How to Save Tax in India

11 January 2023
9 min read

In India, taxes are levied on income, wealth, and property. Income tax is levied on individual incomes, while the central government levies corporate taxes. The wealth tax is levied on the net value of assets owned by individuals or companies.

In addition to these taxes, a wealth tax is imposed on unencumbered immovable properties (such as houses and flats) owned by individuals or companies.

The revenue generated from these taxes is vital for the smooth functioning of the country, as the government needs these funds to foster economic growth and development. The tax varies with the respective income as per the tax slab in India.

Income taxpayers always look forward to opportunities that can help them save tax and reduce their entire tax liability

Many people search for tax-saving investment options and how to save income tax in India every time the ITR filing date steps closer. This is fair, too, as no one would like to miss out on such income tax saving options that can save their money paid as tax. There are numerous lawful ways to save tax under the Income Tax Act of 1961, entailing some tax-saving mutual funds, NPS, insurance premiums, medical insurance, home loan, and many others. 

Whether you are a salaried individual, a freelancer, a business owner, or earn an income from your investments, you must pay taxes to the government as per the Income Tax Act within the stipulated time.

List of Tax-Saving Options for Different Sections

Following is the list of sections along with their respective investments to help you understand how to save tax under each section-

Section

Investments

Exemption Limit

80C

Investments in PPF, PF, insurance, NPS, ELSS, etc.

150,000

80CCD

NPS investments 

50,000

800

Investment in medical insurance for self or parents

25,000/50,000

80EE

Interest on Home loan

50,000

80EEA

Interest on Home loan

1,50,000

80EEB

Interest on electric vehicle loan

1,50,000

80E

Interest in education loan

Full amount

24

Interest paid on the home loan

200,000

10(13A)

House Rent Allowance (HRA)

As per the salary structure

  • Section 80C 

Section 80C is one of India's most common yet prominent tax-saving options available to individuals and HUFs. It has multiple investments and expense options on which you can claim deductions – up to a limit of Rs. 1.5 lakh in a financial year.

The purpose of Section 80C is to encourage savings and investments by exempting from tax any interest paid or credited on money borrowed for lending to a person in India. This section also provides a deduction at source for an amount equal to 10% of the total interest payable under section 8 of the Income Tax Act 1961.

Section 80 of the said Act prescribes the conditions under which interest may be deducted at source. Once you have satisfied these conditions, you can claim a deduction of up to 10%. If you pay interest on loans given to Indian resident borrowers, you can claim a deduction at source on this amount. 

Below-mentioned is some of the investment options available under 80C-

Investment

Returns

Lock-In Period

Unit Linked Insurance Plan (ULIP)

Varies with Plan Chosen

5 years

Sukanya Samriddhi Yojana (SSY)

7.60%

N/A

Senior Citizen Saving Scheme (SCSS)

7.40%

5 years

Public Provident Fund (PPF)

7% to 8%

15 years

National Savings Certificate

7% to 8%

5 years

National Pension System (NPS)

12% to 14%

Till Retirement

ELSS Funds

15% to 18%

3 years

5-Year Bank Fixed Deposit

6% to 7%

5 years

  • Equity Linked Savings Scheme 

It is a type of mutual fund with a lock-in period of 3 years. It is the only category of mutual fund in India that qualifies for a tax deduction under Section 80C of the Income Tax Act.

Returns provided by ELSS are comparatively higher than other tax-saving schemes in the long run, as the investments are primarily made in equity markets. Investment can either be made in a lump sum or SIP (Systematic Investment Plan) method. However, you cannot withdraw your money before the completion of the three-year lock-in period.

A significant point to take note of here is the risk factor. Since the investments are made in the stock market, they could carry a relatively high risk. But if you remain consistent, it can prove to be a great option in the long run. 

  • Public Provident Fund

Public Provident Fund is a long-term government savings scheme that has a tenure of 15 years. It is a common income tax saving scheme available at most banks and post offices in India. Its rates change every quarter. Per the circular, the current interest rate on PPF is 7% to 8%.

The interest on PPF is tax-free. Therefore, one can open a PPF account with as little as Rs. 500, while the maximum investment allowed in a financial year is Rs. 1.5 lakh, respectively. 

  • National Savings Certificate 

National Savings Certificate is another significant income tax saving scheme that provides a fixed rate of interest at a rate of 7% per annum and has a tenure of 5 years.

The interest received on NSC is considered a tax-saving option, and up to Rs 1.5 lakh can be taken as a rebate under section 80C. 

