9 income tax saving tips that also help financial fitness
December, 03rd 2021
Here is a look at 9 ways one can save income tax and improve one's overall financial fitness. 1.Investment in tax-saving instruments To encourage saving by citizens, the government has provided certain tax deductions on the amounts invested in specified instruments under section 80C of the Income-tax Act, 1961. Some of the popular specified investment instruments for the purpose of tax planning are:
Employees' Provident Fund (EPF)
Public Provident Fund (PPF)
Fixed deposits (tenure of 5 years or more)
Life insurance policies
ELSS mutual funds
National Pension Scheme (NPS) and other pension plans
Investing in these instruments wisely can serve the dual purpose of meeting financial goals and tax savings (up to an investment limit of Rs 1.5 lakh per financial year) concurrently. However, tax savings will be available only if an individual opts for the old tax regime. If one opts for the new tax regime, which offers concessional tax rates, one will have to forgo many of the tax deductions and exemptions available under the old tax regime like the section 80C benefit. For those who have opted for the new tax regime, investments in the above the instruments will only help in achieving their financial goals and not in tax savings.
2.Selection of appropriate components in the salary structure offered by employer In 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 w ..
3. Increase in retirement fund contribution Salaried individuals can look at making additional contribution towards 'Voluntary Provident Fund' in addition to EPF, if the investment limit of Rs 1.5 lakh is not exhausted. This additional contribution will also be deductible from taxable income subject to conditions. Further, the employer's contribution to NPS (subject to 10% of salary) will provide an additional deduction to the employee.
However, do keep in mind that employee's own contribution to EPF and VPF should not exceed Rs 2.5 lakh in a financial year or else income tax will be payable on the interest accretion on the excess provident fund contributions.
4. Tax benefits on a home loan If a housing loan is availed from a financial institution such as bank or NBFC or housing finance company to acquire/ construct a house property, then the interest and principal paid on the loan taken can be claimed as a deduction from taxable income, subject to specified limits under the tax provisions. However, the tax savings can be claimed only if old tax regime is opted for. Do keep in mind that the deduction on principal principal repayment amount is subject to the overall Rs 1.5 lakh limit under Section 80C.
5. Protecting oneself with health insurance Income tax provisions provide for deductions against premiums paid towards health insurance for self, spouse, dependent children and dependent parents. Hence, one can buy health insurance for oneself and family members to help manage medical expenses in case of health emergencies and at the same time, avail tax benefits for premium paid towards these policies (Rs 25,000 for self, spouse and dependent children; Rs 50,0000 for senior citizen parents, as applicable).
Similarly, if senior citizens are not covered under any health insurance policy, then also they can claim deduction of up to Rs 50,000 for medical expenses made during the year.
6. Claiming appropriate deduction for medical expenses, tuition fees etc. It is important to note that in certain instances even if one doesn't make any additional investment, tax benefits can be availed in connection with certain expenditures incurred like Rs 5,000 for preventive health check-ups. However, the deduction for expenditure on health check up is subject to the overall limit under section 80D which includes the health insurance premiums mentioned above. Also, parents can claim a tax deduction of up to Rs 1.5 lakh under section 80C (under the overall limit of Rs 1.5 lakh) for the tuition fee paid for their children's education.
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, 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.
8. New concessional tax regime A new simplified optional personal income tax regime has been introduced by the government from FY 2020-21 onwards.
Subject to certain conditions, an individual or HUF will have the option to pay taxes at reduced slab rates which are applicable without certain exemptions and deductions. In view of the same, one can compare tax payable under the existing and new tax regime and opt for the regime which is more beneficial from tax tax perspective.
9. Documentation requirements While no documents are required to be uploaded while e-filing ITR, one should maintain adequate record of documents for investments made like PF account statements, passbooks, copies of insurance policies, pension plans, bank statements etc. for a hassle-free interaction with the relevant authorities.