Income Tax Savings

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.

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 Income Tax Saving for FY 2020-21

Here are some additional ways you can save on income tax under various sections of the Income Tax Act, 1961, for the financial year 2020-21:

  • Under Section 10 (1): Any income from agriculture, be it from the sale of agricultural products, rent from agricultural land, or income from farm buildings, is exempt from tax.
  • Under Section 10 (2) : An amount that is received as the income or family estate of a Hindu Undivided Family (HUF) is not subject to tax obligations. An individual can also deposit any secondary income into an HUF account which will not have any tax liabilities.
  • Under Section 10 (16): The total sum received for an educational award or scholarship is exempt from tax without any ceiling on it.
  • Under Section 24: You can avail a tax deduction of up to Rs.2 lakh on the interest component of your home loan.
  • Under Section 80: Interest paid on an education loan can be claimed as tax deduction under this section.
  • Under Section 80C:
    • Insurance: Traditional insurance plans which are either moneyback or whole-life insurance plans provide tax benefit for premiums paid which comes under Section 80C. The value is also tax-free on maturity or in the case of the policyholder's demise.
    • Home loans: You can claim a tax deduction of up to Rs.1.5 lakh on the principal amount paid on a home loan in a financial year.
    • Public Provident Fund (PPF): The interest accumulated on the balance in a PPF account is exempt from tax if the contribution is below Rs.1.5 lakh in a financial year.
    • Unit-linked Insurance Plan (ULIP): This not only provides life insurance but also makes investments in market-linked assets that are a mixture of fund options ranging from equity to debt offerings. There is a lock-in period of five years after which the amount can be enjoyed tax-free or tax-free at maturity. The tax benefit is up to Rs.1.5 lakh per year.
  • Under Section 80E: There is no limit on the tax deduction for the interest component paid on education loans for higher education for anyone in India.
  • Under Section 80EE: First time homebuyers can get a tax benefit of up to Rs.50,000 on their home loan under this section. Also, you can get tax deduction, without any limit, on your second home loan if you reside in the residence bought with your first home loan.
  • Under Section 80G: Under this section, you can avail 50% to 100% tax deduction on voluntary donations made in cheque or cash as contribution to the National Relief Fund or other organizations specified by the Ministry of Finance as being eligible for tax deduction for contributions.
  • Under Section 80RRB: You can claim tax deductions for income that is earned from any patents or royalties. Up to Rs.3 lakh in income tax can be saved for patents that are registered under the Patent Act, 1970.
  • Under Section 80TTA: You can claim tax deductions for interest earned on savings accounts with a cap of Rs.10,000. Any interest amounts exceeding Rs.10,000 will be taxable income.
  • Under Section 80U: Under this section, tax deduction can be claimed for disability with a disability certificate as proof so that up to Rs.1 lakh can be exempt from 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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