  • Tax-Saver FDs 

Tax-saving FDs are also one of the best ways to save taxes. For example, one can avail of a tax deduction of up to Rs 1.5 lakh under 5-year tax-saver FDs. However, this income tax saving scheme carries a fixed rate of interest which is currently between 7-8%, and the interest on these FDs is taxable per the investor’s tax bracket. 

  • Senior Citizens Savings Scheme 

SCSS is a government-backed long-term income tax saving option. It has a tenure of 5 years and can be availed of by those above 60 years of age. It provides a rate of 7.4% (taxable). Under this scheme, one can get a tax deduction of up to Rs 1.5 lakh.

  • Sukanya Samriddhi Yojana 

All such parents with a girl child below the age of 10 can benefit from the SSY scheme. In addition, one is eligible for tax deduction under Section 80C of up to Rs. 1.5 lakhs for the investments made towards this scheme. This account has a tenure of 21 years or until the girl gets married after turning 18.

For this scheme, the current interest rate is set at 7.60%, and the interest earned is tax-free. 

  • Employee Provident Fund 

EPF is a retirement benefits scheme, especially for salaried employees. Under the EPF Act, the employer deducts 12% of the basic salary and Dearness Allowance (DA). This amount is then deposited in government-recognized provident fund schemes.

This is one of the typical tax saving schemes wherein the deduction is counted towards the Rs 1.5 lakh limit under Section 80C. 

  • Home Loan Repayment 

Those who have taken a home loan can claim tax deductions under Section 80C for the part of EMI that goes towards repaying the principal amount. Although, the amount that one would pay as interest does not qualify for tax deductions.

  • Tuition Fees 

This income tax saving benefit is available only to individual parents or guardians with a maximum of two children per individual. Tax deductions of up to Rs. 1.5 lakh can be claimed on tuition fees paid for your child’s education. Also, this deduction does not depend on the class of the child. Yet, the education course the child is enrolled in must be full-time in an Indian school, college or university.

This scheme’s benefits can be claimed and availed by parents who have adopted children, are unmarried individuals, or are divorced parents.

A Few Tips To Save Your Taxes

Whenever the question of how to reduce taxable income comes in, there are some predominant sections under which you can save tax; they include 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80CCG, and 80G.

Enlisted below are the sections and exemption limits for each. If you are a salaried person, availing benefits of these sections is probably the best fit for you.

However, many other exemptions are available in various unique situations, but these are the significant exemptions that people usually prefer. However, as it’s evident, most of these exemptions cannot cover only your basic needs and expenses.

Understanding these allowances and exemptions is the first step while planning your finances.

There are a lot of tips to save taxes in India.

  • The first tip is not to purchase gold and other precious metals. Gold is taxed at a high rate, and it’s not an investment that can generate much income.

  • Another way to save taxes is by ensuring you have a valid PAN card. Getting a PAN card is easy, but you must do it correctly. You should go to the Income Tax Department (and not just any office) for help with this process.

  • You can also save money by making sure you use your deductions correctly and claim them on your tax returns. For example, if you paid for your child’s education, you should claim this expense as a tax deduction.

Tax Saving Options Other than Section 80C 

How to save income tax other than 80c is another common question taxpayers search for answers to. There are various deductions under Section 80 apart from the 80C deductions that can be used to save on income tax. For example, tax name a, tax benefits on health insurance premiums and home loan interest. 

Enlisted below are such provisions:-

  • You can get Medical Insurance & claim a deduction of up to Rs. 25,000 (Rs 50,000 for Senior Citizens) for medical insurance premiums. 
  • A deduction of up to Rs 50,000 can be claimed on home loan interest under Section 80EE. 
  • A tax deduction of up to Rs 1.5 lakh for contributions to NPS (National Pension System) can be claimed under Section 80CCD. 
  • Under Section 80E, you can claim a deduction on interest paid on education loans. 
  • If you have made specific charity to notified institutions or funds, they can be claimed as a deduction under section 80G
  • Under Section 54-54F, you can claim the Capital gain exemption for capital gains.  
  • Under Section 80EEB, the interest deduction for a vehicle loan taken for purchasing an electric vehicle can be claimed. 
  • Under Section 80TTA, you can claim a deduction of up to Rs 10,000 for interest received in a savings bank account.

Conclusion

The government also gives many tax benefits to resident and non-resident individuals and institutions. So, it is better to take advantage of all the available options instead of complaining about them. If you are well aware of your rights, you can save a lot of tax in India. 

Sometimes you might have to save tax in India. Tax is unavoidable in this country. Investing in mutual funds, stocks, and bonds is the best way to save tax. Mortgage interest and capital gains, too, come under-saving tax. However, keeping a tax isn't that easy; it takes time and effort from the person who saves it.

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