Income tax is the tax paid by an individual or a Hindu Undivided Family or any taxpayer other than companies, on the income received. 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.
There are certain lawful ways to save tax under the Income Tax Act, 1961 that entail some of the 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 have to pay the taxes to the government as per the Income Tax Act.
Best Ways to Save Tax
When we talk about saving income tax in India, the predominant sections under which you can save tax are 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80CCG, 80G. Enlisted below are the sections and exemption limit for each. If you are a salaried individual these sections are the best fit for you. However, many other exemptions are available in various special situations but these are the major exemptions that are usually preferred by people.
As it’s evident, most of these exemptions have a limitation to cover only your basic needs and expenses. Understanding these allowances and exemptions is the first step while planning your finances.
List of Tax-Saving Options for Different Sections
Below given are the sections and respective investments to help you understand how to save tax under each section:
|80C||Investments in PPF, PF, insurance, NPS, ELSS, etc.||150,000|
|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 on education loan||Full amount|
|24||Interest paid on the home loan||200,000|
|10(13A)||House Rent Allowance (HRA)||As per salary structure|
Some of the best options to save tax available to individuals and HUFs in India are under Section 80C of the Income Tax Act. This section includes multiple investments and expenses options that you can claim deductions on – up to a limit of Rs. 1.5 lakh in a financial year. Some of the investment options available under 80C are:
Equity Linked Savings Scheme
Equity Linked Savings Scheme is a type of mutual fund which comes 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 is comparatively higher than other tax-saving schemes in the long run, as the investments are primarily made in equity markets. Investment can be either made in a lump sum amount or SIP (Systematic Investment Plan) method. However, you cannot withdraw your money before the completion of the three-year lock-in period. One point to note here is the risk factor; since the investments are made in the stock market, they could carry a moderately high risk. But if you remain invested, it proves to be a good option in the long run.
PPF (Public Provident Fund)
Public Provident Fund is a long term government savings scheme with a tenure of 15 years. This scheme is available at most banks and post offices in India. Its rate changes every quarter and its rate as of July, August and September 2020 is set at 7.1%. The interest on PPF is tax-free. 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
A National Savings Certificate provides a fixed rate of interest which is currently at a rate of 6.8% per annum and has a tenure of 5 years. The interest received on NSC is considered as a tax saving option and up to Rs 1.5 lakh can be taken as a rebate under section 80C.
Tax saving FDs are also one of the best ways to save tax. A tax deduction of up to Rs 1.5 lakh can be availed under 5-year tax-saver FDs. They carry a fixed rate of interest which is currently between 6-8% and the interest on these FDs is taxable as per the investor’s tax bracket.
Senior Citizens Savings Scheme
SCSS is a government-backed tax-saving investment and long-term savings option. It has a tenure of 5 years and is available to those above 60 years of age and provides a rate of 7.4% (taxable). A tax deduction of up to Rs 1.5 lakh can be availed under this scheme.
Sukanya Samriddhi Yojana
Those who have a girl child below the age of 10 can benefit from this SSY scheme. Investments made towards this scheme are eligible for tax deduction under Section 80C of up to Rs. 1.5 lakhs. This account has a tenure of 21 years or until the girl gets married after turning 18. The current interest rate is set at 8.5% and the interest earned is tax-free.
Employee Provident Fund
Under the EPF Act. 12% of the part of employees’ salary in the organized sector is deducted towards the Employees Provident Fund. This deduction is also 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. The amount that is paid as interest, however, does not qualify for tax deductions.
Tax deductions of up to Rs. 1.5 lakh can be claimed on tuition fees paid for your child’s education. This benefit is only available to individual parents or guardians with a maximum of two children per individual. The deduction does not depend on the class of the child. However, the education course must be full-time in an Indian school, college or university. Parents who have adopted children, unmarried individuals and divorced parents can also claim these benefits.
Tax Saving Options Other than Section 80C
There are various deductions under Section 80 apart from the 80C deductions that can be used to save on income tax. Tax benefits on health insurance premiums and home loan interest, to name a few.
- You can get a Medical Insurance & claim a deduction of up to Rs. 25,000 (Rs 50,000 for Senior Citizens) for medical insurance premium
- 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
So these are some of the ways to save tax on income in India. If you are choosing tax saving investment options, make sure you select the one that aligns the best with your financial objectives and liquidity needs.