Income Tax Deductions

An individual or a taxpayer can have multiple sources of income in his life. However, whatever earnings or profits he is receiving will be taxed, according to the provisions of the Income Tax Act, 1961. However, people have various means of saving tax.

Tax is charged on all your earnings in a particular financial year. Whether your money is coming in by way of salary or business income, rent or investment, or even from betting and gambling, you will be taxed by the government. However, there are a number of options through which you can save on tax. The right investments will ensure that you save a considerable amount of money which would otherwise go to the government in the form of tax. Section 80C, Section 80D and Section 80G of the Income Tax Act, 1961, define the ways through which you can save on tax.

Some of the most common means of saving on tax include investments in insurance and government schemes. However, there are differences in the benefits offered by each scheme. Here, we will look at some of the investments that can help you save on tax.

Public Provident Fund (PPS)

One of the most commonly used and popular investments to save on tax under Section 80C of the Income Tax Act is PPF. Individuals are allowed to invest the whole Rs.1.5 lakh into this scheme and the full amount is tax-free. Perhaps the reason why PPF has become so popular is the fact that the interest it offers under the scheme is also tax-free, unlike the returns from National Savings Certificate or a five-year term deposit, which are taxable. Any citizen of India who has a PPF account can avail the scheme and it can be opened at any post office across the country, or a private sector bank, or the State Bank of India. The interest rate for PPF at the moment is 7.8%.

Employees’ Provident Fund (EPF)

An increasing number of companies and organisations in the country allow their employees to go for an EPF as the amount invested in the scheme is eligible for tax deductions while the returns are also exempt from tax. Individuals who opt for EPF will have to contribute about 12% of their basic salary towards the scheme and their employer will match the contribution. Employees also have the option to voluntarily contribute a greater sum towards the scheme, but the maximum deduction that can be claimed is limited to Rs.1.5 lakh.

Equity-linked Savings Scheme

Equity-linked savings schemes became popular due to the exceptional performances of the stock market. However, the whole mutual fund market has been underperforming recently and ELSSs have taken a hit as a result. Even though ELSSs are not highly volatile, they have the potential to offer considerably good returns. For instance, ELSSs offered yearly returns of 22% in 10 years for the year ended 2012.

Senior Citizen’s Savings Scheme

Senior citizens (individuals who are 60 years of age and above) can get regular income by investing in a Senior Citizen’s Savings Scheme. This scheme provides returns of 8.4%, but has a five-year lock-in period. However, the money can be withdrawn post the first year by paying a penalty. All returns offered by the scheme, however, are subject to tax. In case the amount is in excess of Rs.5,000, it shall be deducted at source.

National Pension Scheme (NPS)

Individuals who opt for the National Pension Scheme will have to ensure that their company is registered under the programme. Investing in this scheme can help in lowering your tax liability by 10% of your basic pay under Section 80CCD(2) of the Income Tax Act, 1961. A minimum contribution of Rs.6,000 has to be made annually under the scheme, and the returns it offers are market-based, which doesn’t exactly qualify it as a savings scheme. It works more like a pension plan which helps in building a corpus for retirement. However, only 60% of the whole amount can be withdrawn and the rest of it will be paid out on a periodic basis as pension annuity. The reason why NPS has become so prominent is that the charges associated with it are much lower in comparison with other pension plans.

Unit-linked Insurance Plans and Endowment Plans

Although unit-linked insurance plans and endowment plans are two different kinds of schemes, they both come with an insurance component. ULIPs and endowment plans are offered by insurance companies are quite flexible. The charges associated with them are relatively high, but they have been growing in popularity thanks to the tax benefits they provide. Despite their returns, it is more beneficial to invest in PPF along with a term insurance plan instead of an endowment plan. And instead of purchasing a ULIP, it is considered more beneficial to invest in mutual funds and term plans.

Term Deposits

Term deposits are subject to tax so far as the interest earned through them is concerned. They are considered as less lucrative investment options in comparison with PPF. However, the interest rates offered by term deposits are higher when compared to PPF. The lock-in period for term deposits is 5 years, and they can be purchased from banks or post offices.

Term Insurance

Tem insurance is a crucial tool to stay financially protected, and the fact that tax deductions can be availed on them is an incentive.

Infrastructure Bonds

A number of companies in the infrastructure industry issue bonds at the end of the year to their employees. The best bonds to invest in are in the Infrastructure Finance Corporation of India, PTC India Financial Services, Rural Electrification Corporation, SREI Infrastructure Finance and L&T Infrastructure. Investing in infrastructure bonds could open the door to claiming extra deduction of Rs.20,000 under Section 80CCF of the Income Tax Act, 1961, and the interest rate offered by these bonds is around 8.7%.

Medical Insurance

Section 80D of the Income Tax Act allows individuals to claim deductions of up to Rs.35,000 by purchasing medical insurance. The maximum premium payment to be made to purchase a medical insurance policy is around Rs.15,000, and if premiums are paid by an individual for his/her parents, an extra deduction of Rs.20,000 can be availed provided the parents are over 60 years of age, or Rs.15,000 in case they are below 60 years of age.

Medical Expenses

In case you have availed medical treatment or have paid for the medical treatment of your dependents, tax deductions can be claimed for up to Rs.40,000. In case the amount you have paid for the treatment is less than Rs.40,000, the whole amount will be reimbursed to you under Section 80DDB of the Income Tax Act, 1961. The amount that can be claimed in case you have paid for the treatment of a senior citizen is Rs.60,000.

