Many of us know the rush of the end of the financial year when we scramble to submit documents that could help reduce the income tax that needs to be paid on that year’s earnings. The most common scenario is the submission of rent receipts, and various insurances but is that the only way you can save on taxes?
If you were to take a closer look at all the instruments available to you for this purpose you’d realise that we are spoilt for choice when it comes to saving on income tax. So the very first question we need to ask is how much can you save on tax? To understand that first you need to understand the slabs.
The income tax slab is a way of categorising taxpayers based on their annual income. It has four segments where a limit is provided and income exceeding that limit is taxed at a predefined amount. The whole exercise of investing is indulged in for two main purposes and they are to create savings for the future or for a rainy day or to save on income tax.
Tips on Saving Tax
To save on taxes you can either invest your money in insurance and markets or put them in savings instruments for the future. Even the various allowances provided by the employers can be used to save on taxes. Here is a brief explanation of some.
Investments would typically be instruments where you pay today and reap benefits later. But that’s not the only advantage of investments. They provided tax benefits too. Some common investments are:
- Mutual funds:
There are certain mutual fund schemes, also known as Equity Linked Savings Schemes, which can be used to gain benefits in income tax under section 80C. These schemes come with lock-in periods which are shorter than those of fixed deposits and PPF’s (Public Provident Funds). They also offer a chance for your money to grow.
- Investment in ULIPs:
ULIPs or Unit Linked Insurance Plans are insurance schemes that are linked to the markets. Investments made under these schemes are also eligible for tax benefits and they too offer the opportunity to help your money grow.
Investing in various forms of insurance also allows for income tax benefits. The two most popular methods of investing in insurance would be life and health insurance.
- Life Insurance:
Life insurance policies are an excellent way to save on taxes. You pay a premium every years and should anything happen to you while the policy is in effect, your family is supported by large sums paid out by the insurers. The premiums paid for these policies are liable for tax benefits under section 80C of the IT Act.
- Health Insurance:
The rising costs of medical care have made health insurance a must have in today’s world. Health insurance policies can ensure that seeking medical help does not leave you penniless. Under the current rules you can reduce the taxable income by as much as Rs. 15,000 to Rs. 20,000 if you pay premiums for health insurance.
- Home loans for constructing or buying a house:
If you have taken a home loan then the principal and the interest you pay each year is eligible for tax benefits ranging from Rs. 1 lakh under section 80C for the principal under section 80C and Rs. 1.5 lakhs for the interest under section 24 of the IT Act
- Home Loans For Renovations:
While most of us are very keen on declaring home loans for income tax benefits when we purchase a house, many neglect to declare it when it is taken for renovations or reconstructions. Home loans taken for this purpose are also eligible for tax benefits.
- Tax Saving Fixed Deposits:
Tax saving fixed deposits are offered by most banks as an instrument to help save on taxes. Individuals can put anywhere from Rs. 1 lakh to Rs. 1.5 lakhs in these deposits and earn an attractive interest while saving on income tax for that year. These deposits come with a lock-in period of 5 years.
- Post Office Time Deposits:
Post office time deposits also work in much the same way as fixed deposits do except for the fact that they have no limit on how much can be put in them. The minimum is Rs. 200 and interest rates can be as compelling as 8.5% per annum. Time deposits opened for 5 years are eligible for tax benefits under section 80C.
- National Savings Certificates:
National savings certificates can be taken from the post office and come with a minimum investment of Rs. 100. They also come with lock-in periods of 5 and 10 years. Investments made in NSC’s are eligible for tax benefits and can also help your money grow in a safe environment.
- Provident Funds:
Provident funds can also be considered pension funds as they are created with long term returns in mind. They offer interest rates to the tune of 8.7% per annum over a period of 15 years and can be used to invest Rs. 500 to Rs. 1.5 lakhs in one financial year. Deposits made into the provident fund are eligible for tax benefits under section 80C.
Lesser Known Tips
- Medical deductions:
- Medical Allowance:
If you have sought treatment for any ailment in the current financial year then the expenses you incurred are eligible for deductions under section 10. The deductions can be availed to the tune of Rs. 15,000 in one financial year. It is important to note you need to claim this benefit by producing medical bills.
- Medical Deductions For Disabled Dependants:
If you have dependants who have disabilities and require medical care then the expenses incurred are also eligible for tax deductions under section 80DD to the tune of Rs. 50,000 to Rs. 1 lakh depending on the severity of the disability. This facility will cover spouses, children and parents dependant on you.
- Medical Allowance:
- Leave Travel Allowance:
Many employers may offer LTA or leave travel allowance which is eligible for tax benefits under section 10(5) of the IT Act. The benefits provided under this section are limited to the amount claimed. For example if your LTA is Rs. 25,000 and you produce bills for Rs. 20,000 then benefits will be provided for Rs. 20,000 only.
- House Rent Allowance:
This is a facility provided under section 10(13A) only to salaried individuals. If you live in a rented accommodation then you are eligible for HRA which is calculated as the least of actual rent paid less 10% of basic salary, 50% of basic salary and HRA received from the employer.
- Education Fee:
If you have children who are currently being educated then the amount that you pay towards their education is eligible for deductions under sections 10(14) and 80C. Under 10(14) an allowance of Rs. 100 per month, per child for 2 children is provided and under section 80C deductions up to Rs. 1 lakh are permitted for amounts paid towards tuition fees.
- Donations To Social Causes:
If you are in the habit of making donations to charitable organisations in India and do so regularly then you could be entitled to tax benefits under section 80G. These benefits could translate into deductions of up to 100% or 50% depending on the scheme you donate to. However, it should be noted that not all charities are included in this, therefore you will need to check if the organisation you donate to is covered or not.
- Stamp Duties on Registering A New House:
If you have just bought a house then you are sure to have spent a decent amount on stamp duties and to get the documents of the house registered. All these amounts are eligible for tax benefits under section 80C of the IT Act.
- Capital Gains:
This tax benefits is generally claimed under sections 54, 54EC and 54F of the IT Act. If you have recently gained a large sum of money from a long term asset then you would be required to pay a tax on the gains which could come to a lot since long term assets provide considerable gains. However, if you reinvest this gain within a certain period then you would not be liable to pay taxes on that gain. For example, if you have recently sold you house, if you re-invest that money in another house within 2 years then you will be exempt from paying taxes on that gain.
Let us assume that your taxable income is Rs. 5.5 lakhs that means that your total tax liability will be Rs. 35,000.
Now if you invest Rs. 30,000 in life insurance your taxable income comes down to Rs. 5.2 lakhs (5,50,000 – 30,000). This means that now the tax you have to pay is Rs. 29,870.
Let us assume that you then submit medical bills worth Rs. 12,000 as a part of your medical allowance. Now your taxable income is down to Rs. 5.08 lakhs which means that the tax due is Rs. 27, 398.
Now we add house rent allowance deductions of Rs. 83,000 which brings the taxable income further down to Rs. 4.25 lakhs which means that the new tax you have to pay is just Rs. 15,965 which is less than half of what you started with.
The best way to save on taxes is to ensure that you plan well in advance and continue to make your investments throughout the year otherwise you will be near the end of the year scrambling to make investments and might not be able to take all the advantages you could. You should also remember that in case you are not liable to pay tax, you might be required to submit forms 15G & 15H while investing in certain instruments like fixed deposits.