How to Save Tax in India
Taxes are a part of our financial lives that often cause stress and anxiety. But with effective planning, you can significantly reduce your tax burden. Whether you're a salaried individual, a business owner, self-employed, or a senior citizen, understanding how to save tax in India can help you make the most of your income. This guide explains tax-saving strategies and provides actionable insights on saving income tax in India.
Understanding the Basics of Income Tax
Before diving into the strategies for saving tax, it’s essential to understand the basics of income tax. Income tax is a direct tax levied by the Government of India on your income. The Income Tax Act of 1961 defines the tax rates and slabs, which are subject to change every financial year during the Union Budget.
Your total taxable income is calculated by adding all income sources, including salary, business income, capital gains, and other income, and then subtracting eligible deductions and exemptions. The resulting amount is your taxable income, which is taxed as per the applicable income tax slabs.
Best Ways to Save Tax in India
Invest in Section 80C Instruments
1. Public Provident Fund (PPF)
The PPF is a long-term savings scheme that offers a fixed interest rate which is backed by the government. It has a lock-in period of 15 years, which can be extended in blocks of 5 years. The interest earned is completely tax-free, and contributions qualify for tax deductions under Section 80C. PPF is ideal for risk-averse investors looking for assured returns and capital safety. The minimum annual contribution is ₹ 500, and the maximum is ₹ 1.5 lakh.
2. Equity Linked Savings Scheme (ELSS)
ELSS are mutual funds that invest predominantly in equities and have a mandatory lock-in period of 3 years, the shortest among Section 80C options. These funds have the potential to provide high returns compared to other 80C investments, but they come with higher risk due to market volatility. Dividends and long-term capital gains (above ₹ 1 lakh) are taxable, but the investment amount qualifies for a tax deduction under Section 80C.
4. 5-Year Tax-Saving Fixed Deposit
These are special fixed deposits offered by banks with a lock-in period of 5 years. They provide assured returns and are relatively safe investment options. Interest earned is taxable as per your income slab, but the investment amount is eligible for a tax deduction under Section 80C. These deposits are ideal for investors who prefer guaranteed returns without exposure to market risks.
5. Sukanya Samriddhi Yojana (SSY)
SSY is a government-backed savings scheme aimed at the parents of girl children. It offers a high interest rate, which is compounded annually. The scheme has a tenure of 21 years or until the girl gets married after 18 years. Partial withdrawals are allowed after the girl turns 18. Contributions up to ₹ 1.5 lakhs per annum qualify for a deduction under Section 80C, and the interest earned is tax-free.
6. Senior Citizen Savings Scheme (SCSS)
SCSS is a government scheme designed for senior citizens, offering a high interest rate with a maturity period of 5 years, extendable by 3 years. The interest is paid out quarterly and is fully taxable. However, the principal amount invested qualifies for a deduction under Section 80C. This scheme is ideal for senior citizens looking for a safe investment with regular income.
7. Unit Linked Insurance Plans (ULIPs)
ULIPs are insurance-cum-investment products that offer life cover along with investment in equity, debt, or a mix of both. The lock-in period for ULIPs is 5 years, and the returns depend on the performance of the chosen funds. Premiums paid towards ULIPs qualify for a deduction under Section 80C, and the maturity proceeds are tax-free under Section 10(10D), subject to conditions.
National Pension System (NPS) (Section 80CCD)
Contributions to the National Pension System (NPS) are eligible for an additional deduction of up to ₹ 50,000 under Section 80CCD(1B), over and above the ₹ 1.5 lakhs limit under Section 80C. NPS is a retirement-focused investment option with a mix of equity, corporate bonds, and government securities.
Health Insurance Premiums (Section 80D)
Health insurance premiums paid for self, family, and parents can be claimed as deductions under Section 80D. You can claim up to ₹ 25,000 for premiums paid for yourself, your spouse, and your children. For parents, an additional ₹ 25,000 can be claimed, which increases to ₹ 50,000 if the parents are senior citizens. Health insurance not only provides tax benefits but also ensures financial security against medical emergencies.
Home Loan Interest (Section 24 and Section 80EE)
The interest paid on a home loan is deductible up to ₹ 2 lakhs under Section 24 for a self-occupied property. First-time homebuyers can claim an additional deduction of up to ₹ 50,000 under Section 80EE, provided the loan amount does not exceed ₹ 35 lakhs, and the property value is not more than ₹ 50 lakhs.
Education Loan Interest (Section 80E)
The interest paid on an education loan for higher studies can be claimed as a deduction under Section 80E. There is no upper limit for this deduction. The deduction is available for a maximum of 8 years or until the interest is fully paid, whichever is earlier.
