As employees, there are several ways to save income tax in India every year. Many times, we may stick to only a limited-methods that we are aware of. This may cost us the benefit of other productive methodologies that bring in more savings. Thus, every individual should be aware of all the opportunities that can enhance savings on income tax. Lack of knowledge about tax planning could lead to several tax burdens. This article aims to educate readers about the same.
Taxes are levied on everything, from groceries to the taxes charged on every individual’s annual earnings. These are the only means for the survival of any state. Every year the citizens of India are entitled to pay the income tax. The income tax is a part of the income that every individual has to pay to the government. We are always on a constant lookout for various deals that can save at least a penny.
So, let’s dig deeper into the different ways to save income tax. First and foremost, let enhance our knowledge regarding the two tax regimes that can be adopted to make the tax payments. Let’s determine the various deductions and exemptions a person is entitled to under the Income Tax Act 1961. Further, I will mention some more tax-saving tips and conclude by answering some frequently asked questions.
Save Income Tax In India Under The Income Tax Act 1961
According to the Income Tax Act of 1961, all the earnings and the profits earned by every individual in the financial year is liable to be taxed. But apart from just paying these taxes, there are several ways to save money. Here’s a list suggest different ways to save income tax under the IT Act.
(The tax exemptions and deductions under various sections listed below are only applicable to the individuals and businesses that have adopted the old regime of income tax payment.)
1. Section 80C
Under this section, various deductions can be availed by taxpayers. The maximum amount to be deducted in this section is Rs.1.5 lakh. Given below is a list of investments that are subjected to deduction under Section 80C.
i. Tax Saving Fixed Deposits
With a term of 5 years, these fixed deposits eligible for a deduction of Rs.1.5 lakh under section 80C. The interest rate between 7-8% is also taxable.
ii. Public Provident Fund (PPF)
This scheme has a tenure of 15 years. It can be availed in any bank or a post office. The interest in these funds is tax-free.
iii. Equity Linked Savings Scheme
These are mutual funds with a tenure of 3 years. They invest 80% of the equity assets and are subject to Long Term Capital Gains Tax (LTCG). The ELSS mutual funds are exempted from tax.
iv. National Saving Certificate (NSC)
This is also another small saving scheme that has a tenure of 5 years. It is eligible for the tax deduction under section 80C.
v. Life Insurance Premiums
The money received upon attaining the maturity of insurance policies is exempted from tax. This is possible only if the premium is limited to 20% of the sum insured. This is only applicable to policies issued before 12th April. For all the policies issued after this date, the premium is limited to 15%.
vi. National Pension Scheme (NPS)
This scheme is for the benefit of retired individuals. After attaining the age of 60, the individuals can withdraw 60% of the matures returns, and the residue 40% is utilized for the purchase of annuity to receive the pension.
vii. Home Loan Repayment
A deduction of Rs.1.5 lakh can be availed on the repayment of the principal amount on the home loan.
viii. Tuitions Fees Of Children
The payment of tuition fees of children is also entitled to a tax deduction under Section 80C.
ix. Employee Provident Fund (EPF)
As per this scheme, 12% of the employees’ salaries are deducted by the employers to contribute towards the EPF.
x. Senior Citizen Savings Scheme
This scheme is for individuals above 60 years of age. With a tenure of 5 years, it offers tax deductions of up to Rs.1.5 lakh to every applicant.
xi. Sukanya Samriddhi Yojana
Every girl child below the age of 10 can avail of a deduction of Rs.1.5 lakh under this scheme.
2. Section 80CCD
This section provides tax deductions towards the investments in the National Pension Scheme. It has two subsections.
i. Section 80CCD (1)
Individuals between the ages of 18-60 can avail of the benefits under this section. The maximum deductions under this section are Rs.1.5 lakh. This includes 10% of the salary, whereas for self-employed individuals it is extended to 20%.
ii. Section 80CCD (2)
This section enables the individuals to avail of an additional deduction of Rs.50,000. Hence, an individual can avail of a total deduction of Rs.2 lakh under Section 80CCD.
3. Section 80D
The benefits under this section can be claimed by individuals and Hindu Undivided Families (HUF). Tax deductions of up to Rs.1 lakh can be availed towards the medical insurance of dependent family members.
4. Section 80E
As per this scheme, the interest charged on any educational loans is deducted from the total income. The educational loan can be availed by a parent for himself, his children, or any student he is the legal guardian.
5. Section 80EE
First-time homebuyers can avail of the benefits under this section. A tax deduction of Rs.50,000 will be provided on the interest paid on the home loan.
