All You Need To Know About Saving Income Tax
Save Income Tax By Investing In Smart Tax-Saving Instruments
Tax planning has to be made at the beginning of the year so that you can save taxes efficiently and not worry about it at the last minute. The Income Tax Act helps Indian investors to claim deductions and reduce their tax liability when they make investments in certain instruments. In this article, we will learn how you can save income tax every year by investing smartly in tax-saving instruments.
India has over 8 crore taxpayers and 5.83 crore income tax returns were filed until July 31, 2022. More and more people are joining the taxpayer league every year. If you are someone who is going to pay taxes for the very first time, the entire process might be confusing for you. Even people who have been paying taxes for a few years might not clearly understand how the process works and how they can save tens of thousands of rupees in taxes.
We are going to explain who has to pay income tax every year and how they can reduce their tax liability, legally, of course!
Do You Have To Pay Income Tax?
Not every person who earns a salary has to pay taxes every year. However, if your income crosses a certain threshold, you would have to pay a percentage of your income as taxes.
There are two tax regimes, known as Old Tax Regime and New Tax Regime. The below table will explain how much tax you need to pay when you choose one of the below regimes.
General Category (less than 60 years)
If you are a newbie to tax-paying or if your salary has increased during the year, you can use the above table as a guide to see how much tax you will be paying this year.
How Can You Save Income Tax In India?
Suppose you have an annual income of ₹7 lakhs. Here’s how your income tax will be calculated.
If you follow the Old Tax Regime:
Gross Total Income - ₹7,00,000
Tax on total income will be (12,500 +20% above 5 lakhs) - ₹32,500 Health & Education Cess - ₹1,300
So, the total tax will be ₹33,800
Let’s see how you can reduce your tax liability with deductions:
Gross Total Income - ₹7,00,000
Standard deduction - ₹50,000
Investment in ELSS funds - ₹1,50,000
Medical Insurance - ₹25,000
Investment in ELSS funds - ₹1,50,000
Medical Insurance - ₹25,000
After all the deductions, your taxable income becomes ₹4,75,000. Your investments in tax-saving instruments have helped reduce your taxable income and now, you have to pay zero taxes. This means that when you make smart investments, you can avoid paying ₹33,800.
Below are the instruments where you can invest to save taxes.
Investment Options Under Section 80C
Under Section 80C of the Income Tax Act, you can make an investment of ₹1.5 lakhs to lower your taxable income. You can invest in any of the below instruments to save taxes under this section.
Equity Linked Savings Scheme (ELSS)
An ELSS fund is an equity mutual fund that invests a greater majority of its corpus in equity and equity-linked financial securities. Act. When you invest in ELSS, you can claim up to a maximum of ₹1.5 lakhs as tax deduction benefits.
One of the main reasons why ELSS is loved by many is because they have the lowest lock-in period of three years when compared to other tax-saving instruments. Once the lock-in period ends, you can redeem or switch the units. Also, among the other tax-saving avenues, ELSS has the highest potential for wealth creation in the long term. ELSS provides options to invest across both growth and dividend options.
Unit-Linked Insurance Plan (ULIP)
ULIP is a combination of insurance and investment. When you make an investment in ULIP, the insurance company invests part of the premium in shares/bonds, etc., and the remaining amount is used in offering an insurance cover. ULIPs allow you to switch your portfolio between equity and debt based on your risk appetite and performance.
Under Section 80C of the Income Tax Act, the premium paid towards the purchase of a life insurance policy qualifies for a deduction of up to ₹1.5 lakhs. On top of that, as per Section 10(10D), income on the maturity of the policy is tax-free.
Tax-Saving Fixed Deposits
A tax-saving FD is a scheme through which you can get tax deductions under Section 80C of the Income Tax Act, of 1961. You can open a tax-saving FD of a minimum amount of ₹100 and a maximum of ₹1.5 lakhs. If the deposit is opened jointly by you and your spouse, the tax benefit is given to the primary holder. The deposit comes with a lock-in period of five years.
