Income Tax Savings: Important Things You Must Know

If you want to save income tax legally invest in financial instruments coming with tax benefits under the various sections of the Income Tax Act, 1961. By doing this, you can not only lower your tax burden but can also get good income tax benefits.
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Some of the ways through which you can save taxes under Section 80C, Section 80D, and Section 80EE of the Income Tax Act, 1961, include investments to the extent of Rs.1.5 lakh which can lower your taxable income, purchasing medical insurance that will make you eligible for deductions to the extent of Rs.25,000, availing home loans which will enable you to claim deductions to the extent of Rs.50,000 on the interest payments. Here, we will take a look at some of the ways through which you can significantly lower your tax liability.

Section 80C of the Income Tax Act

Individuals as well as Hindu Undivided Families can save tax under Section 80C of the Income Tax Act, 1961. This section covers a number of expenses and investments which you can use to claim deductions. The maximum amount that can be claimed as deductions under this section is Rs.1.5 lakh over the course of a financial year. Making investments in instruments that offer tax benefits under this section of the Income Tax Act will lower your taxable income, which in turn will lower your tax liability. The following are the best investment options under Section 80C of the Income Tax Act:

Investment Option Returns Lock-in Period
Five-year bank FDs 6% to 7% Five years
National Savings Certificate (NSCs) 7% to 8% Five years
Public Provident Fund 7% to 8% Fifteen years
Equity Linked Savings Schemes (ELSSs) 15% to 18% Three years
National Pension System (NPS) 8% to 10% Till retirement

Tax Saving Options Apart from those under Section 80C of the Income Tax Act

While Section 80C of the Income Tax Act is the most popular section in terms of deductions, there are other sections that can help you save on tax. Availing a home loan or purchasing health insurance could also help you save a considerable amount of money that would otherwise be spent on taxes. Here are some things you could do to claim tax deductions beyond Section 80C of the Income Tax Act, 1961:

  • If you purchase medical insurance, not only will you be financially covered in times of emergencies, but you will also be eligible for tax deductions to the extent of Rs.25,000. The deduction limit for senior citizens is Rs.50,000. The section under which this deduction can be claimed is Section 80D of the Income Tax Act, 1961.
  • If you have availed a home loan, you can claim deductions on the interest component of the loan. The maximum amount that can be claimed is Rs.50,000, and the section under which this deduction can be claimed is Section 80EE of the Income Tax Act, 1961.
  • Home loans can also come in handy with regard to lowering your taxable income. The principal amount of the loan is eligible for deductions under Section 80C of the Income Tax Act, and the maximum amount that can be claimed under this section is Rs.1.5 lakh. The interest portion of the loan, on the other hand, is eligible for deduction under the head ‘Income from House Property’.

Effective Planning Methods for FY 2018-19

The start of the financial year is ideally the best time to think of strategies to save tax. A large number of taxpayers across India tend to procrastinate and wait till the end of the financial year to plan their tax-saving strategies. Waiting for the last minute usually opens the door to hurried decisions, which in turn lead to human errors. Planning your taxes earlier in the year will help you achieve your long-term financial objectives, and more importantly, help you in saving a lot of money that you would otherwise end up paying as tax. Investments in tax-saving instruments can be utilised to build wealth as well as save tax. Here are some simple pointers that can help you save tax during FY 2018-19:

  • Look out for the expenses that you are already incurring to check if they can be claimed as deductions. Expenses on things such as the tuition fees of your children, the insurance premiums you have been paying, the contributions you have been making towards Employees’ Provident Fund, the repayment of your home loan, etc. can help you save a considerable amount of money over the course of a year.
  • These expenses must be added up and subtracted from Rs.1.5 lakh as doing so will help you understand how much you should invest. The whole amount needn’t be invested in case your expenses are already covering it.
  • Tax-saving investment options must be chosen based on your profile and your financial goals. Consider investing in instruments such as Public Provident Fund, National Pension System, Equity Linked Savings Schemes, and fixed deposits as they can help you in your efforts to save tax.

Following these simple pointers will help you understand how much money you should invest if you want to save tax. If you haven’t started planning on your tax-saving strategies, it is best you start immediately as waiting for the end of the financial year will only make it difficult for you to meet your financial goals.

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