6. Section 80G
By donating money to charity, several tax deductions can be availed by individuals. Under Section 80G, the government allows deductions on donations from certified charities. The donations have to be proved by procuring a valid certificate from the organizations.
7. Section 80GG
The House Rent Allowance may be a part of the salary for some salaried individuals. This section allows several deductions on the rent.
8. Section 80TTA
According to this section, a deduction of Rs.10,000 can be availed by individuals on the interest income. This is applicable only under certain conditions.
- The interest should be earned on a savings bank account.
- The interest can also be earned on a savings bank account associated with the co-operative society that deals with banking facilities.
- The interest can also be earned on a savings account in a post office.
9. Section 80DD
Under this section, benefits are offered to individuals if they have to look after any individual with a disability or a differently-abled family member.
10. Section 80DDB
Under Section 80DDB, a deduction of Rs.40,000 is applicable for the treatment of specific diseases. These diseases are cancer, HIV, AIDS, dementia, etc. in the case of Senior Citizens, a deduction of Rs.1 lakh is offered. The treatment should be for the taxpayer or any of his family members.
11. Section 80U
Any person suffering from ailments like blindness, leprosy, mental illness, locomotion disability, etc. can avail of several benefits under this section. A tax deduction of Rs.75,000 can be availed by individuals suffering from a 40% disability. Further, if a person is severely disabled by more than 80%, he can claim deductions worth Rs.1,25,000.
12. Section 80GGC
Under Section 80GGC, a 100% deduction can be availed by the individuals on income tax. This is possible by providing donations of up to 10% of the gross earnings to political parties. The amount that an individual donates to the political party is entirely exempted from the income tax. The party should be registered under Section 29A of the Representation of People Act, 1951.
Applying The Income Tax Act,1961
1. Home Loan Tax Benefits Under Section 80C
There are several tax benefits associated with the home loan. Many government housing schemes like the Pradhan Mantri Awas Yojana and the Delhi Development Authority aim towards constructing affordable houses. Under Section 80C and Section 24(b), several benefits can be claimed by the applicants.
- As per Section 80C, Rs.1.5 lakh can be deducted from the repayment of the principal amount borrowed under the home loan.
- As per Section 24(b), Rs.2 lakh can be exempted from the home loan’s interest section annually.
- The first-time borrowers can further claim more deductions under section 80EEA.
2. Health Insurance Policies
These policies reduce the financial burden on individuals during medical emergencies. India’s medical costs are soaring; therefore, availing of the entire family’s health insurance policies is handy in crisis times. The premium payment towards the policies under Section 80D makes the investor entitled to several tax deductions from the annual taxable income. With a minimum premium of Rs.25,000, a tax exemption of Rs.5,000 can be claimed under section 80D for health check-ups.
As per the Income Tax Act, the tax deductions offered are stated in the tabular column.
3. Make Investments
By investing in several financial schemes, individuals can avail of high returns and heavy tax exemptions and deductions. These investments can be made in capital gains or some government schemes. Investment tools like ELSS have a tenure of 3 years. In this scheme, tax waivers of Rs.1.5 lakh apply to the total investment. If the gains at the end of the term sum up below 1 lakh, then no tax will be paid on the returns. Also, every investment that amounts up to Rs.1.5 lakh is applicable for tax deduction under Section 80C.
4. Create Accounts In Various Government Schemes
Tax waivers of up to Rs.1.5 lakh can be claimed on various government schemes like:
- Senior Citizen Savings Scheme (SCSS)
- Sukanya Samriddhi Yojana (SSY)
- National Pension Scheme (NPS)
- Public Provident Fund (PPF)
5. Life Insurance Plans
Several tax benefits are available on the premium payments and the amount disbursed in maturity.
- Under section 80C, tax benefits of up to Rs.1.5 lakh can be claimed on these policies’ annual premium. The constraint bounds this that the premium should be less than 10% of the total sum assured (if the policy was taken after April 2012). Otherwise, tax is exempted only if the premium payment does not exceed 20% of the assured sum.
- Under Section 80CCC, tax waivers worth Rs.1.5 lakh can be claimed on renewing the life insurance policies.
- Under Section 80CCD (1) few pension funds under Section 23AAB are eligible for a deduction of Rs.1.5 lakh.
- Investments in Unit Linked Insurance Plans (ULIP) are also eligible for tax waivers under Section 80CCD (1)
6. House Rent Allowance
Under Section 10(13A), several tax exemptions can be availed by individuals residing in rented premises. However, the total tax exemptions are the minimum of the three components:
- HRA is received annually.
