How to Save Income Tax?

Written by : Knowledge Centre Team

2024-08-02

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The income tax regime in India offers multiple ways for individual taxpayers to save tax. You can invest your savings in specific long-term schemes to reduce your taxable income. Certain expenses, usually necessary in family life, also help you save tax.

From the financial year 2020-21, individual taxpayers can choose between two tax regimes- the existing or old tax regime and the new concessional one. The rates of payable tax for a given tax slab differ between these two regimes.

Tax-saving investments will reduce your taxable income only under the old tax regime. However, the long-term investments which help you save tax also build long-term wealth for you. So, a majority of these investments are good for your present and future wealth. Let us Understand How to Save Tax for Business People & Salaried Employees.

How to Save Income Tax in India – Tax Saving Guide

Section 80C

Section 80C is the most popular section of the Income Tax Act of 1961 in India. This section contains a large portfolio of investments you can use to save tax. Many of these investments can also make your investments completely tax-free even in the future.

Section 80C deductions are available from the gross total income or taxable income. If you do not have taxable income in a financial year, you cannot claim deductions under this section. In other words, section 80C investments out of a tax-exempt income will not lead to tax refunds.

Certain important family expenses also make the list of 80C eligible outflows. You can also claim deductions for emergency medical expenses under other sections such as 80D, 80DD, etc.

Here are the most popular investments under section 80C for tax saving:

a) Equity Linked Savings Scheme

Equity-Linked Savings Scheme or ELSS is a pure equity mutual fund with allocation to specified equity stocks. Being a pure equity mutual fund, ELSS holds 90-95% of their assets in equity stocks. The scheme also has a lock-in period of three years, which is among the lowest for a tax-saving investment.

However, the recommended holding period for your ELSS investments should be 5 to 10 years. SIP into ELSS has to be planned with a margin of at least 3 years. This is because every SIP into the scheme will face a 3-year lock-in.

b) Senior Citizen Savings Scheme

The senior Citizen Saving Scheme (SCSS) is part of the small savings portfolio of the government of India. This tax saving scheme allows senior citizen investors to earn a quarterly interest on their wealth. You can invest up to Rs 15 lakhs in an individual account.

The rate of return on the investment is higher than other deposits of similar maturity of five years. The scheme does not have a lock-in period. So, you can withdraw prematurely from the account. However, a penalty is applicable on early withdrawals.

You can also extend the account for another three years after maturity. Current interest rate on senior citizen savings scheme is 7.4% p.a. (w.e.f. 1 April 2020). The interest on the deposits does not face TDS charges.

Also Read - Income Tax Slab For Senior Citizen

c) National Pension System

The National Pension System of NPS is a modern retirement investment option open to all Indian residents. NPS allows you to invest in market portfolios of fixed income corporate, government securities and equity stocks.

The tax-saving scheme allows you to invest in a mix of funds as per your risk appetite. You can invest up to 75% in equity funds depending on your age.

Alternatively, you can invest in an automated mode where your asset allocation will automatically change as per your age.

Withdrawals from the account are available after you reach 60 years of age. You can withdraw up to 60% of the total corpus tax-free. The remaining 40% must be invested in a pension fund.

Also, you can claim an additional tax deduction of Rs 50,000 through NPS.

d) Life Insurance Premium

Life insurance policies also qualify for tax savings under section 80C. Life insurance policies like term life insurance, endowment plans, moneyback policies, etc. all qualify for tax saving.

You only need to ensure that your total investment in a life insurance policy in a financial year does not exceed 10% of the base death benefit amount.

e) Public Provident Fund

Public Provident Fund or PPF is one of the safest long-term tax-saving investments in India. The rate of interest is announced every financial year by the government of India. PPF is a completely tax-exempt savings scheme. That means, your invested money, interest on the fund, and maturity values are all exempt from tax.

PPF is also only available to resident individual investors. The scheme has a maturity of 15 years, but partial withdrawals are available from the sixth year of investment.

Within the lock-in period of five years, as well, the scheme allows borrowing if you need money.

f) National Savings Certificate

National Savings Certificate or NSC is a five-year fixed return instrument. The certificate comes with a sovereign guarantee. Thus, offers a safe return on investment.

