Discover how you can save income tax like a Pro with these top 10 tips!!

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Discover how you can save income tax like a Pro with these top 10 tips!!

Who does not want an extra part of income saved, as experts say ” A penny saved is a penny earned”. If you want this extra money saved stay tuned with this piece of content where I have described the top tips to save your hard earned income.

Here is what will be covered today:

Tax saving basics 

Taxes are one of the important instruments for a nation to run smoothly, as they provide revenue for the development of public infrastructure and services such as healthcare and education. The government also makes use of tax money to provide various schemes for different sections of our society.

But as a taxpayer, who doesn’t want to have some extra savings in their pockets, so that you can enjoy more luxuries and benefits. Having said that, you can’t save yourself entirely from paying taxes if you don’t fall under the basic exemption limit, as defined in tax slabs, prescribed by the Income-tax department.

There are certain deductions and exemptions prescribed by the income tax department that you can avail of to reduce your tax liability. 

These deductions are called tax-saving instruments. You can invest in these tax-saving investments so that it provides you with two-pronged benefits:

  1. Grow your investments
  2. Have more money saved in your pocket

Also Read: What is Professional Tax (PT)? The ultimate guide

How can I reduce my taxable income

There are tax slabs specified by the Income Tax department of India for different income ranges. If you fall above the basic exemption limit, then you are liable to file income tax. 

Here is the case of a young boy, named Rahul, who is 22 years old and has started his job as a software engineer and his income is INR 7,50,000 without TDS.

Also Read: How to calculate Income tax and TDS like an expert

Here are some tax-saving investments and deductions that he can avail of so that he can reduce the taxable income:

DeductionsMax Amount (Rs.)
Standard deduction50,000
Section 80C150,000
Section 80CCD(1B) NPS50,000
Section 80D25,000
Section 24(b)200,000
Total4,75,000

Now if we calculate his tax, without availing these deductions, it would be:

Total Taxable IncomeRs. 7,50,000
(Minus) Tax Saving Investments/Spends – Standard DeductionRs.(50,000)
(Minus) Section 80TTA (savings in banks, post office, etc)(10000)
Net Taxable IncomeRs.6,90,000
Tax on Net Taxable Income:nil
20% of Rs. 190,000 (Rs.690,000 – Rs.500,000)Rs. 38,000
(Add) 5% of Rs. 250,000 (500,000 – 250,000)+ 12,500
Total Tax on Income50,500
(Add) 4% Cess+ 2,020
Total Tax Payable in FY 2019-20Rs. 52,520

With tax savings:

Total Taxable IncomeRs. 7,50,000
(Minus) Tax Saving Investments/SpendsRs.(4,75,000)
(Minus) Section 80TTA (savings in banks, post office, etc)(10000)
Net Taxable IncomeRs.265,000
Tax on Net Taxable Income: 
5% of Rs. 15,000 (265,000 – 250,000)Rs.750
Rebate u/s 87A (Rs.12,500 or Actual Tax payable; whichever is less)Rs.(750)
Total Tax on IncomeNIL

Or, we can also look at this case from a different angle:

Here is what Rahul’s payslip states:

  • Basic salary – 30,000
  • House rent allowance – 15,000 
  • Special allowance – 10,000
  • Net salary – 6,60,000

 He finds out that every month TDS is deducted by his employer from his salary. He wanted to know if he can save any tax on his income, so first, he needed to calculate his gross salary (total income from other sources). 

He has been receiving an interest of 2,500 on the principal amount of money deposited in the savings account. Also, he has invested 50,000 in FD so that he is earning 3500 as interest out of that, so his gross salary would be:

  • Basic salary- 30,000
  • House rent allowance- 15,000
  • Special allowance- 10,000
  • Other incomes – 6,000

Net Income- 6,66,000

He also revealed that he is paying rent of 10,000 every month. So now, he can claim HRA exemption if he can provide the rent agreement, and rent slips signed by his landlord. You can check out our detailed blog on how to calculate HRA

His HRA exemption would be:

  • HRA received (1) – 15,000
  • 50 % of basic salary – 15,000
  • Rent paid minus 10% of basic salary- 7,000
  • Less of the above HRA exemption (2) – 7,000
  • HRA taxable – 8,000

Revised tax calculation:-

  • Total salary income – 5,76,000
  • Basic salary- 3,60,000
  • HRA exemption – 96,000
  • Special allowance- 1,20,000

Salary from other sources – 6,000 

  • Gross salary- 5,82,000
  • Deduction from 80C – 1,50,000
  • Deduction from 80tta – 2,500
  • Taxable income- 4,29,000
  • Tax payable – 8,975
  • Rebate under section 87A – 8,975
  • Tax – nil

Now Rahul does not need to pay any tax, that is how he can save all his taxes with a basic exemption limit and other deductions.