The rate of interest on a tax-saving FD will range from 5.5% - 7.75%. The interest that you earn on your FD is taxable. The tax-saving FD offers either monthly or quarterly interest payout. One of the best features of a tax-saving FD is that it has the guarantee of assured returns.
Public Provident Fund (PPF)
This is a government-backed fixed-income scheme and investment in PPF is completely tax-exempt too. The investment of up to ₹1.5 lakhs per annum and the maturity amount you receive from investing in PPF is also exempted from any tax. You can consider PPF to be a risk-free investment as its returns are guaranteed by the government.
At present, the government offers an interest rate of 7.1% for PPF. A PPF fund will mature in a span of 15 years and partial withdrawals are allowed after five years of the account opening. In a year, you can invest a maximum of ₹1.5 lakhs in PPF and a minimum of ₹500.
If you wish to put your money in PPF and want to learn more about your maturity amount and how much interest you can accrue on your investment, check out the PPF Calculator by Koshex.
National Savings Certification (NSC)
The certificate can be readily bought at Indian public banks, all post offices, and some private banks. In order to buy a certificate, a minimum investment amount of ₹1000 is mandatory. You can invest any amount in the multiple of 100 in 12 installments in one financial year or the desired deposit at once. There is no upper limit on investment in NSC. With NSC, you don't have to pay any tax until maturity and it provides tax savings of up to ₹1.5 lakhs under section 80C.
You can invest every year in NSCs for five years (the lock-in period of NSC is 5 years) and post that, you only need to invest the principal while using the interest as your income. The interest is compounded annually at the rate announced by the Ministry of Finance every quarter and it is paid at the end of the maturity period. The interest every year is considered reinvestment and not taxed, but the final chunk of interest will be taxed as per your regular tax slab.
National Pension Scheme (NPS)
This government-monitored pension fund invests in diversified stock market portfolios including government bonds, corporate debentures, and shares. The returns or the accumulated pension wealth made on such investments are used to purchase a life annuity and a portion is available for withdrawal at the end of the scheme cycle.
There are two types of NPS accounts - Tier I NPS Account and Tier II NPS Account.
Tier I NPS Account
The Tier I NPS account is available for Indian citizens between the age of 18 and 65. This account can be opened by depositing ₹500 and an amount of ₹1000 has to be deposited in a financial year in order to keep the account active. Investments of ₹2 lakhs per annum in this account are exempted from tax under Section 80C and Section 80CCD. The returns earned on NPS tier I accounts are exempted from tax.
Tier II NPS Account
The Tier II NPS Account is a voluntary account and can be opened only if an individual already has an NPS Tier I account. You have to pay a minimum investment amount of ₹1,000 at the time of opening the account. There is no mandatory annual contribution in the tier II NPS account and there is no maximum limit of investment amount into this account.
After you reach the age of 60, you can withdraw a maximum of 60% of the total corpus, and the rest of the 40% is used to buy a pension plan of your choice. There are no tax benefits in the tier II NPS account and income from this account will be taxed as per your tax slab. Only government employees get tax benefits if they stay invested for three years.
If you wish to put your money in NPS and want to learn more about your maturity amount and how much interest you can accrue on your investment, check out the NPS Calculator by Koshex.
Life Insurance Premium
The premium paid by you for the insurance policy qualifies for tax exemption under Section 80C of the Income Tax Act of 1961. The maximum amount you can save by paying the premium under this section is ₹1.5 lakhs. You can lower your taxable income further by purchasing term life insurance for your parents, spouse, and children. The payout received by the nominee upon the policyholder's death is completely tax-free.
Sukanya Samriddhi Yojana (SSY)
SSY is a small deposit scheme backed by the Government of India for a girl child. The SSY account is opened anytime after the birth of the girl child until she turns 10 years old. You can invest regular deposits into the scheme for which you will earn interest, which is determined by the Government of India. The rate of interest is determined on a quarterly basis and is payable on maturity.
Tax benefits of up to ₹1.5 lakhs are provided under Section 80C for contributions made towards the scheme. The interest amount that is generated from the scheme is exempted from tax. Tax benefits are also provided for the maturity amount or the withdrawal amount. The Koshex SSY Calculator will help estimate the amount you will receive on the maturity of the SSY scheme (i.e.) 21 years.
