Other than conventional methods, what are the ways to save tax in India?

Written by : Knowledge Centre Team

2024-08-02

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Income tax planning becomes crucial in order to achieve one’s financial goals, and while some find it tedious, it is imperative to understand the nuances involved, along with the various existing tax-saving instruments. According to the data provided by the income tax department, for the Assessment Year 2019-20, more than 5.65 crore taxpayers filed income tax returns (ITRs) before the August 31st deadline ended. However, if one’s annual taxable income places them in a higher tax slab, they can consider unconventional methods to save tax. These new tax saving methods also provide good returns on investment, and help taxpayers achieve their financial and tax saving goals.

Filing ITR As Hindu Undivided Family (HUF)

Under the Hindu Law, a Hindu Undivided Family (HUF) consists of people who are lineal descendants of a common ancestor, and the family also includes their spouses and unmarried daughters. HUF, as per law, is treated as an independent financial entity; under Section 2(31) of the Income Tax Act, 1961, a Hindu Undivided Family (HUF) is treated as a person, and thus, considering one has multiple sources of income, filing their ITR as a HUF will prove to be extremely beneficial. Furthermore, it is also possible to show income as a gift from a member of the family while filing tax, and not pay tax for the said income.

House Rent Allowance (HRA) Deduction

Taxpayers who currently do not own a home, and stay with their parents can claim house rent allowance (HRA) on their income. To claim HRA deduction, one has to show that they pay rent to their parents every month, which can be done by either keeping a record of the banking transactions, or saving rent receipts.

Investing Through Parents Who Are Senior Citizens

Senior citizens enjoy additional tax breaks, as they can earn up to Rs. 3 lakh tax-free income. Thus, if a tax payer’s parents have low income to their credit, the taxpayer can divert his or her income from investments their way, whether it is through ELSS, or other mutual funds. Thus, if one generates an interest income of Rs. 1 lakh, they can redirect it to their parents, instead of accumulating it to their taxable income for that particular financial year.

Furthermore, giving money to one’s parents is tax-free, and the amount can be invested in other schemes targeted towards senior citizens, such as the Senior Citizen FD, or Senior Citizens’ Saving Scheme. This not only reduces their tax burden, but also helps in building a corpus for their parent’s retirement, or earn higher gains for themselves.

Reinvesting Gains

Instead of opting for new tax-saving investments, taxpayers can use the amount from existing investments to reinvest in new tax saving methods. For instance, one can recycle their ELSS investments by reinvesting their money in another ELSS fund, or in a different tax-saving investment after the mandatory lock-in period of three years.

Paying Parents’ Insurance Premium

Under Section 80D of the Income Tax Act, 1961, taxpayers are eligible to claim a deduction up to Rs. 25,000 every financial year for health insurance premium instalments. It is also possible to add to the existing benefits, by paying for one’s parents’ medical insurance premiums. If one’s parents are up to 60 years old, it is possible to claim an additional deduction of Rs. 25,000 while paying their premium. However, if one’s parents are above 60 years of age, they can claim up to Rs. 50,000 on their insurance premium payment.

Sukanya Samridhi Yojana

The Sukanya Samridhi Yojana scheme is targeted towards parents who wish to save for their daughter’s future, and offers attractive interest rates (higher than a PPF), and is capped at Rs. 1.5 lakh. Parents can open the scheme in private banks or in post offices as a savings account in the name of their daughter. Furthermore, the minimum investment amount is Rs. 1,000, and the girl should be less than 10 years old while opening the scheme.

Before opting for new tax saving methods, it is also important to choose a policy that aligns with one’s financial goals, savings horizon and risk appetite. For instance, the Guaranteed Savings Plan from Canara HSBC Life Insurance provides policyholders with the flexibility to modify the policy according to their needs. The policy offers guaranteed benefits that are payable on maturity, and provides life cover for the entire term, while the premium is only paid for a limited period. Furthermore, policy holders are also provided with the flexibility to choose a payment term that aligns with their payment horizon.

