Last Updated on 09/01/2024 by Pardeep Garg
Tax planning is an important part of sound wealth management, especially for salaried individuals. The Income Tax Act, 1961, provides certain deductions and exemptions that help in reducing the total taxable income. By availing of such deductions, you may reduce your taxable liability by a great extent.
Following are five tax saving investments options you may use to your advantage to reduce your income tax liability.
1. Take maximum advantage of Section 80C
Section 80C allows deductions of up to INR 1.5 lakhs on numerous tax saving investments. Some of the common investments allowed under this section include Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), Employee Provident Fund (EPF), National Pension Scheme (NPS), and Unit Linked Insurance Plans (ULIPS), among others. Under this section, you may also claim deduction on tax-saving Fixed Deposits. Such fixed deposits come with a 5-year lock-in period, and have a minimum investment amount of INR 1000.
There are also some payments that are eligible for deductions under Section 80C, such as repayment of home loan, payment of children’s tuition fees, or payment of premium towards a life insurance policy. Premiums payable towards self, spouse, and dependent children, qualify for tax deduction under this section as well. You may purchase a life insurance policy through the Internet and avail of tax benefit on this online investment option.
2. Restructure your salary to your advantage
You may request your employer to restructure your salary so as to avail of tax benefits. For example, you may utilize a part of your salary towards food coupons. According to stipulations of the Income Tax Act, 1961, you may avail of exemption of INR 50 per meal. You may also claim benefits from your transport allowance of up to INR 1600 each month, under Section 10(14)(ii) and Rule 2BB. Such an allowance is provided to help you meet your transport expenses from your office to your residence, and vice versa. In addition to your transport allowance, you may avail of tax benefits on your Leave Travel Allowance, telephone expenses, medical allowance, and uniform expenses, simply by submitting the bills at the end of the financial year.
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3. Deduction towards rent
Many taxpayers are unaware of the fact that they may claim deduction towards rent paid, even if House Rent Allowance (HRA) does not form a part of their salary. You may, therefore, claim tax deduction in respect of house rent under Section 80GG of the Income Tax Act. The amount that you may claim is the least of INR 5000 a month, paid rent less 10 percent of the adjusted total income, or 25 percent of the adjusted total income. Here, adjusted total income refers to your total income prior to deductions calculated under Section 80GG.
In order to claim benefits under this section, it is necessary to file Form 10BA, wherein you are required furnish details of payment of rent. This form provides proof that you are not claiming tax benefit any self-occupied property in another location or the location where you are employed. Along with Form 10BA, you may submit rent receipts as well as the rental agreement. Remember, it is also necessary to provide details on your Permanent Account Number (PAN) in case your annual rent is higher than INR 1 lakh.
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4. Purchase your dream home
Home owners may enjoy tax relief on the principal amount as well as on the interest paid towards their home loan. The principal repayment qualifies for exemption under Section 80C of the Income Tax Act. The interest paid towards your home loan, on the other hand, qualified for deduction under Section 24. The maximum deduction allowed under Section 24 is INR 2 lakhs. Under Section 80EE, first home buyers may claim deduction of maximum INR 50,000 per financial year. Tax planning through a home loan is, therefore, highly advisable as you may claim benefits under three sections, thus resulting in large tax savings.
5. Invest in health insurance for your loved ones
A health insurance plan offers financial protection against medical expenses in an event of hospitalization. The insurance provider covers all your expenses, thereby allowing you to receive treatment without worrying about meeting high medical bills. The good news is that your mediclaim policy allows you to enjoy tax benefits along with insurance coverage.
You may claim a deduction of up to INR 25,000 on health insurance premiums for self, spouse, and dependent children. Senior citizens, too, may avail of tax benefits on premiums paid towards mediclaim policies. The limit for health insurance deduction for a senior citizen, which was earlier INR 30,000, has now been increased to INR 50,000. You may also claim additional tax benefit on insurance premiums for parents. The maximum deduction allowed in such a case is INR 25,000. In case your parents are senior citizens, you may enjoy tax benefits of up to INR 50,000.
Besides the aforementioned tax saving options, you may opt for various other ways to lower your taxes. You may borrow an education loan, and may thereby claim benefits under Section 80E. Additionally, you may invest in the Rajiv Gandhi Equity Saving Scheme, and seek deduction under Section 80CCG. Further, you may make a donation towards any social, charity, or philanthropic cause, and claim the donation under Section 80G of the Income Tax Act. It is necessary to be a well-informed taxpayer. You may, therefore keep the aforementioned deductions in mind and reduce your tax liability by a significant amount.
