How to Save Income Tax in FY 2023-24?
Everyone has to pay certain percentage of his/her income as tax to government. There are many ways by which you can save tax and increase income. The income tax act provides tax deductions to tax payers for various investments, savings and expenditures in a particular financial year. We will discuss some of the schemes which can help save taxes. First lets understand what is income tax.
Read also: HOW TO SAVE TAX BY INVESTING IN MUTUAL FUNDS
What is income tax?
Income tax is a type of tax imposed by the government on the income earned by individuals, businesses, and other entities within a particular jurisdiction. It is one of the primary sources of revenue for governments and is used to fund various public services and programs.
For individuals, income tax is calculated based on their taxable income, which is the total amount of money they earn from various sources, such as salaries, wages, investments, and rental income, minus any allowable deductions and exemptions. The tax rates applied to different income levels are determined by the tax laws of the specific country or region.
Higher income earners are generally subject to higher tax rates and the lower income earners subject to lower income tax. This progressive structure is intended to ensure that individuals with higher incomes contribute a larger proportion of their earnings in taxes.
How to save income tax?
- Tax saving investment options under Section 80C:
Under Section 80C of the Income Tax Act, there are several tax-saving investment options available. Investors can claim maximum upto ₹1.5 lakh deductions from taxable income through these investment options in a financial year. Here are some popular tax-saving investment options under Section 80C:
- Employee Provident Fund (EPF): Contributions made to EPF by both the employee and employer are eligible for deductions under Section 80C. The interest earned and the maturity amount are also tax-free.
- Public Provident Fund (PPF): PPF is a long-term investment scheme with a lock-in period of 15 years. Contributions to PPF are eligible for tax deductions, and the interest earned and the maturity amount are tax-free.
- National Savings Certificate (NSC): NSC is a fixed deposit investment offered by the post office. The investment has a lock-in period of 5 years and qualifies for tax deductions under Section 80C.
- Tax-saving Fixed Deposit (FD): Certain banks offer tax-saving FDs with a lock-in period of 5 years. The interest earned is taxable, but the investment amount is eligible for deduction under Section 80C.
- Equity-linked Saving Scheme (ELSS): ELSS is a type of mutual fund that primarily invests in equity markets. Investments in ELSS have a lock-in period of 3 years and qualify for tax deductions under Section 80C. Returns from ELSS are subject to long-term capital gains tax.
- Sukanya Samriddhi Yojana (SSY): SSY is a government scheme designed to facilitate savings for the girl child. Contributions made to SSY accounts are eligible for deductions under Section 80C, and the interest earned and the maturity amount are tax-free.
- Life Insurance Premiums: Premiums paid for life insurance policies, including those for yourself, your spouse, or your children, are eligible for deductions under Section 80C. However, policies should have a minimum term of 5 years.
- National Pension Scheme (NPS): Contributions made to the NPS are eligible for deductions under Section 80C, up to a maximum of ₹1.5 lakh. Additionally, contributions to the NPS Tier-I account are eligible for an additional deduction of up to ₹50,000 under Section 80CCD(1B).
- Health Insurance:
Under Section 80D of the Indian Income Tax Act, individuals and Hindu Undivided Families (HUFs) can avail of tax benefits on health insurance premiums paid. Below are the key details regarding the tax benefit under Section 80D:
Deduction Limits for Individuals and HUFs:
- For individuals (below 60 years) and HUFs: Up to ₹25,000 can be claimed as a deduction for health insurance premiums paid for self, spouse, children, and parents.
- For individuals (above 60 years) and HUFs: Up to ₹50,000 can be claimed as a deduction for health insurance premiums paid for self, spouse, children, and parents.
- An additional deduction of up to ₹25,000 is available for health insurance premiums paid for parents (below 60 years).
- If both the individual and parents are above 60 years, the maximum deduction for health insurance premiums paid for parents increases to ₹50,000.
- Submit rent receipts:
If you are staying in a rented accommodation and your employer gives House Rent Allowance (HRA), you can claim deduction under Section 10(13A). The tax exemption on HRA is calculated as the least of the following three amounts:
- Actual HRA received from the employer
- The actual rent paid is more than of 10% of salary
- 50% of the salary if you stay in a metro city and 40% of the salary if you stay in a non-metro city
However, under Section 80GG, if you do not receive HRA from your employer or do not own a residential house, you can get a deduction of house rent expenses from your taxable income. The least of the following three will be allowed as a deduction from taxable income:
- ₹60,000 per annum(₹5000 per month)
- Rent paid minus 10% of the total income
- 25% of total income for the year
- Make charitable donation:
Section 80G of the Income Tax Act allows taxpayers to save tax by donating money to eligible charitable institutions. By donating to eligible institutions and organisations, taxpayers can claim deductions ranging from 50% to 100% of the amount donated. The payment of donation has to be through a cheque, demand draft, or electronic modes. However, cash donations exceeding ₹2,000 are not eligible for deduction.
All taxpayers, individuals, companies, or HUFs are eligible to make charitable donations and claim tax deductions under section 80G of the Income Tax Act, 1961. Taxpayers under the new tax regime cannot avail of this deduction benefit.
- Education loan:
Under Section 80E of the Income Tax Act, the amount spent in repaying the interest of education loan can qualify as a deduction from total income. Tax deduction can be claimed by individual for education loan taken for self, spouse, children or a student for whom you are the legal guardian. The loan should be taken from a bank or an approved financial institution.
The total amount paid as interest against the education loan in a financial year is regarded as the deduction amount and there is no limit on the maximum amount you can claim as a deduction. You will have to acquire a certificate from the bank that differentiates the principal from the interest of the education loan you have repaid.
- Home loan:
Section 80EE of the Income Tax Act, of 1961 allows a tax deduction benefit on the interest paid on home loans taken by a first-time homebuyer. If you fall in this category, you can claim a tax deduction up to ₹50,000 under section 80EE. Under Section 24, you can get deduction from taxable house property income, of the interest paid on home loan upto ₹2 lakhs. To avail tax benefit under Section 80EE, the following criteria’s should be met:
- The housing loan should be sanctioned in the FY 2016-17
- The loan should not be more than `35 lakhs
- The residential house value should be less than `50 lakhs
- The home buyer does not own any other residential property registered in his name on the date of sanction
- Life insurance:
You can save tax by taking life insurance policy. Depending on the type of life insurance policy you choose, you can claim the following tax deductions:
- The premiums paid under the policy are eligible for tax deductions up to ₹ 1.5 lakh annually under Section 80C of the Income Tax Act, 1961
- Under Section 10(10D), payouts received under the policy are tax free subject to conditions prescribed under Section 10(10D) of the Income Tax Act, 1961.
- The premiums paid towards critical illness benefit are also eligible for tax exemption under section 80D of the Income Tax Act, 1961
Remember, tax planning should align with your overall financial goals and should not be the sole focus of your financial decisions. It’s essential to seek advice from a tax professional or financial advisor who can consider your specific circumstances and provide personalized guidance.