- If the individual is a metro city resident, then 50% of his salary (40% if he resides in non-metro cities).
- The total annual rent-10% of the basic salary.
But some companies do not include the HRA benefits in the salary of the employees. In that case, they can claim tax benefits under section 80GG. Here the total deductions will be calculated against the minimum of any of the three components.
- Only Rs.5,000 of the total rent payment.
- 25% of the total income.
- The entire rent amount- 10% of the monthly salary.
Tips To Save Income Tax in India For Businessmen
1. Expenses For Traveling
The business travel expenses can account for tax deductions to save income tax.
2. Expenses For Food
Such expenses can also be a valid reason to save income tax.
When two businessmen join together to run a business, the profits earned are shared in this case. Therefore, no tax is levied on the income earned through such partnerships.
Tips To Save Income Tax In India For Salaried Individuals
Every working individual receives a fixed component in their bank balance towards the end of every month. This is the basic salary. Taxes are levied on this source of income every year. You can save income tax by following the methods below.
1. Leave Travel Allowances
Under Section 10(5), employees can cover their spouse, children, parents, and siblings (dependent on the salaried individual). This is allowed only for travel within India.
2. Bonus From The Employers
This is a performance-based incentive. It is 100% taxable.
3. Food Coupons
Coupons received on food items are not taxable but only to a certain limit. The limit is up to Rs.2,600.
4. Standard Deduction
This was introduced in the year 2018. Every individual can avail of a standard deduction of Rs.50,000.
5. Expenses For Telephone And Internet
Such expenses are also used to avail tax deductions.
6. Amount From The Voluntary Retired Scheme
This amount can be availed by individuals planning to retire voluntarily. It is not taxed up to a certain limit. The limit set by the government is Rs.5 lakh.
7. House Rent Allowance
These allowances can be claimed by individuals residing in rented apartments or houses. This enables individuals to exempt themselves partially or completely from taxes.
8. Employer’s Provident Fund
Both the employer and the employees can contribute to this scheme. They have to invest 12% of their salaries towards these funds every month. The interest earned through these funds is 8.65%.
9. Professional Tax
The state levies this tax on every employee. As per this tax, a maximum of Rs.2,500 is deducted from the salary and credited to the state government account.
10. Leave Encashment Policy
Leave engagement is the amount received by the employees during their leave. This amount is taxable.
This amount is fully exempted from the central and state government employees. However, for the non-government employees, either one of the three will be exempted.
- Before retirement or resignation, the average salary of 10 months can be exempted.
- The leave encashment amount was received.
- The amount equivalent to the salary of the leave.
11. Section 89(1)
As per this section, when employees receive their salaries in advance or arrears, they are entitled to tax benefits.
This is the monthly payment made to retired individuals. The pension is taxed as per the income tax act.
13. Amount Of Gratuity
The individuals are entitled to this payment only after the completion of 5 years in the company. This amount is received only after the retirement or the resignation of the employees. It is tax-free if received upon the retirement or the death of the employee. Otherwise, the Payment of Gratuity Act has to be covered by the employers.
If the employees are covered or not covered under this act, then the following is exempt.
- The salary is drawn at the end of every completed year for the past 15 days.
- The gratuity amount was received.
14. Tax Deducted At Source
Tax Deducted at Source or TDS is a part of the income deducted by the employers. This amount is paid to the Income Tax Department on behalf of the employees. The TDS certificate called form 16 displayed the amount of tax deducted every month.
15. Form 26AS
This form is provided by the Income Tax Department to every employee stating the amount of tax deducted every month.
Tips To Save Income Tax In India For Individuals In The Highest Tax Bracket
Individuals with an annual income of more than 15 lakh fall under this category. Although there aren’t many tax deductions and exemptions, in this case, individuals can still make attempts to save income tax.
- If the spouse is not earning, then huge lump sums can be transferred to their accounts. This transfer can be made against assets like jewelry, gold, etc.
- Money can be invested in the name of parents who are retired.
Tips To Save Income Tax In India For Retired Individuals
1. Investment in annuity schemes provides a regular income and several tax benefits. Senior Citizen Saving Scheme (SCSS) is one such scheme claimed by individuals above 60 years. It has a tenure of 5 years, but premature withdrawals are permitted.
2. Several Unit Linked Insurance Plans (ULIP) are also beneficial to senior citizens. These offer an exemption of Rs.1.5 lakh under Section 80C and tax-free withdrawals at maturity under Section 10D.