The interest from NSC is taxable. However, through the tenure of the certificate, it is assumed to have been reinvested. Thus, the interest on NSC becomes taxable only upon maturity.

g) Tax-Saving Fixed Deposits

You can invest in tax-saving fixed deposits with your bank or post office. The deposits have a maturity period of five years. Unlike normal FDs, you cannot take a lien against tax-saving FDs. In the event of partial withdrawals, your tax saving due to the deposit also has to be rescinded.

The interest on the deposit is taxable every year and will face a TDS deduction if the total interest exceeds Rs 10,000 in the year.

h) Home Loan Repayment

If you take a home loan to purchase or construct a house, you can claim a deduction on the home loan principal repayments. The tax deduction is available up to Rs 1.5 lakhs if you are below 60 years of age, and up to Rs 2 lakhs if you are 60 or above.

The interest paid on the home loan can also be accounted for in your tax estimates. But you can do so while estimating your income or losses from house property.

i) Tuition fees

Tuition fees paid for the full-time education of your children also qualify for tax deduction under section 80C. The fees can be for school or college education. The deduction is available for expenses of up to two children only.

Section 80CCD

Section 80CCD of the Income Tax Act, 1961 has been introduced to define the tax exemptions available with your NPS contributions. You can contribute to NPS as an employee or self-employed. Your employer can also contribute to your NPS account as an alternative to EPF.

Section 80CCD consists of two subsections defining the tax treatment of self and employer contribution to your NPS account:

a) Section 80CCD (1)

Defines tax treatment of self-contribution to NPS Tier-I account. The section has two parts Section 80CCD (1) and Section 80CCD (1B). While the first section is a part of section 80C and provides a tax deduction of up to Rs 1.5 lakhs on self-contributions.

You can contribute up to 10% of your salary or 20% of your annual income (for self-employed) to your NPS account. If you contribute more than these limits you can avail of an additional tax savings of up to Rs 50,000 under section 80CCD (1B).

Thus, the total deduction available on self-contribution to the NPS account is up to Rs 2 lakhs.

b) Section 80CCD (2)

Section 80CCD (2) defines the tax treatment of an employer’s contribution to an NPS account. Employer's contribution of up to 10% of your salary is tax-free in your hands. Any contribution beyond the limit is treated as a perquisite and becomes taxable as part of your income.

Section 80D

Section 80D is a deduction over and above section 80C. The tax saving is available on the premiums paid for securing a health insurance cover for the following:

a) Self, spouse and children
b) Parents

You can claim separate deductions for both health insurance covers. In the case of senior citizens, medical expenses for the treatment of specified diseases also fall under the deduction umbrella of section 80D.

You can claim up to Rs 25,000 on health insurance premiums paid if when the age of the eldest covered member is below 60 years. In the case of senior citizen health cover (and medical expenses) the limit goes up to Rs 50,000.

Section 80D limits also include a deduction for preventive health check-ups of up to Rs 5000.

Thus, the total deduction you can claim under section 80D can go up to Rs 75,000.

Section 80E

Section 80E defines the conditions for deduction of interest paid on an education loan. The tax deduction is available on education loans taken for pursuing higher studies. The deduction is available only for up to eight years. So, you can aim to repay the entire loan within this period.

This deduction does not have a maximum limit. The tax deduction is only available on education loans taken for higher studies after senior secondary. Higher education should be pursued from a recognised institution.

Section 80EE

Deduction under section 80EE is available for home loan interest payments. The tax deduction is limited to Rs 50,000 per year. This deduction is separate from the deduction for loss from house property (section 24B). Your home loan needs to meet certain conditions to qualify for this deduction:

a) You must have secured the loan in FY 2016-17
b) The value of the loan should be up to Rs 35 lakhs
c) The value of the house you have bought with the loan should not exceed Rs 50 lakhs
d) At the time of buying the house, you did not own any other house property
e) The loan has been sanctioned by a financial institution or housing finance company

Section 80G

Deduction under section 80G, in a way, rewards your charitable work. You can avail of the deduction when you contribute to any of the charitable institutions recognised under section 12A. You can claim the deduction if it meets the following conditions:

a) Contributions have been made from taxable income
b) Cash donations should not exceed Rs 2000
c) Larger donations should be made via cheque or draft

Deduction under section 80G is available to both resident and non-resident Indian taxpayers. The limit of tax deduction can be 100% or 50% depending on the institution’s registration.

