Do you also want to avoid paying taxes legally? The famous saying claims that a penny saved is a penny earned. There are numerous ways you can reduce your tax bill and boost your income through tax planning. Taxpayers can deduct various investments, savings, and expenses in a particular year under the income tax act. Let’s explore some of the ways you can reduce your tax bill.
How to save income tax in India?
To enhance our quality of life, we tend to invest in various items, but this can also strain our finances. As a result, the government imposes a direct tax on your gross salary to reduce this burden substantially.
1. Receive tax benefits under section 80C when you take out a house loan
A home loan has dual benefits, since it reduces your tax liability, along with giving you the satisfaction of owning your own home.
The government mandates many housing schemes, such as PMAY (Pradhan Mantri Awas Yojana) and the DDR (Delhi Development Authority) Housing Scheme, which reduces monetary obligations.
- Under Section 80C, a deduction of up to ₹1.5 lakh can be made for the amount spent on repayment of the principal borrowed.
- There is a tax exemption available on the interest section of a home loan under Section 24(b), up to a value of ₹2 lakh.
A new house you rent out will also be excluded from income tax calculations as long as the entire interest component is rented.
The construction process of purchasing a home can also qualify for section 24(b) if it is completed within five years of purchasing the property.
First-time homeowners may claim a reduction on their annual taxes under section 80EEA.
The stamp duty value of the property must be less than ₹45 Lakh to qualify for a total waiver of up to ₹1.5 Lakh in addition to Section 24(B).
2. Get health insurance
As medical costs rise in India and health quality deteriorates due to multiple factors, health insurance is becoming more and more imperative. In times of failing health conditions, such insurance policies reduce the financial strain on individuals and their families.
To induce individuals to purchase such insurance policies, the government offers tax benefits, which allow them to receive quality healthcare at premier medical institutions at no or low additional cost.
Individuals can claim a tax deduction under section 80D for the amount of their annual taxable income spent on premium payments. According to the age of the insured, different amounts are excluded from such income tax calculations.
3. Reduction of tuition fees for children
Our income heavily dominates by the costs associated with children’s education. So, maximizing their tax benefits makes a lot of sense. Parents can deduct tuition fee payments for their children as a tax deduction under Section 80C. Remember that this benefit includes any full-time education program that impart at any registered institution, whether it be a school, a college, or a kindergarten. As a caveat, this only applies if there are no more than two children in a household (i.e. if a couple includes two individuals, they can include 4 children).
Also, this benefit only covers the tuition fee and no other fees, such as development fees and late payment fees. Additionally, if you are offered a children’s education allowance and a hostel allowance by your employer, you can claim a tax exemption of Rs 1,200 per annum (up to 2 children) and Rs 3,600 per annum (up to 3 children).
4. Contribute more to the EPF with VPF
Salary earners rely on Employees’ Provident Fund to save for retirement. By entering a Voluntary Provident Fund scheme, workers can save more than 12% of their total salary and dearness allowance as EPF (up to 100% of the total salary and DA). A voluntary contribution to the VPF made in addition to the mandatory contributions to the EPF.
Salaried employees can reach out to their HR partners to learn how to contribute to their VPF. In addition, they can avail of a tax exemption benefit of Rs 1.5 lakh for the contributions to their EPF and VPF under Section 80C. The interest rate on this risk-free investment scheme is currently 8.5% p.a., making it higher than most PPFs or 5-year fixed deposits. Note, however, that withdrawals of the EPF and VPF funds before five years are subject to a 10% withholding tax. We advise that you should not disturb their EPF or VPF funds, since these funds meant for after retirement. Contributing to the EPF is the best way to avoid paying taxes legally.
5. Consider investing in government schemes
Tax waivers are among the benefits associated with several government-mandated schemes. Tax waivers on total annual income are available on up to *1.5 Lakh spent on such investments under Section 80C of the Income Tax Act.
Investing in the following tools can result in tax exemptions:
- Senior Citizens Saving Scheme (SCSS)
- Sukanya Samriddhi Yojana (SSY)
- Scheme of National Pensions (NPS)
- Public Provident Fund (PPF)
6. Donate to charities
Following Section 80G of the Income Tax Act, donations made to specific organizations in cash qualify for a tax reduction amounting to *2,000. Meanwhile, wire transfers and bank transfers enjoy complete or partial tax exemptions, respectively.
Section 80GGA allows you to deduct donations made to an organization that facilitates scientific research or rural development.
Donations in cash partially waived, while transfers made by check or draft are fully waived.
7. Contribute to a political party
A contribution to an electoral trust or donation to a political party is entitled to a tax waiver under Section 80GGC of the Act of 1961.
Providing the organization registered under Section 29A of the Representation of People Act. Any donations made to your preferred political party are exempt from income tax calculations.
Donations of this type must be made via bank wire or wire transfer directly, cash donations not accepted.
Tax-saving investment planning for the year
When planning your tax-saving investments, start early in the year.
Procrastination by taxpayers often leads to hurried decisions made at the end of the year. By starting your investments at the beginning of the year, you can benefit from compounding and achieve long-term goals. Savings on taxes should be viewed as an additional perk and not as a singular goal.
Here are some tips for planning your tax savings for the year:
- Make sure you have enough tax-saving expenses already – such as insurance premiums, kids’ tuition fees, EPF contributions, and mortgage payments.
- Calculate how much to invest by subtracting this amount from 1.5 lakhs. If expenses exceed the limit, you needn’t invest your entire allocation.
- Invest in tax savings investments based on your goals and risk profile. Popular options include ELSS funds, PPFs, NPSs, and fixed deposits.
In this way, you will know what to do to exhaust the 80C limit. To spread the investment over the year, you should begin investing early in the year. Making informed investments will also allow you to avoid burden at the year’s end.