There are several ways in which we can save tax. Some are popular with salaried class and some are useful to self-employed. Though all the tax-saving instruments are equal- they help to save tax. This post will help you save tax.
Check How people make financial mistakes
Public provident fund or PPF
It is the most popular tax saving instrument as it comes under E-E-E category. A minimum of 500/- and a maximum of 1.5 lakh can be deposited in a financial year in a maximum of 12 installments. It has a lock-in period of 15 years, extendable for 5 years after maturity for n number of times. A PPF account can be opened in the named individual or a minor. But the total deposit period should not exceed 1.5 lakh. Maximum deduction allowed under section 80C of Income Tax Act 1961 is 1.5 lakh
The government declares the rate of interest every quarter. Currently, the rate of interest is 8% per year, compounded annually. Interest is calculated on the available balance between the fifth and the last day of the month. PPF is a low risk and return- guaranteed investment.
Top tip: 1.5 lakh should be deposited before the 5th of April in every financial year to earn maximum interest and to save tax.
Life insurance policy
Saving tax through Life insurance policies is one of the conventional methods. They not only provide life coverage but also act as tax-saving investments. The premium paid for life insurance policies is deductible under 80C up to 1.5 lakh. There are several types which include pure term plan, endowment plans, and ULIPs, etc. All are eligible for deduction under 80C.
Health Insurance
Health insurance premiums up to 25000 can be claimed for deduction under 80D. For senior citizens, the limit of deduction is 35000 rupees.
Sukanya Samriddhi Yojna (SSY)
One of the recent small savings schemes SSY is slowly gaining popularity. It is an initiative of the Government of India to boost the education of girls. A parent or legal guardian can open an SSY account in the name of a girl child up to the age of 10 years. The account can be opened in a post office or designated branch of a bank. A maximum of two accounts can be opened in the name of two girls, one account each. A minimum deposit of one thousand and a maximum of 1.5 lakh can be deposited in a financial year. The maximum deduction that can be claimed under section 80C is 1.5 lakh in a financial year. The maturity period of the account is 21 years of the when the girl marries after 18 years. There is no limit on a number of deposits in a month. Rate of interest is reviewed by the government every quarter and is generally higher than PPF and interest earned is tax-free as in PPF.
Top-tip: SSY account should be opened as early as possible after the birth of girl child to avail the maximum benefit of compounding and accumulation of a huge corpus.
Equity-linked savings scheme (ELSS)
Also commonly known as a tax-saving mutual fund, it is the only mutual fund that allows for deduction under section 80C of income tax Act. It is a diversified equity mutual fund that has a lock-in period of 3 years which is shortest among all tax-saving instruments. Since it is market-linked, returns may vary from 15% to 20% but are way better than a fixed deposit. There is an option to invest in lump-sum or monthly.
Top-tip: Investing in ELSS through SIP will average out the purchase cost and maximize returns.
National Pension Scheme (NPS)
NPS is a voluntary and defined contribution retirement savings scheme, which enables the subscriber to accumulate savings during his or her working life. There are two types of accounts-Tier I and Tier II. Contributions in tier I cannot be withdrawn till the age of 60. Partial withdrawal can be made in specific cases only. On the other hand tier, II is just like another saving account. Income tax benefits on NPS were announced by the government in Budget 2017. Both salaried, as well as self-employed, get income tax benefits on investing in NPS. An investment of up to 10% (basic + DA) is deductible from taxable income under section 80CCD of the financial year, subject to a maximum of 1.5 Lakh under 80C.
Senior citizens Saving scheme (SCSS)
It is a government-backed saving instrument and is the best saving scheme for resident Indians above 60 years of age. The tenure of SCSS is five years extendable by an additional three years. Investment up to 1.5 lakh can be claimed for deduction under section 80 C of the income tax act.
Tax saving Fixed Deposits
Investing in fixed deposits with banks and post office allows individuals and HUF to claim a tax deduction up to 1.5 lakhs under section 80C. These FDs have a lock-in period of 5 years and can not be withdrawn prematurely. But loans can be availed against the FD at competitive rates. The interest earned on these deposits, however, is taxable as per the tax bracket of the individual.
National Savings Certificate (NSC)
The National Savings certificate is a fixed income investment scheme that can be opened with any post office. It is a small saving scheme. It is a secure and low -risk product. It can be bought individually, jointly with another adult or in the name of a minor. They come with two fixed maturity periods- five years and ten years. There is no maximum limit on the purchase of NSCs but only 1.5 lakhs can be claimed for deduction.
Home loan
Home loan consists of two components: Principal and interest. Deduction of 1.5 lakh under 80C for principal repayment and up to 2 lakh for payment of interest under section 24 of income tax act 1961 are available. Apart from this if you avail a second loan for home repair, renovation or construction then the interest paid will also be eligible for deduction up-to 30,000 rupees. But the maximum interest payment eligible for deduction including both the home loan and second loan for renovation is 2 lakh.
Child’s school and college tuition fees
Sending children to school and college has an inbuilt tax advantage. Yes, you can claim a deduction up to 1.5 lakh in a financial year under section 80C of Income Tax Act. The deduction is allowed for a maximum of 2 children and only on the school or the college tuition fees. If both the parents are working, the tax advantage will be given to the parent who pays the fee. It covers the fee paid from playschool, nursery to higher education. But the payment made in the form of development fee or capitation fee or transport charges is not eligible for deduction. Also, the deduction is allowed on full-time courses only. The school, college or the higher education institution should be well affiliated to the appropriate body. It is available to individual assesses and not to HUF. The amount of tax benefit is within the overall limit of section 80C.
Top-tip: Retain the fee receipts carefully.
Infrastructure bonds
Infrastructure bonds are risk-free tax-saving instruments for the fixed income category. These bonds are issued by companies falling under the infrastructure category and are approved by the government of India. Investment up to Rs. 20000 is eligible in these bonds which can be utilized for deduction under section 80C of the income tax act. An individual, any minor or HUF is eligible to apply for these bonds. LIC and L&T infrastructure are few companies to issue these bonds.
Donation
There are three sections in the income tax act in which a taxpayer can claim tax deductions on charitable contributions: sections 80GGC, 80G, and 80GGA. These sections do not have an upper limit like 80C. As per the provisions of section 80G 50-100% exemption on contributions made to government relief funds and 50% deduction up to 10% of income in case of some NGOs registered under income, tax Act can be claimed. The entire amount you donate is eligible for deduction. Donations can also be made to religious institutions or trusts. But you have to be careful that the entity has been approved by the commissioner of income tax.
Top-tip: Do not donate more than 2000/- in cash.
Paying Rent
Those who live in a rented house can save tax by showing their rent receipt to their employer. You can also pay rent to your parents and can claim an exemption if the house is owned by any of them.
Leave a comment