Some More Tips To Save Income Tax In India
Below are some tips to follow to enhance savings and save income tax:
1. NRE Account Interest
The NRE account belongs to the Non-Resident Indians. The interest in this account is generated on the accumulated account in the fixed deposit. The amount generated through such an account is not taxable by the government.
Deductions to Non-Resident Indians and Person of Indian Origin.
2. Educational Scholarships
Any scholarships received from private or public schools are tax-free. This is possible under Section 10(16).
3. Income Through Sold Equity Mutual Funds
The taxes are applicable only if the long-term gains are more than 1 lakh. The tax levied is 10% of the investment amount.
4. Dividends On Equity Mutual Funds
The amount received as dividends is tax-free.
5. Wedding Gift
Under Section 56(2), the cash, cheques, and gifts received during a wedding or any other family functions are not taxable.
6. Income From Agriculture
Any sources of income earned through agricultural land are tax-free. This also includes rent from land, the amount generated through the sold products, and the amount through a farm building.
7. HUF And Secondary Income
Many individuals may also have secondary sources of income apart from the primary salary income. The secondary income earned can be invested by the individuals in a separate HUF account. Further, the individual can claim several tax benefits.
8. Inherited Amount
The amount inherited by the successor of the will is not taxable in India.
The Minimum Threshold For Income Tax
This varies the age of every person. The minimum threshold is:
- For individuals below 60 years of age and Hindu Undivided Families (HUF), the value is Rs.2.5 lakh.
- For individuals between the ages group 60 to 79, the value is Rs.3 lakh.
- For individuals above 80 years of age, the value stands at Rs.5 lakh.
Tax Liabilities After The Minimum Threshold
Once the taxpayers’ minimum threshold income tax is exceeded, the excess income is taxed as per the rates.
i. For Individuals Below 60 Years
ii. For Individuals Between The Ages Group 60: Less Than 80 Years
iii. For Individuals Above 80 Years
Filling The Income Tax Returns
i. This can be achieved electronically on the official portal of the income tax department.
ii. To fill the online form, the individual has to log into the website. The PAN card and the aadhar card details are necessary to create and log in to the account.
iii. Once logged in, the individual has to select the assessment status and the year of filling to access the form.
iv. The ITR form should be filled as specified. In the case of a salaried individual, form 16 and 26AS should be used.
v. The services of Tax Return Prepares (TRPs) can also be used instead of online applications.
New Income Tax Regime Since The FY 2020-21
Let’s look into the details of the new tax structure by considering an example. Now suppose that an individual’s total income is Rs. 14 lakh during the financial year 2020-21. If his employers have contributed to the NPS, they are eligible for a deduction under Section 80CCD (2). Therefore, the taxable amount is 14 lakh – the contribution (Assume the contribution as Rs. 50,000). The income tax liability is calculated on Rs.14.5 lakh under the new regime.
As per the table, the tax is not charged for the first 2.5 lakh from the 14.5 lakh. Now the amount remaining is 14.5-2.5=12 lakh.
The next 2.5 lakh (Rs.5 lakh minus the exempt Rs.2.5 lakh) from the 12 lakh will be taxed at 5%. Therefore 5% of 2.5 lakh is Rs.12,500. Now the amount left will be 12-2.5=9.5 lakh.
The next 2.5 lakh (Rs.7.5 lakh minus the exempt Rs.5 lakh) from the 9.5 lakh will be taxed at 10%. Therefore 10% of 2.5 lakh is Rs.25,000. Now the remaining amount is 9.5-2.5=7 lakh.
The next 2.5 lakh (Rs.10 lakh minus the exempt Rs.7.5 lakh) from the 7 lakh will be taxed at 15%. Therefore 15% of 2.5 lakh is Rs.37,500. Now the remaining amount is 7-2.5=4.5 lakh.
The next 2.5 lakh (Rs.12.5 lakh minus the exempt Rs.10 lakh) from the 4.5 lakh will be taxed at 20%. Therefore 20% of 2.5 lakh is Rs.50,000. Now the remaining amount is 4.5-2.5=2 lakh.
The remaining 2 lakh (Rs.14.5 lakh minus the exempt Rs.12.5 lakh) is still to be taxed at the rate of 25%. Therefore 25% of 2 lakh is Rs.50,000.
Hence on summing up, the tax liabilities for the income come out to be Rs.1.75 lakh. Apart from this, the educational and health cess is added at the rate of 4%, which amounts to Rs.7,980. Therefore, the total tax liability in the new regime is Rs. 1,82,980.
