We all work hard to earn money but the government takes one third of that money as taxes (highest tax bracket). Most of us wonder, what are some of the legitimate ways of saving taxes?
While business owners have multiple avenues to reduce taxes, the options for salaried individuals are different.
Here are a few broad options by which salaried individuals can save taxes.
Save Tax via Interest payments on your Loans - Section 80 E and Section 24B
Education Loan: Section 80E allows the entire interest paid on education loan as deduction from the assessment year relevant to the previous year in which the assessee begins paying interest and seven subsequent years.
Home Loan: A house, besides being a long-term asset, makes you eligible for significant tax breaks. You can claim deduction up to Rs 1.5 lakh for repayment of home loan principal under the overall limit of Section 80C of the Income Tax Act. Moreover, you can claim an additional deduction of up to Rs 1.5 lakh under Section 24B for interest payment once you get possession and occupy the house. If you take a joint loan with your spouse, then each of you can claim both these deductions individually, thus optimising your tax savings further.
Save Tax via Investments - Section 80C: Section 80 C allows for expense incurred under certain heads or investments made to be deducted from the total income. 100% of the amount invested or Rs.1,50,000, whichever is less, is available as deduction from total income. Below mentioned is the list (not exhaustive) of most popular investments u/s 80C: >> Life insurance premium paid towards life of self, spouse or any child.
>> Contribution towards Public Provident Fund Scheme.
>> Any sum deposited in a 10 year or 15 year account under the Post Office Savings Bank
>> Subscription to the NSC (VIII Issue)
>> Subscription to units of mutual fund Equity Linked Savings Scheme notified by the central government.
>> Term Deposit (Fixed Deposit) for 5 years or more with Scheduled Bank.
Protect Yourself and Save Tax - Section 80D
Buy a Health Policy: Premium paid on health insurance policies is allowed as deduction from total income, within the limits specified by section 80D. Deduction is available up to Rs. 15,000 in other cases for insurance of self, spouse and dependent children. Additionally, a deduction for insurance of parents (father or mother or both) is available to the extent of Rs. 20,000 if parents are senior Citizen and Rs. 15,000 in other cases. Therefore, the maximum deduction available under this section is to the extent of Rs. 40,000.
Now you might be wondering, if your employer provides you a medical cover, do you still need a health care policy? Most of us change our employers quite often that may leave us with inadequate medical coverage. It is a good practice to maintain one health policy even if your employer offers a health plan.
Protect your family and save tax: Most people buy insurance to save on tax and to get some residual retirement income. Infact, it’s not uncommon to find people with multiple LIC policies. Very few of them have the most essential and basic form of insurance, popularly known as term insurance.
An insurance policy is not meant for you. It’s meant for your loved ones and to provide them with a lump sum of money in case something was to happen to you. Get a term insurance policy if you really care for your family. Premium paid towards Term Insurance Plan qualifies for deduction u/s 80C.
Donate and Save Tax - Section 80G: Section 80G allows you to claim deduction up to specified limits for contributions made to charitable organisations. There are various donations specified in Sec. 80G are eligible for deduction up to either 100% or 50%. The deduction is available to anyone who donates in the specified categories as defined by Income tax under Sec 80G
The New Pension Scheme - Section 80CCE: Ask your employer to provide you New Pension Scheme (NPS). Under direct regulatory oversight by government agency (PFRDA) the scheme offers option of extra saving through tax benefit over and above 80C (employer sponsored). The returns are also linked to the market that will help to grow your savings more than return on debt. The employer's contribution up to 10% of basic plus DA is eligible for deduction under Section 80CCE over and above the Rs 1.5 lakh limit.
Most of us get trapped in insurance policies to save taxes but there are other better ways of saving taxes and growing your wealth. A combination of a health plan, term policy, Mutual Fund (ELSS), PPF and New Pension Scheme contribution will help you save taxes, provide adequate health and life cover and also provide growth to your portfolio.