7 ways one can save income tax and improve one's overall financial health
December, 06th 2021
Covid-19 pandemic has hit the salaried class hard. Lockdown led to salary cuts and even job losses for lakhs of employees last year. Even the informal sector workers have been badly hit by the pandemic and subsequent lockdowns. We have always believed in the importance of having more money in hand to face any crisis.
Here is a look at 7 ways one can save income tax and improve one's overall financial fitness.
1) Liquidate old tax-saving investments and reinvest
You can reduce your tax outgo cost-effectively by withdrawing tax saving funds that have completed the lock-in period and reinvesting it to save tax going forward. Schemes such as ELSS can be withdrawn after three years from the start of the investment and PPF can be partially withdrawn upon finishing seven years. PPF investments can give you EEE tax benefits.
2) Invest in the National Pension Scheme
NPS is a lucrative pension scheme that can help reduce your tax liability by Rs 2 lakh (Rs1.5 lakh under Section 80 (C) and Rs 50,000 under Section 80 CCD (1B). In a recent development, the entire redeemable corpus of 60% has been proposed to be made tax free as opposed to the previous 40%. The annuity income however is taxed as per the applicable tax slab. With NPS, you can choose your mix of equity and debt.
3) Buy a health insurance policy
If you haven’t invested in health insurance yet, you must add this to your financial portfolio to cover your hospitalization bills. Don’t rely solely on the insurance provided by your employer as the cover offered can only take care of your basic requirements, needless to mention, you would be without a cover if you were to transit from one job to another or take a career break.
Health insurance premiums are eligible for tax exemption under Section 80 (D) of the Income Tax Act. You can avail deduction to the tune of Rs. 25000 for premium contributions made for children, spouse and self. For parents above the age of 60 years, you can get an additional deduction of Rs. 50000.
4) Buy term insurance cover
Term cover is another crucial element in personal finance. So if you haven’t done the needful yet, buy a term cover to secure your family financially for a time when you may not be around. Your sum assured should be 10-20 times of your annual income, an amount substantial enough to replace your income, if you were to be faced with an untimely demise. The premium cost for term insurance is reasonably low. However, before you zero in on a product look for the claim settlement ratio.
5) Donate to eligible institutions
Donations made towards certain relief funds and charitable institutions are eligible for tax deduction under Section 80G. The extent of deduction offered may vary depending on the type of institution you are donating to.
6) Selection of appropriate components in the salary structure offered by an employer In the case of a salaried individual, one can evaluate the salary structure offered by the employer and opt for those salary components which help maximise tax benefits. For example, one can opt for House Rent Allowance (HRA) in case they are paying rent, telephone/ internet expense reimbursements, education allowance, food coupons etc. Accordingly, one can claim appropriate deductions/exemptions while computing taxable income (as per the specified conditions).
7) Filing of tax returns within the specified timelines The importance of filing income tax returns and other statutory forms (as applicable in one's case) within the specified timelines cannot be emphasised enough. The same assists in setting up a proper tax record for any enquiry/ verification by the tax authorities. Further, filed income tax returns (ITR) are also required to be submitted for various purposes like applying for immigration documents, housing loans, carry forward of losses, certain high value transactions etc. Hence, it is important to file one's ITR within the set timelines to avoid interest/ penal implications.