Income Taxes tends to eat into an individual’s annual income, which in turn lowers their scope to save money. This is why taxpayers are always on the lookout to know more about how to save taxes. Ideally, with smart investment strategies and effective tax planning, individuals can save on taxes and boost their savings. The Income Tax of India Act, of 1961, extends several provisions that enable individuals to save taxes on their accumulated earnings.
Let us read along to understand how to make the most of such provisions and more for better tax planning.
Effective Ways To Save on Income Tax
Most new taxpayers are burdened with the question of how to save income tax and reduce their tax liability effectively. However, the same is easily achievable if they tune their investments, expenses, and savings in these ways:
● Planning to buy a house? Get a home loan to fund your dream while saving on taxes
Individuals who aspire to buy a house might want to think about applying for a home loan. Notably, under Section 80C of the Income Tax Act, home buyers are allowed to claim tax deductions. Individuals who qualify for govern-backed affordable housing schemes like Pradhan Mantri Awas Yojana can be eligible to claim deductions, which further makes the process of buying a house easier. Under Section 80C and Section 24(b) they can claim deductions and save on tax liability on their principal loan amount and interest amount in these ways:
- Home loan borrowers can claim a maximum of Rs. 1.5 lakh as deduction under Section 80C deductions. They can claim it for the amount of money they spend from their income annually to repay the home loan principal.
- Under Section 24(b) they can enjoy tax exemptions of a maximum of Rs. 2 lakhs on the loan interest they pay in a year.
- Besides these, Section 80EE entitles home buyers to are additional Rs. 50,000 annually, which they can claim on the interest component of the residential housing loan. The same can be claimed until the entire loan burden is paid off by the home buyer.
- If a borrower rents out a newly bought property, the whole interest paid for the loan is free from taxation. Notably, those who buy land with the intention of building a house can also profit from Section 24(b) only if the construction is completed within 5 years.
- The 80EEA provision allows first-time home buyers to take an additional deduction on their taxable income as per their tax slab.
● If you are looking to invest to build a corpus over time, park your money into tax-saving instruments
Several government-mandated offerings provide significant returns on investments as well as tax advantages. Take for instance, Section 80C of the Income Tax Act allows taxpayers to claim exemptions on the earnings for up to Rs 1.5 lakhs spent on investments. This implies they can create earnings while shielding them from taxation by investing in tax-saving investment options.
Some of the most popular investment options that also offer tax benefits are:
- National Pension Scheme
- Equity-linked savings scheme
- Senior Citizen Savings Scheme
- Public Provident Fund
- Unit Linked Insurance Plan
- Sukanya Samriddhi Yojana
- National Savings Certificate
However, before investing, be sure that your chosen investment instruments and savings plans align with your financial goals and risk tolerance.
- A health insurance policy is a must as it helps cushion emergencies and save taxes
Section 80D of the Income Tax Act allows taxpayers to file for a deduction on the yearly taxable earnings they spent on their health insurance premiums. Notably, the deductible amount tends to vary among insured and is based on their age. For instance, under the aforementioned ITA clause, a medical insurance premium amount of Rs. 50,000 can be claimed by the taxpayer. Similarly, Rs. 50,000 can be claimed for their self-spouse and children, while Rs. 25,000 can be claimed by the dependent parents under the age of 60.
If the policyholder is a senior person, then they can claim an insurance premium of up to Rs. 1,000,000 per year as deductible. However, if older citizen is not insured by any health coverage, they can claim up to Rs. 50,000 in medical expenditures annually.
● Did you know a life insurance policy not only serves as a financial safety blanket but also extends tax benefits?
Section 80C of the Income Tax Act, 1961 provides for premium payment exemptions, and subsection (10D) of section 10 accounts for the sum guaranteed at the early death of the insured or maturity of the policy whichever occurs first.
Notably, the exemption on insurance policy also depends on the date of its purchase.
- For the life insurance policy purchased after April 1, 2012
If an insurance policy is purchased from a provider after April 1, 2012, a maximum tax deduction of Rs. 1.5 lakh can be availed on the amount the policyholder spent on yearly premiums. However, the total of the same should be less than 10% of the sum assured.
- For the life insurance policy purchased before April 1, 2012
If the life insurance policy was purchased prior to April 1, 2012, then the policyholder can submit a claim under Section 80C of the Income Tax Act. The total premium payments, however, should not exceed 20% of the actual sum guaranteed.
- Purchase or renewal of a policy
Section 80CCC of the Income Tax Act allows for maximum tax exemptions of Rs. 1.5 lakhs on the acquisition or renewal of a life insurance policy. It is also applicable to the annuity payments deducted from each month’s salary. However, only certain pension funds under Section 23AAB qualify for tax exemptions of up to Rs. 1.5 lakhs under Section 80CCD(1) of ITA.
- Your charitable donations are also tax-friendly contributions
Taxpayers can also raise a claim for deductions under Section 80G on their charitable activities. However, such donations or acts of charity should be meted out to notified institutions.
Notably, the tax benefits are mostly applicable to those under the old income tax regime and may not be applicable to those under the new tax regime slabs. To be sure, individuals must do their share of research and then plan their finances accordingly.
Applying these strategies individuals can save on their taxes and at the same time build a reliable corpus for the future.
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