Donations to Charitable Organisations (Section 80G)
Donations to specified charitable institutions and relief funds are eligible for deductions under Section 80G. To claim this deduction, ensure the organisation is approved under Section 80G and obtain a receipt with the PAN of the organisation.
Savings Account Interest (Section 80TTA)
Interest earned on savings accounts in banks, post offices, or cooperative societies is eligible for a deduction of up to ₹ 10,000 under Section 80TTA. For senior citizens, the limit is ₹ 50,000 under Section 80TTB, which includes interest from savings accounts, fixed deposits, and recurring deposits. This deduction helps in reducing the tax burden on the interest income earned from savings accounts.
Disclaimer: The investment options listed are based on the old tax regime. Before making any investment decisions, it's crucial to evaluate whether the old or new tax regime is more beneficial for your specific financial situation. Different regimes offer distinct advantages, so please review the options under each and choose accordingly. Consult with a financial advisor if necessary to ensure you make the best decision for your tax planning and investment goals.
How to Plan Your Tax-Saving Investments for the Year?
Effective tax planning involves strategically selecting and investing in instruments that not only provide tax benefits but also align with your financial goals. Here are some steps to plan your tax-saving investments for the year:
- Assess Your Taxable Income: Calculate your total taxable income and identify the tax slab you fall into.
- Identify Eligible Deductions: List out all possible deductions you are eligible for, such as Section 80C, 80D, 80E, etc.
- Align with Financial Goals: Choose tax-saving instruments that also help you achieve your financial goals. For instance, if you are planning for retirement, consider investing in PPF or NPS.
- Spread Out Investments: Don’t wait until the end of the financial year to make your tax-saving investments. Spread them out throughout the year to manage your finances better.
- Consult a Financial Advisor: If you are unsure about the best investment options for saving tax, consider consulting a financial advisor who can provide personalised advice based on your financial situation.
Conclusion
Saving tax is not just about reducing your tax liability but also about making informed financial decisions that can secure your future. By understanding the various tax-saving options available and planning your investments wisely, you can maximise your savings and achieve your financial goals. Whether you are a salaried individual, self-employed, or a senior citizen, these strategies can help you understand how to save tax in India effectively. Remember, the key to successful tax planning is starting early and being consistent with your investments.
Learn how to optimise your investments and save more on taxes with m.Stock.
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FAQ
How can I reduce my tax legally in India?
By leveraging the tax-saving instruments mentioned in this article, you can effectively reduce your taxable income and save more of your hard-earned money. It’s important to choose the right mix of investments based on your financial goals, risk tolerance, and investment horizon.
How to pay zero income tax?
To pay zero income tax in India legally, you need to plan your finances effectively and make use of the available deductions and exemptions to their fullest. However, the net tax payable will depend on your annual earnings and calculated tax liability. You can consult a financial advisor in this regard.
How to pay zero tax up to 15 lakhs?
To pay zero tax on an income of up to ₹ 15 lakhs in India, you can strategically use various deductions and exemptions. By leveraging the ₹ 2.5 lakhs basic exemption, investing ₹ 1.5 lakhs under Section 80C, claiming a ₹ 50,000 standard deduction, and using ₹ 2 lakhs deduction under Section 24(b) for home loan interest, along with HRA exemption and other allowable deductions, you can significantly lower your taxable income. Proper optimisation of these tax-saving instruments can potentially reduce your taxable income to zero.
How can senior citizens save tax on their income?
Senior citizens can save tax by investing in schemes like SCSS, claiming higher interest deductions under Section 80TTB, and availing deductions for medical insurance premiums and medical expenses.
What are the tax benefits of investing in NPS?
Investments in the National Pension System (NPS) are eligible for tax deductions of up to ₹1.5 lakhs under Section 80CCD(1) and an additional ₹50,000 under Section 80CCD(1B).
What is the maximum deduction available under Section 80C?
The maximum deduction available under Section 80C of the Income Tax Act is ₹1.5 lakhs per financial year. This includes investments in instruments like PPF, ELSS, NSC, and tax-saving fixed deposits.
Are donations to political parties eligible for tax deductions?
Yes, donations to registered political parties can be claimed as a deduction under Section 80GGC for individuals and Section 80GGB for companies.
How can I save tax if I am a self-employed professional?
Self-employed professionals can save tax by claiming deductions for business expenses, investing in tax-saving instruments, and availing benefits under Sections like 80C, 80D, and 80E.
What is the difference between Section 80C and 80CCD?
Section 80C allows deductions for various savings and investment instruments, while Section 80CCD specifically provides deductions for contributions to the National Pension System (NPS).
Is the interest earned on PPF taxable?
No, the interest earned on the Public Provident Fund (PPF) is completely tax-free under the Income Tax Act.