Every individual above the age of 18, with a steady stream of income, is liable to file Income Tax Return, as per the Income Tax Act, 1961. The tax contribution can range from 5% to 30% of the annual earnings of the individual.
However, the IT Act also allows for numerous ways to enjoy tax benefits through the way of savings, investments, and charity.
Let’s take a quick look at some of the legitimate and most convenient ways of saving Income Tax in India.
As per the Section 80C of the Income Tax Act, 1961, an Assessee can claim a deduction of up to Rs. 1.5 Lakh on the investments made towards the below mentioned alternatives.
Fixed Deposits in banks can earn an interest ranging from from7.60 % – 8.75%. You can claim a deduction of up to Rs. 1.5 Lakh on investment into Tax Saving Fixed Deposits. However, the interest earned on banks deposits is fully taxable.
Public Provident Fund is essentially a Savings Instrument, with a fairly long tenure of 15 years. This government-backed retirement saving option is not only a safe investment earning a high return of 8% per annum (subject to quarterly change) but also allows you to claim a deduction of up to Rs. 1.5 Lakh on your deposits (u/s 80C). In this case, the interest earned is also exempt from taxation.
Popularly known as ELSS, this investment comes with a lock-in period of 3 years and offers a deduction of up to Rs. 1.5 Lakh on the investment. You must note here, that the 10% tax rate that ELSS is known for is only applicable on returns beyond Rs. 1 Lakh.
The National Savings Certificates (NSC) is essentially a fixed income investment scheme, which can be availed for two fixed maturity periods – 5 years and 10 years. The instrument earns an interest of 8% per annum (subject to change) and also allows you to claim a deduction of up to Rs. 1.5 Lakh on the deposits made and the interest earned.
If you are opting for a life insurance policy, ULIP, Term Insurance or an Endowment Plan which offers a cover of at least 10 times the annual premium, you can claim a deduction of up to Rs. 1.5 Lakh on the premium paid towards the policy. However, you must remember that the deduction is only applicable if the amount of premium paid in a given financial year is at least 20% of the assured amount of the policy.
Likewise, NPS contribution up to Rs 1.5 Lakh can be claimed as a deduction.
The principal amount repaid on a Home Loan in a given Financial Year is tax deductible up to Rs 1.5 lakh. Likewise, you can save up to Rs 2 Lakh on Home Loan Interest Rate cost. In the next FY, Home Loan paid up interest for affordable units will fetch an additional Rs 1.5 Lakh deduction.
As are the other investments on this list, even the money spent on School Tuition Fee can help you claim a deduction of up to Rs. 1.5 Lakh in a Financial Year.
The EPF Act dictates a deduction of 12% of the pay of employees towards the Employees Provident Fund. You can claim a deduction of up to Rs. 1.5 Lakh on the amount that gets invested in this fund.
Senior Citizens’ Savings Scheme is characterised by a high return of 8.7% (subject to quarterly revision), with tenure of up to 5 years, which can be extended for another 3 years. The investment for this scheme is limited to Rs. 15 Lakh per individual.
The benefits of this scheme can be enjoyed by the parents of daughters who are 10 years or below in age. The deposits towards the scheme currently accrue interest of 8.5%. The taxpayer can conveniently claim a deduction of up to Rs. 1.5 Lakh on the amount that gets invested in this scheme, and on the interest earned through it.
Here, you must remember, that the limit on deductions is for the overall investments in any of the instruments discussed above. Hence if you make a large investment towards one scheme, it will significantly reduce the room for a deduction for your investment in any of the other schemes.
Launched to aid investments and savings for senior citizens aged 60 and above, the NPS allows investment in Equity and Debt Pension Funds in order to build a Retirement Corpus. You can claim a deduction of up to Rs. 50,000 on contributions made towards the NPS, under the Section 80CCD (1B).
If you have opted for a Health Insurance Policy, you can claim a deduction of up to Rs. 25,000 on the premiums paid, under Section 80D of the Income Tax Act.
If you are a Senior Citizen, you can claim a deduction of up to Rs. 50,000 under the same section. Besides, if you are under 60 years of age, and are contributing to Health Insurance Premium for the self, as well as parents (aged 60 and above), you can claim a total deduction of up to Rs. 75,000 in a financial year.
If your employer offers a House Rent Allowance, you can claim tax benefits on the same, under Section 10(13A), Rule 2A of the Income Tax Act. However, the HRA benefit will be limited to the lowest of the following:
(a) Actual HRA received
(b) Excess of rent paid over 10% of basic salary
(c) 50% of basic salary, for employees working in any of the four metro cities, or 40% of basic salary for employees residing in a non-metro city.
If, however, your employer does not offer HRA but pays rent, you can claim a deduction of up to Rs. 60,000 in a financial year, as per Section 80GG.
If you are servicing a Home Loan, you can claim a deduction of up to Rs. 2 Lakh on the interest paid towards the Home Loan, under Section 24(b), i.e., if the house is self-occupied. If you are repaying a Home Loan on a let-out property, there is no upper limit on the deduction you can claim towards the interest outgo. In the latest amendment, Home Loan on affordable units extends additional Rs 1.5 Lakh on interest paid up amount.
Under Section 80TTA, you can enjoy the tax-free interest of up to Rs. 10,000 in a financial year. If you are a senior citizen, the tax-free interest limit is up to Rs. 50,000, for Savings as well as Fixed Deposit Accounts.
When you donate to a charity or an NGO and obtain an 80G certificate for your donations, you are eligible to claim a deduction of up to 50% of the donated amount to an NGO, subject to a maximum of 10% of your total adjusted income.
Now you are well-informed of some of the most promising ways of saving income tax in India, while creating savings, making investments, buying the property, and donating to charitable causes!
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