Best Tax Saving Options To Invest in India

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Isha is a techie. She completed her studies recently, and she got a job placement in a multinational company. Her monthly salary is ₹45,000 per month on paper. 

After working sincerely for a month, Isha plans to celebrate her first salary with friends and family. It is the last day of the month when she gets a notification - your salary has been credited to your account. More than being happy, Isha seems obnoxious. 

Well, the problem is, she was supposed to receive a salary of ₹45,000 however the salary credited in her account is just ₹40,500. 

Where did the other ₹4500 disappear? 

In utter despair, she calls HR and puts up a question about the deduction in her salary. HR quickly says "we have deducted income tax from your salary". Isha feels terrible about the deduction but also realizes that she needs to educate herself about taxation

Are you also sailing in the same boat? You are also about to receive your salary, or you have received your paycheck but don't know why the money is being deducted. Yes, you know that it was income tax that was deducted from your salary but how was it calculated what could you have done to save it or what can you do to get a return? 

What is tax and why are we paying it?

Any tax is a statutory and mandatory payment that we make to the government. We pay a tax on income so that the government can raise the resources to pay for different facilities like- street lighting, roads, police, hospitals, etc. All the facilities which you cannot afford on your own but the government provides you require money to function. 

The reason behind the tax is to support the government in providing us with all the facilities. 

What is income tax? 

When you pay a percentage of your income to the government, it is called income tax.

Income tax slab rates

Do you know income tax is different for all age groups and income slabs? The tax rates of income are first categorized based on age groups and re-categorized across age groups. Based on age, there are three categories of the taxpayer: 

  1. Individuals below the age of 60 years
  2. Senior citizens between 60 years and 80 years old
  3. Super senior citizens above 80 years old

Upon the announcement of the budget for every year, the tax slabs are often revised. For the financial year 2020-21, you have the option to choose from the old scheme or the new scheme.

Following are the rates under these two schemes for resident Indians who are below 60 years of age:

Taxable income

Tax Rate

(Existing Scheme)

Tax Rate

(New Scheme)

Up to Rs. 2,50,000

Nil

Nil

Rs. 2,50,001 to Rs. 5,00,000

5%

5%

Rs. 5,00,001 to Rs. 7,50,000

20%

10%

Rs. 7,50,001 to Rs. 10,00,000

20%

15%

Rs. 10,00,001 to Rs. 12,50,000

30%

20%

Rs. 12,50,001 to Rs. 15,00,000

30%

25%

Above Rs. 15,00,000

30%

30%

The senior citizens, between the ages of 60 and 80 must apply the following rates:

Taxable income

Tax Rate

(Existing Scheme)

Tax Rate

(New Scheme)

Up to Rs. 2,50,000

Nil

Nil

Rs. 2,50,001 to Rs. 3,00,000

Nil

5%

Rs. 3,00,001 to Rs. 5,00,000

5%

5%

Rs. 5,00,001 to Rs. 7,50,000

20%

10%

Rs. 7,50,001 to Rs. 10,00,000

20%

15%

Rs. 10,00,001 to Rs. 12,50,000

30%

20%

Rs. 12,50,001 to Rs. 15,00,000

30%

25%

Above Rs. 15,00,000

30%

30%

For the super senior citizens, who are over the age of 80, the following are the applicable rates:  

Taxable income

Tax Rate

(Existing Scheme)

Tax Rate

(New Scheme)

Up to Rs. 2,50,000

Nil

Nil

Rs. 2,50,001 to Rs. 5,00,000

Nil

5%

Rs. 5,00,001 to Rs. 7,50,000

20%

10%

Rs. 7,50,001 to Rs. 10,00,000

20%

15%

Rs. 10,00,001 to Rs. 12,50,000

30%

20%

Rs. 12,50,001 to Rs. 15,00,000

30%

25%

Above Rs. 15,00,000

30%

30%

Section 80C of the Income Tax Act of India is a clause that guides various expenditures and investments that are spared from income tax. As per section 80C, a maximum deduction of up to Rs.1.5 lakh is allowed every year from an investor’s total taxable income. 

Since the section 80C is applicable for individual taxpayers and Hindu Undivided Families, the corporate bodies, partnership firms, and other businesses do not qualify to avail tax exemptions under Section 80C.

Therefore, your entire salary is not taxable. You are eligible to deduct a certain amount before you calculate the tax on your total income. There are many deductions for individual taxpayers under section 80C of the Act which are most applicable. 

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The following items are permitted as a deduction under section 80C.

  • Investment in Public Provident Fund (PPF)
  • Investment in Employee Provident Fund (EPF)
  • Investment in National Saving Certificate (NSC)
  • Investment in Sukanya Samriddhi Yojana (SSY)
  • Investment in 5-year Tax Saving Fixed Deposit
  • Investment in Senior Citizens Savings Scheme (SCSS)
  • Investment in life insurance
  • Investment in infrastructure bonds
  • Investment in Unit Linked Insurance Plans (ULIPs)
  • Investment in Equity Linked Saving Scheme (ELSS)
  • Investment in the National Pension System (NPS)
  • Repayment of the principal of a housing loan
  • Payment of tuition fees for children

Other deductions available under other subsections of section 80 are: 

  • Deductions for interest on a savings account, as per section 80TTA
  • Deductions for house rent paid, as per section 80GG
  • Deductions for interest on education loans, as per section 80E
  • Deductions for interest on home loans, as per section 80EE
  • Deductions for premiums paid for medical insurance, as per section 80D
  • Deductions for certain specific donations, as per section 80G

Now when you know the income tax slabs and the deductible income, it is time to get right into the most crucial question, which is how you can save taxes? 

You can save tax by investing in insurance. There are many benefits of investing in insurance; one of them is that it will save you taxes. This is how you can save tax with insurance. 