Tax saving investments in India 2021-2022

  • Invest in tax saving schemes under section 80c

This is one of the most common tax-saving investments that most Indians are benefitting from. It can be used by salaried/ self-employed individuals, HUFs and NRIs but can’t be availed by Corporates, AOPs, LLPs. 

Section 80C also includes subsections 80CCC, 80CCD (1), 80CCD (1b), 80CCD (2).

80C allows a deduction for the investment made in:

  • Provident Fund (PF) – A provident fund is a government-managed retirement savings scheme that is compulsory for employees who should contribute every month for retirement funds. This lump sum can be accessed by the employee on his retirement, without tax.

 

  • LIC premium – Life insurance premium payments can be exempted under section 80C, subject to a maximum deduction of Rs. 1,50,000, but the only condition is that premium should be less than 10% of total sum.
  • School/College education expenses – Deduction of tuition fees can be claimed by parents under section 80C on payment to schools, colleges, and universities. Other components of the fee such as transport or development fee are not eligible.
  • Equity linked saving scheme (ELSS) – It is the only type of mutual fund that is eligible for tax exemption. These mutual funds are equity linked and invest about 65% of the amount in shares.
  • Home loan principal amount payment – The amount paid as the principal repayment of home loan can be claimed as a deduction. However, the property should not be sold within five years of its possession.

 

  • Sukanya smriddhi yojana (SSY) – This scheme is a part of beti bachao beti padhao campaign where parents can deposit money in the name of a girl child. Parents can then claim a deduction of the entire amount, which can be accessed by the girl child after maturity.

 

  • National saving certificate (NSC)  – It is a fixed income savings scheme which can be opened at any post office branch. This obviously is tax-free and its interest per annum is 6.8 %.

 

  • Senior citizen savings scheme (SCSS) – The process of opening SCSS is very easy, you can open it in any bank, and the interest you will receive is about 7.4%

 

  • Post office time deposits – This is similar to the bank FDs, and can be exempted from income tax.

 

  • Unit linked insurance policy (ULIP) – It is a combination of both investing and insurance so that you can have both term insurance and investment in equities.

 

  • FD for 5 years – One can claim tax exemption on the amount invested in FD for five years, and you will get returns from 7% to 8%.

 

  • Infrastructure bonds – Section 80C states that an amount of 20,000 invested in infrastructure bonds can be exempted from income tax. However, the upper limit is INR 1,00,000 if you hold bonds for about 10 to 15 years.

 

Investment optionsAverage InterestLock-in period forRisk factor
ELSS funds12% – 15%3 yearsHigh
NPS Scheme8% – 10%Till 60 years of ageHigh
ULIP8% – 10%5 yearsMedium
Tax saving FD7% – 8%5 yearsLow
PPF7.10%5 yearsLow
Senior citizen savings scheme7.4%5years (can be extended for other 3 years)Low
National6.8%5 yearsLow
Sukanya Samriddhi Yojana8.4%Till girl child reaches 21 years of age

 

(partial withdrawal allowed when she reached 18 years)

Low

How to increase deductions to 2 lakhs under 80c

This is only available for NPS subscribers. You can claim a deduction of 50,000 under section 80CCD (1b) additionally for contributing towards the NPS.

Now the deduction is increased to a limit of 2 lakhs under 80C and subsections.

Tax savings options other than 80C

tax saving options other than 80c

There are some other options also that you can select for saving your taxes other than section 80C, especially in case you are buying a home or you are a parent.

These are mainly through loans, insurance premiums, saving bank account interest, house rent allowance, donations to charity and political parties, disability, medical expenses, and royalty.

We will talk about some of them in detail. 

You may be interested in:  [Section 80 JJAA] How to get a tax deduction in employee generation

Medical Insurance 

It is important that every individual should be medically insured as you can’t predict the future, but unfortunately, most of the Indian population is still not covered under medical insurance. 

Having medical insurance can provide you and your family safety, and also ease the burden on your pocket, as you can claim an income tax deduction with section 80D of the income tax act.

