tax. Money can be deposited for 14 years in this account. The deposited amount is eligible for tax deductions under Section 80C.
Home Loan Principal Repayment
The Equated Monthly Installment (EMI) towards your home loan consists of two parts – Principal and Interest. The principal component of the EMI is eligible for deduction under Section 80C.
So, you can avail Tax Benefit on your home loan principal repayment.
National Savings Certificate (NSC) (VIII Issue)
The National Savings Certificate (NSC) is a time-tested tax saving investment instrument. It comes with a five and ten year maturity period and provides 8.50% p.a. Interest on a five-year NSC and 8.80% p.a. Interest on a ten year NSC.
The minimum investment amount is kept at Rs.100 whereas there is no maximum limit. Investments made in an NSC are eligible for deductions under Section 80C up to a maximum of Rs.150000.
Pension Funds – Section 80CCC
The investments made in Pension Funds can be claimed as a deduction under Section 80C and Section 80CCC. The total deduction u/s 80C and 80CCC cannot exceed Rs.150000.
5-Yr Bank Tax-saving Fixed Deposits
Tax-saving fixed deposits of 5 years which are done with scheduled banks are also eligible for deduction u/s 80C.
Save Tax under Section 80CCD
Section 80CCD of Income Tax Act allows an additional deduction of Rs.50000 for investment in National Pension Scheme.
The deduction was effected via Financial Act 2015 and is applicable from the financial year 2015-16 onwards. The deductions u/s 80CCD is applicable for contributions made towards the notified Pension Scheme of the Central Government.
It is available to individuals but not to HUFs. Salaried, as well as Non-Salaried individuals, can contribute to the NPS Scheme and avail deductions under Section 80CCD.
The maximum amount that can be invested in the NPS is Rs.150000. The benefit of Rs.50000 as deduction u/s 80CCD is over and above the limit of Rs. 1.5 Lakhs that is allowed for deduction under Section 80C.
So, the total deduction that can be claimed u/s 80C + 80CCD is Rs. 2 Lakhs.
Save Tax under Section 80D
The Income Tax Act lays down provisions for deductions on the gross income of a taxpayer for the purpose of calculating income tax if the expenditure has been done for taking Medical Insurance for Self, Spouse or Children.
The deduction allowed u/s 80D is Rs.25000 and Rs.30000 for Senior Citizens. For very senior citizens i.e. individuals who are above 80 years of age, a deduction of Rs.30000 is allowed u/s 80D for payment made on account of Medical Expenditure.
Section 80D allows a tax deduction for the payment of medical insurance premium by an individual or HUF. The tax deduction is over and above the deduction of Rs. 2 Lakhs under Section 80C + Section 80CCD.
Save Tax through Home Loan
By taking Home Loan, you can claim a deduction on the repayment of the principal amount as well as on the interest paid on Home Loan.
The repayment of the principal amount is eligible for tax deductions under Section 80C. One can also claim a deduction on the interest paid on home loan u/s 24.
The first time home buyers can claim an additional deduction of Rs.50000 under Section 8EE. The maximum tax deduction that can be availed u/s 80C is Rs. 150000.
Tax Saving through Education Loan
A taxpayer is eligible for deduction under Section 80E if he has taken an education loan for himself or spouse or children.
The deduction is allowed for the repayment of interest and is not applicable on the repayment of the principal amount. The deduction is available only to individual taxpayers’ u/s 80E.
Saving Tax on Donations u/s 80G
A deduction u/s 80G of the Income Tax Act can be claimed if a taxpayer has made a donation or a contribution towards National Relief Fund.
In some cases, as much as 100% of the donation can be claimed as a deduction. Only the donations made by cash or cheque are allowed for deductions. For cash donations, only Rs.10000 can be claimed for deductions.
Interest on Savings Bank Account
There is good news for Savings Bank Account Holders. Section 80TTA of the Income Tax Act exempts interest up to Rs.10000 from tax in one financial year from a savings bank account.
It means that if you are holding Rs. 250000 in a savings bank account and the bank pays you 4% p.a. interest, the amount earned as interest (in this case it is Rs.10000) would be tax-free.
The above description provides some ways of saving income tax legally in India. However, the list is not exhaustive in any way.
Having said that, we have incorporated various ways for saving income tax legally. We hope that this helps you to save income tax legally in India.