Learn about - Section 80GG

2. Buying a Health Insurance Policy (Section 80D)

If you purchase a health insurance policy for yourself, your spouse, or a dependent (this cannot include siblings), you are eligible under section 80D of the Act to claim an income tax deduction. The amount of possible tax saving will be Rs.25,000 for each financial year if the insured individuals are under the age of 60 years.

If, however, an insured individual is above the age of 60 years, this amount can go up to Rs.50,000.

What are the Best Tax Saving Schemes in India?

1. Public Provident Fund (PPF)
2. Sukanya Samriddhi Yojana (SSY)
3. National Pension System (NPS)
4. Employees' Provident Fund (EPF)
5. Sukanya Samriddhi Yojana Interest Rate
6. National Savings Certificate
7. House Rent Allowance
8. NSC Interest Rate

How to Plan your Tax Savings for the Year?

You need to plan your taxes for the year. However, the majority of tax planning happens at the investment stage. While investing you can choose tax saving investments which have a EEE status:

a) Investments in the scheme avail deduction
b) Interest accrued in the scheme is exempt from tax
c) Maturity values (including any withdrawals) are exempt from tax

This way, you will not have to create a separate tax plan after the goal and investment planning. Your investments should always be driven by your financial goals and not the short-term need of saving taxes. You need to maximise your tax saving within the ambit of your goal-based investments.

Tax Saving Tips for Salaried & Non-salaried Taxpayers

You can take care of the following while investing to maximise your tax savings for the year:

a) Always use tax-saving investments like ULIP, ELSS, PPF, NPS etc for long-term goals
b) 10-15% of your income should go to your retirement goal into investments like EPF, NPS, and PPF, all of which offer tax saving
c) Self-employed can invest up to 20% of their annual income in NPS
d) Term life and health insurance covers are a necessary addition to your emergency preparations
e) Benefit from long-term capital gains while investing in the following:

Equity stock investments must be held for more than 12 months
Invest for at least 36 months in debt funds or gold

This way you will not need a separate plan for tax savings and you can maximise your tax savings with your goal-based investments.

Some Additional Income Tax Saving Tips

The best tax saving methods enable an automatic reduction in tax liabilities. If you invest according to your financial plan the following investments will allow you to maximise your tax saving:

a) Have term life insurance cover the premiums are deductible under section 80C
b) Have health insurance cover for self and family. Premium is deductible under section 80D
c) Invest in NPS (available to self-employed as well) or EPF for retirement. Investment increases your deduction under 80C. NPS investment can enable you to save Rs 50,000 more under section 80CCD(1B)
d) Invest in Unit Linked Insurance Plans (ULIP) for your long-term goals like child’s education and marriage
e) Use ELSS funds for investing in equity funds

FAQs Related to Section 80GG

Adjusted total income is that part of your Gross Total Income for the financial year which excludes the following incomes:

a) Income received from a foreign company
b) Any income received as an NRI that is taxable at a special rate
c) Long-term capital gains of the financial year
d) Short-term capital gains that are taxable at 10% under section 111A
e) Deductions from gross total income under sections 80C to 80U except for 80GG

Yes, it applies to all categories of individual taxpayers including NRIs.

No, you cannot claim deduction under section 80GG if you are receiving a home rent allowance with the salary. Deduction under section 80GG is available only to those individual and HUF taxpayers who are either self-employed or not receiving HRA as part of the salary.

Paying rent for residential property allows you to avail of tax deductions either as HRA or under section 80GG. While deduction for HRA is available based on the allowance received and rent paid, section 80GG is available to you when you do not receive HRA but live on rent. Section 80GG deduction is limited to the minimum of the following three:

a) Rs 5000 per month or Rs 60,000 for the financial year
b) Rent paid over 10% of Adjusted Total Income
c) 25% of the Adjusted Total Income

Yes, you can claim a deduction under section 80GG while staying with your parents. However, you need to meet the following conditions:

a) There is a rent agreement between you and your parents
b) You are paying rent to your parents which they show as income in their ITRs for the relevant financial years

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