Medical Treatment of Disabled Persons

Tax exemption can be availed under Section 80DD of the Income Tax Act, 1961, for costs incurred on medical treatments of dependents who are physically disabled, in case you are making premium payments to the Life Insurance Corporation of India or another insurance provider who has been approved by the Income Tax Department. The definition of dependents in this scenario is limited to siblings, parents, spouse and children. In case the disability suffered by the person is 40%, the claim amount you can claim per year is Rs.50,000. Likewise, if the person is 80% disabled, the sum that can be claimed will be Rs.1 lakh per year.

Interest on Loan

In case you have taken an education loan to pursue higher studies, either for yourself or for one of your dependents, the interest payments associated with it are tax-free under Section 80E of the Income Tax Act, 1961. The loan can be availed for your children, wife, or minors of whom you are a legal guardian. The deduction on this loan can be claimed for 8 years or until the date on which you make interest payments, whichever is earlier. However, deductions are only given for loans taken to pursue higher education such as full-time graduate and post-graduate courses in the fields of applied sciences, management studies, pure sciences such as statistics and mathematics, or engineering. However, this exemption is now extended to other fields of education such as vocational studies too. Part-time courses do not qualify for exemptions or deductions.

Donations to Charity

Donations made to approved educational institutions, charitable institutions and trusts can be claimed as deductions under Section 80G of the Income Tax Act, 1961. Depending upon the kind of donations made, the claims can be made for 50% to 100% of the amount. Donations made to certain funds such as Prime Minister’s National Relief Fund, National Defence Fund, National Foundation for Communal Harmony, Prime Minister’s Drought Relief Fund, National Children’s Fund, etc. are all eligible for tax exemptions.

Contributions to Political Parties

In case you make contributions to an electoral trust or political party, it can be claimed as deductions under Section 80GGC of the Income Tax Act, 1961.

Rental Allowance

In case a self-employed or salaried individual is residing in a rented house, and he/she does not get any sort of House Rent Allowance, deductions can be claimed under Section 80GG of the Income Tax Act, 1961. However, individuals will not be allowed to claim such deductions in case his/her spouse or child owns a residential property in the country or overseas. In such a scenario, the claim will be limited to the least of 25% of the overall income, or excess of rent paid over 10% of overall income, or Rs.2000 per month under Section 80GG of the Income Tax Act, 1961.

Disability Exemption

Any Indian resident who suffers from a particular disability can make claims for tax deductions under Section 80U of the Income Tax Act, 1961. To claim this deduction, the person has to be more than 40% disabled with mental illness, blindness, mental retardation, low vision or hearing impairment. The amount that can be claimed as deduction is fixed at Rs.50,000 regardless of the costs incurred on treatments. In case the disability is serious (100% disability), the amount that can be claimed is Rs.1 lakh.

Investment in the Stock Market

Section 80CCG was introduced to the Income Tax Act by the Finance Act in 2012 so that a 50% tax break could be offered to new investors who put up to Rs.50,000 into the stock market. However, the taxable income of such an individual must be less than Rs.10 lakh.

Losses in Stocks

Losses incurred in stocks in a particular year can reduce your taxable income. In case you have sold debt funds or gold or property and made any long-term capital gains, they can be set off against short-term capital losses in stocks, thereby lowering your tax liability. You can set off short-term capital losses against taxable long-term capital gains and short-term capital gains, which is especially beneficial for those who have recorded profits in physical gold and gold ETFs.

In case the long-term capital gain made by an individual through the sale of gold ETFs is Rs.5 lakh, he/she will be taxed for Rs.50,000. However, in case the person has made a short-term loss of Rs.2 lakh, by selling some stocks within a year of purchasing them, the loss can be set off against the gains from gold ETS, which means that the gain from gold will come down to just Rs.2 lakh, and the person will be taxed Rs.20,000.

Family Finances

In case investments are made in children’s names, the income received from such investments is clubbed together with the income of the parent who falls in the higher tax bracket. However, a deduction of Rs.1500 can be claimed per child, and claims can be made for two children. In case you open a fixed deposit account in the name of your child, the interest you earn (up to Rs.1500) will not be clubbed with your taxable income.

In case you reside with your parents in their own house, rent payments can be made to them. In case your parent falls in the lower tax slab or earns no income whatsoever, your tax liability can be decreased to a significant extent. However, your parent will be taxed on the income received through rent post a standard deduction of 30%. Basically it means that parents who are senior citizens can receive up to Rs.3.57 lakh per annum and there will be no added tax liability for them to deal with. In case the parents who receive rent are senior citizens who are over 80 years of age, they can receive up to Rs.7.15 lakh and have no added tax liability. In case the house in which you’re residing is co-owned by both parents, the rent can be divided by two.

Leave Travel Allowance

Leave Travel Allowance can be used for holidays. The allowance is given two times in four years. If you have not claimed the allowance in a certain four-year block, one journey can now be carried forward to the following block and can be claimed in the first calendar year of that particular block.

Tax on Bonus

Bonuses received from employers are subject to tax in the year they are received. But if you request your employer to give your bonus payments the following year if the tax slabs are set to be modified or if rates are forecast to be lowered in the current assessment year. Your tax investment information will have to be furnished to the employer so that they do not deduct tax on bonus before they have actually given it to you.

Restructuring of Salary

Salary restructuring is not always possible for the purpose of saving on tax. However, in case your company allows it, or if your HR department permits it, you could restructure some of the components of your salary and lower your tax liability.

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