How to Save Income Tax in FY 2021-22?

How to Save Income Tax in FY 2021-22?

Every Indian & Non-Indian Resident who makes more than Rs 2.5 Lakh annually is mandated to file an Income Tax Return in our country. However, the IT Act, 1961, offers several tax saving options to each of assesses. By making use of these saving and investment options, you can retain more in your pocket and make most of the available tax-saving provisions.

Now let’s explore options of saving income tax for FY 2021-22.

1. Know your tax regime

Union Budget 2020 introduced a new tax-saving regime with slight variations in the tax slabs. Let’s review the new and old tax slabs below.

Old & New Income tax slabs applicable for FY 2021-2022

Income Tax Slab-OLD Tax Slabs- NEW

Up to Rs 2.5 Lakhs

 

For seniors & super seniors, this slab is up to Rs 3 Lakh

NIL

NIL

Above Rs 2.5 Lakh to Rs  5 Lakh

5 %

In effect, NIL as an additional tax rebate u/s 87a is available

5%

In effect, NIL as an additional tax rebate u/s 87a is available

Above Rs 5 Lakh to Rs  7.5 Lakh

20%

10%

Above Rs 7.5 Lakh to Rs 10 Lakh

15%

Above Rs 10 Lakh to Rs 12.5 Lakh

30%

20%

Above Rs 12.5 Lakh to Rs 15 Lakh

25%

Above Rs 15 Lakh

30%

 

Additionally following are applicable on tax:

1: 4% additional health & education cess applicable

2: Surcharge of 10% or 15% of total income is between Rs.50 lakh & Rs.1 crore or above Rs.1 crore respectively.

Additionally following are applicable on tax:

1: 4% additional health & education cess applicable

2:  Surcharge of 10%, 15%, 25% or 37 % if total income is over Rs 50 Lakh,

Rs.1 crore, Rs.2 crore &

Rs.5 crore, respectively.

 

The new tax slab is straight forward and removes applicable deductions as under the old regime. The new IT regime does not incentivise the assesses for saving, investment and insurance schemes. This is why the tax saving would be more for a savvy investor in the older regime. The new regime is best for a middle-income group who do not save or invest with their income.

Thus we will share all available tax saving options for the old regime in this article.

2. Fully utilise Rs 1.5 lakh limit under Section 80C

Under Section 80C of the Income Tax Act, each individual can claim a rebate on taxable income for a maximum of up to Rs 1.5 lakh. This deduction is available for the following saving, investment and insurance schemes.

a) Tax-Saving Fixed Deposits (FDs): The amount invested in 5 years or above tax-saving Fixed Deposits can be claimed under section 80C and reduce your net taxable income. These FDs fetch maximum and assured deposit returns and thus popular among risk-averse investors like senior citizens.

b) Public Provident Fund (PPF): PPF is a government-backed long term investment option for retirement. The scheme falls under Exempt-Exempt-Exempt (EEE) category, carries high returns and 100% secure. The principal, as well as interest, is exempt from taxation. The individual can claim a max up to Rs 1.5 Lakh tax rebate u/s 80 C for investing in PPF.

c) Equity Linked Savings Schemes (ELSS): As the name suggests, ELSS funds invest a minimum of 80% in equity, and they are tax saving mutual fund schemes with a 3 year lock-in period. The long term capital gains over and above Rs 1 lakh are charged at 10%.

d) National Saving Certificate (NSC): National Savings Certificate is another government-backed tax saving investment scheme with a fixed tenure of 5 years. The rate of return is currently 6.8%, and investment can be claimed for deduction u/s 80C.

e) Premium paid for Life Insurance: Premium paid for life insurance schemes such as ULIPs, term insurance and endowment policies are also capped under 80C. The overall insurance cover should be at least 10 times the annual premium.

f) Home Loan Repayment: The principal repayment amount of a Home Loan in a Financial Year is tax-deductible up to Rs 1.5 lakh per annum u/s 80 C.

g) Tuition fees: The payment of tuition fees for kids is tax-deductible for parents under section 80C.

h) EPF: Again, contribution to EPF is covered under Section 80C.

i) Senior Citizens Savings Scheme (SCSS): Investments in SCSS is also tax deductible up to Rs 1.5 lakh u/s 80C. These schemes yield better than bank FDs and are strictly offered to senior citizens.

j) Sukanya Samriddhi Yojana (SSY): Investment in SSY for a girl child can also be claimed for tax benefit under section 80C.

k) These are various schemes that protect your future and yield good returns, and offer tax benefit under section 80C. However, the claim can be made for a max up to Rs 1.5 Lakh.

3. National Pension System (NPS):

The additional deduction of Rs 50000 can be claimed under Section 80CCD (1B) for investment to the NPS. However, the amount can be claimed at the age of 60.

4. Health Insurance Premiums U/S 80D

Under Section 80D, one gets a deduction of up to Rs 25,000 for payment of health insurance premium. For senior citizens, the max limit is Rs 50,000 and for self and senior citizen parents capping is up to Rs 75,000 per annum.

5. House Rent Allowance (HRA)

Furthermore, there is a provision of claiming a tax deduction on payment of housing rent. You can claim a deduction of up to Rs 60,000 per annum under Section 80GG.

6. Repayment of interest on a home loan

Under Section 24 of the Income Tax Act, a borrower is eligible to claim deduction up to Rs 2 lakh per annum on Home Loan Interest repayment. Over and above this limit, an additional deduction of Rs 1.5 lakhs is offered for interest payments on loans taken up to March 31, 2022, for the purchase of an affordable home up to Rs 45 lakhs.

7. Charity in favour of registered NGOs

Section 80G of the Income Tax Act allows you to claim tax benefits on 50% of the donated amount to NGOs. The max tax saving should not be over 10% of your taxable income.

8. Repayment of Education Loan

The repayment of an education loan makes one eligible to claim a tax rebate on interest component EMI payments for 8 years under section 80E. No tax benefit is offered for the principal part of the loan instalment.

9. Conveyance Allowance

Both new & old regimes offer income tax exemption for conveyance, travel and other allowances given by the employer.

10. Interest earned in Savings Accounts

Interest income up to Rs 1000 on savings accounts per financial year is exempted for tax under Section 80TTA. Under section 80TTB, the limit is Rs 50,000 for senior citizens, which includes interest earned on both FDs and savings accounts.

Using these provisions, you can save substantial income tax legally. These tax-saving avenues not only leave much cash in your pocket or essential savings & investment instruments but also align your portfolio for better financial health. As a rule of thumb, deduction u/s 80 C & 80D should be claimed by all. Further benefits should be used as per your personal life stage. Hope you make most of all these tax saving options.

 

Also Read: Income Tax Return Filing: How Certain Loan Products Can Help You Save Income Tax

 

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