FAQ

Income tax in India is based on incremental slab rates. The rate of tax is higher on higher income. You can also avail deductions from your taxable income if you invest in eligible instruments like PPF, NPS, ELSS, ULIPs, etc. Starting AY 2020-21 you have two tax regimes – old and new. The old tax regime has all the deductions from gross total income, while the new tax regime offers a lower rate of tax. So, if you are not investing in tax-saving instruments you can file your tax as per the new tax regime.

You can avail additional tax savings under the following sections other than section 80C:

a) Section 80D: Health insurance premium payments for family and parents up to Rs 75,000
b) Section 80CCD(1B): Self-contribution to NPS Tier-I account above 10% of salary or 20% of income if self-employed up to Rs 50,000
c) Section 80E: Education loan interest paid through the year
d) Section 80EE: Home loan interest paid up to Rs 50,000
e) Section 80G: Charitable contributions to non-profit organisations registered under section 12A up to 50% or 100% of the contribution
f) Section 24B: Interest paid on home loan

You have many tax-saving investment options. You can consider the following popular tax-saving schemes to save tax:

a) Term life insurance plan
b) Health and critical illness insurance plan
c) Life insurance plans such as endowment and moneyback plans
d) Pension plans from life insurance companies
e) Public Provident Fund (PPF)
f) National Pension System Tier-I account (NPS)
g) Employee Provident Fund (EPF)
h) Unit Linked Insurance Plans (ULIPs)
i) Equity Linked Savings Scheme (ELSS)
j) Senior Citizen Savings Scheme
k) Sukanya Samriddhi Yojana
l) 5-Year Tax Saving Fixed Deposits
m) National Savings Certificate (NSC)

Deduction of Rs 1.5 or 2 Lakhs under section 80C is available when you make investments or spend money under the heads mentioned in the Chapter VI A of the Income Tax Act, 1961. All tax-saving investments like PPF, NPS, ULIP, ELSS, etc. and all tax-saving expenses like children’s tuition fees, and registration expenses of a house property are part of Chapter VI A.

You will need to pay taxes on the incomes and gains from your investments. For example, your salary income is Rs 10 lakhs in a year, out of which Rs 7.5 lakhs becomes taxable after deducting exempt perquisites. Out of your income of Rs 10 lakhs, you invest Rs 3 lakhs in various options.

Even if none of your investments is eligible for tax saving under section 80C, your taxable income will remain Rs 7.5 lakhs. However, returns from some of these investments will become taxable in the next financial year when you receive them.

Since AY 2020-21 you have two ways to lower your income tax outflow on higher income – tax-saving investments and a new tax regime. You can stick to the old tax regime and invest your savings into eligible tax saving options. Tax-saving investments can give you a deduction of up to Rs 2 lakhs under sections 80C and 80CCD(1B), and additional deductions of up to Rs 2 lakhs under section 24.

Your deductions will be higher with other sections like 80E and 80G. But these are specific outflows which are not investments.

The best way to reduce your tax outflow legally is to use tax-saving investments and plan your future taxes carefully. Tax-saving investments will help you reduce your taxable income in the present financial year. If you invest in options which enjoy tax exemptions on maturity values, you can also reduce your future tax outflow. For example, Invest 4G ULIP from Canara HSBC Life Insurance allows you to stay invested up to the age of 99. This means that you can start investing at 30, build a corpus by 60 and have a tax-free lifetime pension.

Usually, a receipt is a convenient document to produce while claiming your deductions for expenses. However, the following alternatives are available if you lose the receipt:

a) Avail fuel or petrol expenses with number of kilometres
b) Credit card statement for computer items
c) Credit/debit card statement for stationery items
d) Membership documents to show running membership to claim the fees amount

You can claim HRA exemption with your employer and declare the amount in your ITR-1 form while filing your tax return. You will need to submit your house rent receipts with your employer to reduce your TDS. Use the online calculator to estimate your HRA exemption and claim the amount directly in your ITR.

If you are self-employed or do not receive HRA from your employer but have been paying rent for residence, you can claim a deduction of up to Rs 60,000 under section 80GG.

You can calculate your HRA exemption based on the following conditions. The amount of exempt HRA will be the lowest of the three:

a) HRA you have received
b) 50% of salary (basic + DA + Commission paid as % of turnover) if you are staying in a metro city otherwise 40%
c) Rent paid over 10% of your salary (as defined in step 2)

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