Investment Options Under Section 80D
Under Section 80D of the Income Tax Act, a maximum deduction of ₹1,00,000 (₹50,000 for self and family if senior citizen and ₹50,000 for senior citizen parents) can be claimed if you buy medical insurance.
Health Insurance Premium
Under Section 80D of the Income Tax Act, you can claim a tax benefit of up to ₹25,000 for paying health insurance premiums. You can get tax benefits for the premium paid to keep in force health insurance that covers yourself, your spouse, or your dependent children. Any contribution to Central Health Government Schemes is also eligible to be claimed under this section. On top of these, any other scheme that may be notified by the central government as eligible for deduction can be used to earn tax benefits.
An additional deduction for the insurance of your parents is available to the extent of ₹25,000. If your parents' age is below 60, you will get a deduction of ₹25,000 or ₹50,000 if they are over the age of 60. If you and your parents are both over 60 years of age, the maximum deduction available is ₹1,00,000 under this section.
Tax-Saving Options Under Section 80G
Under this Section, the donations you make to a charitable organization or a political party can help you get a tax deduction.
Donations
You can get a tax deduction if you donate to an approved charitable organization via cheque or online transfer. Cash transfers, above ₹2000, do not qualify for deduction under this section. Based on the type of organization where a donation has been made, the tax deduction under Section 80G can be either 50% or 100% of the donation amount. However, the same is restricted to 10% of the adjusted gross total income of the taxpayer.
Donation To Political Parties
Under Section 80GGC of the Income Tax Act, you can get tax deductions for contributions made to political parties. This can range from 50% to 100% of the amount contributed. You can donate as much as 10% of your gross earnings to any political organization. The important thing to note here is that only employees who draw a salary with no other income from other businesses can avail of deductions under this section while filing their tax returns.
In The End…
In this article, we have mentioned different investments you can make to reduce your tax liability. We have also talked about other tax-saving options, such as making donations to certain charities and political parties. It is good to remember that you can only claim a certain amount as a tax deduction, for example, you can only claim up to ₹1.5 lakhs of tax deduction under Section 80C even if you invest over ₹1.5 lakhs. This applies to several sections of the Income Tax Act. So, it is important to plan your investments strategically.
You should also consider the different lock-in periods of every instrument to figure out which one would suit your investment portfolio. Many people use tax-saving instruments to grow their wealth, apart from saving taxes. If staying invested for 15 years in a PPF is something that you are not comfortable with, you can check out ELSS funds, NPS, or tax-saving fixed deposits, which tend to have lower lock-in periods.
We have written another article about 20 tax-saving options, which is a comprehensive list that can help you save more taxes. That list includes various tax-saving options such as home loan premiums, education loan interest payments, rent payments, and more. Please check it out if you wish to know more about saving taxes.
If you wish to learn about budgeting, money management, and improving your financial skills, please head over to the Blogs section on our website. We also write about various investment instruments, such as Mutual Funds, Smart Deposits, Digital Gold, and Fixed Deposits to help everyone make informed investment decisions.
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| Old Regime - Income Slab | Old Regime - Income Tax Rate | New Regime - Income Slab | New Regime - Income Tax Rate |
|---|---|---|---|
| Up to ₹2.5 lakhs | Nil | Up to ₹2.5 lakhs | Nil |
| ₹2.5 lakhs - ₹5 lakhs | 5% above ₹2.5 lakhs | ₹2.5 lakhs - ₹5 lakhs | 5% above ₹2.5 lakhs |
| ₹5 lakhs - ₹10 lakhs | ₹12,500 + 20% above ₹5 lakhs | ₹5 lakhs - ₹7.5 lakhs | ₹12,500 + 10% above ₹5 lakhs |
| Above ₹10 lakhs | ₹1,12,500 + 30% above ₹10 lakhs | ₹7.5 lakhs - ₹10 lakhs | ₹37,500 + 15% above ₹7.5 lakhs |
| ₹10 lakhs - ₹12.5 lakhs | ₹75,000 + 20% above |