Old Income Tax Regime Until The End Of FY 2019-20
Now let’s look into the old regime of income tax. Considering the same example from the new regime, let’s take an individual’s income as Rs.14 lakh.
As per the table, the first 2.5 lakh is exempted from taxation. The remaining amount is 11.5 lakh. The next 2.5 lakh (Rs.5 lakh minus the exempt Rs.2.5 lakh) from the 14 lakh will be taxed at 5%. This sums up to Rs.12,500. So, the amount remaining is 11.5-2.5=9 lakh.
The next 2.5 lakh (Rs.7.5 lakh minus the exempt Rs.5 lakh) from the 11.5 lakh will be taxed at 20%. This sums up to Rs.50,000. So, the amount remaining is 9-2.5=6.5 lakh. The next 2.5 lakh (Rs. 10 lakh minus the exempt Rs. 7.5 lakh) from the 9 lakh will also be taxed at 20%. This sums up to Rs.50,000. So, the remaining amount is 6.5-2.5=4 lakh.
The next 2.5 lakh (Rs. 12.5 lakh minus the exempt Rs. 10 lakh) from the 6.5 lakh will be now taxed at 30%. This sums up to Rs.75,000. So, the remaining amount is 4-2.5=1.5 lakh. Further, the remaining 1.5 lakh (Rs. 14 lakh minus the exempt Rs.12.5 lakh) will also be taxed at 30%. This sums up to Rs. 45,000.
The total tax liability under the old regime is Rs.2,32,500. An additional cess amount of Rs.10,500 is also included. Therefore, the total tax liability is Rs.2,43,000. But under this scheme, various tax exemptions can be availed by the taxpayers to reduce the burden and enhance savings. This includes deductions under sections 80C, 80D, etc. and tax exemptions such as HRA, LTA, etc.
With the inception of the new financial year with effect from 1st April 2020, there are few details that taxpayers should be abreast of. For instance, taxpayers now have a choice. They could either stick to their regular tax-paying regime or switch to the new regime. This choice can be taken as per the convenience of the employees and the businessmen. For salaried workers, they can make this choice every financial year. Simultaneously, a business can only switch their regime once after they have chosen the new regime for themselves. The next question that arises is, ‘What is the difference between the two regimes?’ Here’s a detailed tabular column that explains the question.
Here are the income tax slabs for the financial years 2019-20 and 2020-21.
The key point to be noted here is that several tax benefits under the Income Tax Act are only available under the old regime. As per the new regime, there is no provision for tax deductions and exemptions as the income tax is subsidized. However, under Section 87A, taxpayers with an annual income of up to 5 lakh are eligible for a refund of Rs.12,500. This implies that they don’t have to make any tax payments under the new regime. Thus, the taxpayers have to avail of the right regime to avail of maximum savings.
In the new tax structure, the taxpayers are eligible only for a single tax deduction. Under Section 80CCD (2), they can deduce the income tax on the National Pension Scheme account’s contribution. This can be availed, provided the individual contributes 10 percent of his salary.
1. Can the income tax form be submitted online?
2. How are incomes classified?
3. Is it necessary to save money if the annual income of an individual is less than Rs.2.5 lakh?
4. Can investment in mutual funds to save income tax?
5. To avail deductions under the House Rent Allowance (HRA), an individual must submit the PAN number of his landlord?
6. Self-employed individuals can claim the benefits under HRA?
7. The interest earned on the tax-saving fixed deposits is taxed?
8. What is the maximum tax deduction availed on the interest payment of a home loan?
9. Is it possible to claim a deduction on the Health insurance premium paid for parents?
10. Define salary income.
11. What are allowances?
12. If a person has worked under multiple employees who haven’t deducted any tax from the income, they have to pay tax on their own?
13. The money received through a pension is taxed?
14. The arrears received on salaries are taxable?
15. If multiple employers had employed a person, can he claim an exemption of Rs.2.5 lakh on every employment?
16. What is HUF?
17. What are the benefits of forming a HUF?
2. For HUF to exist, the inherited joint family assets are not necessary.
3. HUF families can avail of loans easily.
4. Women can be joint owners of Karta in the HUF, even if they don’t have a separate account of their own.
They can invest in several investment tools.
Although many people are averse to the tax-payment procedure, several ways can be adopted to avoid the burden of taxes. This can be achieved by either claiming expenses or by investing in tax-saving schemes. The new tax regime introduced may not benefit every category of individuals. Hence an individual should carefully analyze his financial status and the regime that reduces the financial burden. Hope this article helps you with the tips to save income tax.