Who all are eligible for medical insurance deductions:

  • Yourself
  • Spouse
  • Dependent children
  • Dependent parents

The amount of deduction available under section 80D

ScenarioPremium paid (Rs) Deduction under 80D (Rs)
 Self, family, childrenParents 
Individual and parents below 60 years25,00025,00050,000
Individual and family below 60 years but parents above 60 years25,00050,00075,000
Both individual, family, and parents above 60 years50,00050,0001,00,000
Members of HUF25,00025,00025,000
Non-resident individual25,00025,00025,000

 

Save your tax through home loan interest payments

Section 24b of the Income Tax Act allows deduction of interest on home loans from the taxable income. This loan should be taken for construction or repair or purchase or reconstruction of a house property.

The deduction is allowed in any form of a loan, whether it may be a house loan or a personal loan, or a loan from a friend/relative. 

The purchase/ construction should be done within 3 years

Get your salary restructured

Restructuring your salary can also possibly reduce the taxable income by increasing the tax-free components in the salary. As you know, salary is broken up into components like basic salary, house rent allowance, special allowance, and so on, and these components are taxed differently.

There are certain allowances and contributions which you can look to add to your salary, in order to further cut down the taxable income. These include:

Allowances

  1. Children education allowance
  2. Hostel allowance
  3. Meal allowance
  4. Uniform allowance
  5. Professional pursuits allowance
  6. House rent allowance
  7. Leave travel allowance

Contributions

There are some contributions that are done by your employers, such as provident funds. Provident funds are fully tax-exempt and can save you big tax.

Check if you can increase the basic salary of the salary component as the higher the basic salary, the more is the contribution towards PF.

You can also opt for NPS contribution as it allows 10% of basic salary as tax-exempt.

Plan long term capital gains

It is important that you invest money on long-term assets as you can save tax more on the gains from the capital that are held for more than 2 years.

  • Investment in bonds issued by NHAI or RECL
  • Invest in unit linked insurance plan
  • Deposit under capital gain account scheme

Make charity donations

Donating to a charity or other causes is considered noble work. Government supports you in this work as donations can be deducted to reduce your income tax. You can claim 100% or 50% deductions on the charity, depending on the donations specified in the section. These deductions can be claimed by an individual, company, or HUFs

These deductions can only be claimed if the donation is done through cheque, draft, or cash.

Personal expenses

There are some personal expenses that can be claimed as deductions.

Food expenses – food coupons or meal coupons can be claimed as a deduction up to a limit of 2,600 Rs.

Business owners can show their food expenses to claim deductions.

Travel expenses – Leave travel allowance is an option for salaried individuals to save expenses made on spouse and children.

Telephone and internet expenses – Telephone and internet bills can be claimed for income tax deductions.

Education loan

Education loans also are an important source of finance for most Indian students, as many of them come from a middle-class background. 

If you have taken an education loan, interest on the loan can be deducted from your income tax under section 80E of the Income Tax Act.

This deduction can only be claimed by an individual and not by HUFs. An individual can take a loan for self, spouse, and his children.

Parents can easily claim a deduction on their income tax if they pay interest on the education loan.

The total interest paid will be considered for deduction.

Buying LIC insurance policies

When your LIC policy is matured and the lump sum is accessible to you, the amount is tax-free under section 10 (10b) of the Income Tax Act. However, there are certain conditions that need to be fulfilled to claim the amount.

How to plan your tax savings for FY 21-22

This is the time when your HR will be asking you for all the documents to support what you have mentioned as investments under the various deductions to save tax for the Financial Year. You may or may not have invested in those schemes.

I will repeat – It is advisable that you should plan your finances well like many experts say “A penny saved is a penny earned”.

The Indian government encourages employees to invest in various schemes to save tax and claim exemptions and deductions so that it gives you mutual benefits of both saving your tax, and growing your money through these investments.

You can plan your budget with ease and save taxes on various personal expenses as well. You can start your financial planning with investing through SIP in mutual funds like ELSS, make an FD for a period of 5 years, that can be included in the deduction amount Sec 80C 

Frequently Answered Questions

  • How to file income tax returns in India?

Income tax can be filed on the online Income Tax portal, so that now you do not need to visit your nearest income tax office to file your ITR.

  • What are income tax slabs?

Income tax slab means that an individual or HUFs are levied a tax on the basis of the income range prescribed by the Income Tax department of India.

  • How can I legally save tax in India?

You can save tax legally in India by opting for various exemptions and deductions prescribed by the income tax department of India.

  • How is tax calculated?

Also Read: How to calculate income tax and TDS like an expert

Tax is calculated on the basis of slab rates defined in the old or the new tax regime. You can opt for either the new tax regime or the old one to calculate tax on the basis of slab rates.

Infograph on Top 10 tips to save your Tax!!

Top 10 tax saving tips