Life insurance

Life insurance policies provide your coverage and also acts as a way to save on taxes. The premium which you have to pay every year for the life insurance policy is paid back to you in a large lump sum amount in case of demise. The premium which you pay for a life insurance policy is liable for a tax reduction under section 80 C of Income Tax Act.

ULIP

The market-linked insurance plans are called unit-linked insurance. If you invest in this plan, you will receive the benefit of both investment and protection under a single plan. The investments done under the scheme are eligible for a tax deduction and also allows you to grow your money.

Health insurance

Medical treatment and medical care are one of the most challenging expenditures to manage. A health insurance policy is much of a necessity now for everyone. A health insurance policy not only provides Finances to cover your medical expenses but also the premium you pay for it can help you save taxes up to rupees 15,000 to 20,000.

Investments

Investments are one of the most preferred ways for people to save taxes. Why is it so? When you invest your money, you reap the benefits of it later. Let us understand how investments help you save taxes.

Mutual funds

You can gain tax benefits from the equity-linked saving scheme. The equity-linked saving scheme has a lock-in period of 3 years. This. Is less as compared to fixed deposits and public Provident funds. The most important benefit of the scheme is that it offers a significant return on investment and also helps you in saving taxes.

Tax saving fixed deposit.

Another tax-saving instrument is fixed deposits offered by different banks. You can put up to rupees 1.5 lakhs in these deposits and gain a handsome amount of interest and also benefits of tax saving for that year. The lock-in for a fixed deposit is five years.

Post office time deposit

Post office time deposit is similar to the fixed deposit. However, there's no limit on how much you can put into a post office time deposit. The minimum amount which you can deposit is rupees 200 and has an attractive interest rate of 8.5% per annum. Under section 80 of the Income Tax Act, you can avail of tax benefits on this deposit, and there is a lock-in period of 5 years.

National Saving Certificates

You can avail of national saving certificates from the post office. A minimum investment of rupees 100 is required for it. NSC has a lock-in. Of 5 years and 10 years and also provide you tax benefits.

Provident Funds

You can invest in Provident funds, also known as a pension fund with the goal of long-term return. Again the deposit made in the Provident fund is eligible for a tax reduction under section 80C of the Income Tax Act.

Loans

  • Education loans: The interest which you pay on loans for higher education for yourself, your spouse, or your children is tax-free under Section 80E. There is no limit set to this amount; you can claim a deduction for the amount of interest paid and not the principal amount.
  • Educational scholarships: According to Income Tax Act 10 (16), any scholarship award which is granted to students are exempted from taxes. The sum which is received for scholarship purposes has no ceiling placed on it.  
  • Voluntary donations: The donation made from charities or philanthropic commitments is claimed for tax deductions. National refunds can also be claimed as per section 80 G. On some donations, you might get a 100% reduction while for others you might get up to 50% exemption. This depends on the reason for the donation. The donations which are made in cash or cheque can be claimed for deductions. There are some organizations that you can make donations to and claim tax deductions specified by the Ministry of Finance.
  • Interest income on saving account: The interest which you earn from saving accounts up to the maximum amount of rupees 10,000 can be claimed as a deduction under section 80 TTA. The amount above the cap of rupees 10,000 is counted as your taxable income. It is considered as income from other sources on your ITR which is later deducted under section 80 TTA.
  • Home loans: You can avail of home loans for construction or buying a new house from various bags. A loan for home is an effective way to save taxes. The principal and interest which you will have to pay up to rupees 1,00,000 are eligible for tax benefits under section 80 C and also rupees 1.5 lakhs for the interest under section 24 of the Income Tax Act.
  • Agricultural income: Under the Indian Income Tax Act, if you generate income from agricultural activities, it is exempted from tax. This step has been taken to boost the agricultural sector. The rent from agricultural land or the income from the product or farm buildings are exempted from tax.
  • Public Provident fund: The government has introduced a Public Provident fund account to help you save on taxes under section 80C. The return on investment you make on a PPF account is tax-free. The rate of interest of PPF is subject to change on a quarterly basis. Anyone can open a PPF account in an authorized post office or bank branch. Even minors can open it. Investors who appreciate low-risk investments and don't want to deal with volatile equities of mutual funds can invest in public Provident funds.
  • Long term capital gains from the sale of long term assets: Profit made on the sale of any capital acid is called a capital gain. It can be short term or long term for the purpose of saving taxes which depends on the period of time of holding and the type of capital asset.
  • If you hold a capital asset for more than 36 months, it is qualified to be called as long term capital assets. If immovable property- land building or house property are held for more than 24 months, They are known as long term capital assets; therefore any immovable property attracts long term capital gains if sold after 24 months or more.
  • HUF receipt: Hindu, Sikh, and Jain families get the status of Hindu Undivided Family (HUF). As per the Income Tax Department, HUF is a separate tax entity. It has a different pan card in a bank account which is exempted from tax. As per section 10 (2), any amount which is received from these families income or the Estate is exempted from tax obligations. You will have to pay tax from your salary under your name and deposit your secondary income in a HUF account which is not liable to tax if you come under the Hindu undivided family act.

Wrapping up

Now that you understand tax saving options in the Income Tax Act, it’s only logical that we move on to the next big topic - Calculating tax liabilities. To discover the answer, head to the next chapter. 

A quick recap

  • The tax is a statutory and mandatory payment that we make to the government.
  • The percentage of your income which you pay to the government is called income tax.
  • Income tax is different for all age groups and income slabs. Based on age, there are three categories of taxpayer- individuals below the age of 60 years, senior citizens between 60 years and 80 years old, super senior citizens above 80 years old.
  • You can save taxes through investments, loans, and insurance.
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