Tax planning is an essential aspect of personal finance in India. By understanding the various tax-saving options available under the Income Tax Act, individuals can significantly reduce their tax liability and increase their savings. This guide will walk you through the key methods to save tax in India, complete with practical examples to illustrate how these strategies can be applied.
Table of Contents
1. Utilize Deductions Under Section 80C (Best way to save tax in India)
Section 80C of the Income Tax Act, 1961, is one of the most widely utilized sections by taxpayers in India for the purpose of reducing their taxable income. This section provides for deductions up to ₹1.5 lakh on various eligible investments and expenditures, thereby lowering the overall tax liability of an individual or Hindu Undivided Family (HUF). Introduced with the objective of promoting savings and investments among taxpayers, Section 80C has evolved over the years to include a wide range of financial instruments so that people can save tax in India.
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Section 80C is one of the most popular sections for tax-saving in India. It allows deductions of up to ₹1.5 lakh from your total income by investing in specific instruments.
Common Investments Eligible Under Section 80C:
- Public Provident Fund (PPF): A long-term investment option with a tenure of 15 years. The returns and maturity amount are tax-free.
- Employee Provident Fund (EPF): Contributions to EPF are also eligible for deductions under Section 80C.
- National Savings Certificate (NSC): A fixed-income investment with a tenure of 5 years. The interest earned is taxable, but the investment amount qualifies for deductions.
- Life Insurance Premiums: Premiums paid for life insurance policies are deductible under Section 80C.
- Equity Linked Savings Scheme (ELSS): A type of mutual fund with a lock-in period of 3 years, which also provides the potential for high returns.
Example:
Rahul, a salaried individual, invests ₹50,000 in PPF, ₹40,000 in ELSS, and pays ₹60,000 as a life insurance premium in a financial year. His total deduction under Section 80C would be ₹1.5 lakh, thus reducing his taxable income by this amount.
2. Take Advantage of Section 80D for Health Insurance (Option to save tax in India)
Section 80D allows you to claim deductions for the premiums paid towards health insurance for yourself, your family, and your parents. This will allow you to save tax in India by the means of Health Insurance. The maximum deduction available is:
- ₹25,000 for self, spouse, and dependent children.
- ₹50,000 for parents who are senior citizens.
- An additional deduction of ₹5,000 for preventive health check-ups.
Example:
Sunita pays ₹20,000 for her family’s health insurance and ₹45,000 for her parents’ health insurance. She can claim a total deduction of ₹65,000 under Section 80D.
3. Claim Deductions on Home Loan Interest Under Section 24(b)
If you have taken a home loan, the interest paid on the loan is deductible under Section 24(b) up to a maximum of ₹2 lakh per year, provided the property is self-occupied. If the property is rented out, there is no upper limit on the deduction.
Example:
Amit pays ₹2.5 lakh as interest on his home loan for a self-occupied property. He can claim a deduction of ₹2 lakh under Section 24(b), reducing his taxable income by this amount.
4. Benefit from Section 80E for Education Loan Interest
Section 80E provides a deduction for the interest paid on an education loan for higher studies. This deduction is available for a maximum of 8 years or until the interest is fully paid, whichever is earlier.
Source: Income tax slab under old regime
Example:
Neha takes an education loan for her MBA and pays ₹50,000 in interest in the first year. She can claim this entire amount as a deduction under Section 80E, reducing her taxable income.
5. Save Tax in India Through Section 80G for Donations
Contributions to certain relief funds and charitable institutions are eligible for deductions under Section 80G. The deduction can be 50% or 100% of the donation amount, depending on the organization.
Example:
Ravi donates ₹10,000 to the Prime Minister’s National Relief Fund, which qualifies for a 100% deduction under Section 80G. His taxable income will be reduced by ₹10,000.
6. Maximize Deductions Under Section 80TTA and 80TTB for Interest Income
- Section 80TTA: Allows a deduction of up to ₹10,000 on interest earned from savings accounts.
- Section 80TTB: Available to senior citizens, this section allows a deduction of up to ₹50,000 on interest earned from savings accounts, fixed deposits, or recurring deposits.
Example:
Shivani, a senior citizen, earns ₹40,000 as interest from her fixed deposit. She can claim a deduction of ₹40,000 under Section 80TTB, effectively making this income tax-free.
7. Opt for the New Tax Regime (If Beneficial)
The Finance Act 2020 introduced a new tax regime with lower tax rates but without most deductions and exemptions. Taxpayers have the option to choose between the old regime (with deductions) and the new regime (lower rates but no deductions).
Source: Latest Income Tax Slab Rates in India 2024
Example:
Vikram, a salaried employee, finds that under the new tax regime, he would pay less tax than by claiming deductions under the old regime. He opts for the new regime to benefit from the lower tax rates. By doing so anyone like Vikram can save tax in India.
8. Claim HRA (House Rent Allowance) Exemption
If you are a salaried individual receiving HRA as part of your salary, you can claim a tax exemption on the HRA received, subject to certain conditions.
The exemption is calculated as the minimum of:
- Actual HRA received.
- 50% of basic salary if living in a metro city (40% if in a non-metro city).
- Rent paid minus 10% of basic salary.
Example:
Meera lives in a rented apartment in Mumbai and pays ₹20,000 per month as rent. Her basic salary is ₹50,000 per month, and she receives an HRA of ₹25,000 per month. The exemption she can claim would be the minimum of the following:
- HRA received: ₹3,00,000 (₹25,000 x 12)
- 50% of basic salary: ₹3,00,000 (₹50,000 x 12 x 50%)
- Rent paid minus 10% of basic salary: ₹1,80,000 (₹2,40,000 – ₹60,000)
Meera can claim an HRA exemption of ₹1,80,000, which will reduce her taxable income.
Final Verdict To save tax in India
Tax planning is a vital aspect of financial management that can lead to significant savings. By understanding and utilizing the various deductions and exemptions available under the Income Tax Act, you can reduce your tax liability and maximize your savings. Whether it’s investing in Section 80C instruments, claiming deductions on health insurance premiums under Section 80D, or exploring the benefits of the new tax regime, there are numerous strategies to save tax in India for salaried or for business. Always assess your financial situation and consult with a tax advisor if needed to make informed decisions that align with your long-term financial goals.