Know 10 Tips to Save your Income Tax this Financial Year
– On February 25, 2021 4:30 pm
Apart from the fact that taxes are viewed as a financial burden, what could further add to the stress could be a lack of knowledge about tax-planning. A majority of taxpayers struggle with fitting the tax-saving piece in the puzzle of their finances.
As a taxpayer, you may have multiple sources of income during your life. According to the Income Tax 1961, your earnings or profits in a given financial year attract taxes.
Here are quick tips on how you can save tax by using various deductions allowed under the Income-tax Act.
- Extract maximum benefit out of Section 80C
Section 80C of the Income Tax Act 1961, reduces your tax liabilities by allowing deductions from your total taxable income in a financial year.
According to Section 80C of the Income Tax Act 1961, taxpayers can claim deduction benefits on any investments, contributions, or payments towards financial products and schemes as stipulated by the Income Tax law. Section 80C came into effect on April 1, 2006, as a replacement of the older Section 88. Currently, the maximum deduction allowed under Section 80C is Rs.1,50,000 in a financial year.
An individual can freely invest in various financial products to avail the benefit under Section 80C namely, Equity Linked Savings Scheme, Senior Citizen Savings Scheme, National Pension System, Term Life insurance premium, Public Provident Fund, National Savings Certificates, Tax-saving FDs, Home loan repayment and Tuition fees.
2. Investments in National Pension System (Section 80CCD)
Section 80CCD discusses the tax deductions available to taxpayers regarding the investments in the National Pension System (NPS) or Atal Pension Yojna (APY).
Investments in NPS are eligible for tax deductions under this section. Any Indian citizen between the age of 18 and 60 years can invest in NPS and avail this tax benefit. Even NRIs can claim this benefit.
The maximum deduction you can avail under this section is 10% of your salary (this includes basic salary + DA). For self-employed individuals, the limit is 20% of their gross total income. Also, the maximum benefit you can avail every year under this section is Rs.1.5 lakh.
This subsection provides an additional deduction of Rs.50,000 on investments in NPS. This is over and above the Rs.1.5 lakh available under Section 80CCD(1). So, in short, you can avail a total tax deduction of Rs.2 lakh when you invest in NPS every year.
3. Triple Benefit on Home Loan
Owning a home offers the triple benefit of house rent saving, property appreciation in the long term and tax benefits. If you are staying on rental property, then your rental expense is going to increase every year, whereas your EMIs is almost fixed (if interest rates do not change) Finance minister Nirmala Sitharaman in her Budget 2021 has extended the timeline for availing additional tax benefit of Rs 1.5 lakhs under section 80EEA. Under ‘Housing for All’, the government is giving tax deduction benefits of up to Rs 3.5 lakhs (Rs 2 lakhs under section 24), which cannot be ignored.
4. Medical insurance premiums (Section 80D)
Under Section 80D of the Income Tax Act,you can claim deductions up to ₹1 lakh for contributions towards medical insurance premiums bought for insuring self, spouse, children and parents. . The deductions under 80D are over and above exemptions you can claim under Section 80C. This benefit can be claimed by individuals and Hindu Undivided Families (HUFs).
If you file your taxes as an individual, you can claim deductions for insuring yourself and family. In addition you can claim a maximum deduction of ₹25,000 in a financial year on the health insurance premium for self and family, i.e., spouse, parents and children.
If you are a senior citizen, you can claim a maximum deduction of Rs.50,000 per financial year.
If your parents are less than 60 years of age, you can claim a maximum deduction of Rs.25,000 per year on their health insurance premiums bought on their behalf. If they are senior citizens, the maximum deduction allowed is Rs.50,000 in a financial year.
Hence, if you purchase a life insurance policy for your family as well as your parents (and your parents are below the age of 60), you can claim a maximum tax deduction of Rs.50,000. But if you and your parents are above the age of 60, you can avail a maximum deduction of Rs.1 lakh under Section 80D.
5. Medical Expenses (Section 80DD and Section 80DDB)
In case of medical expenses incurred for disabled and/or specified persons. Section 80DD offers a tax break on the medical expenses incurred for a dependent disabled person. Dependent here includes spouse, children, parents, brothers and sisters of the individual.
The deduction allowed depends on whether the dependent is disabled or severely disabled. If the dependent is at least 40% disabled, then the maximum deduction that can be claimed is Rs 75,000. On the other hand, if the disability is 80% or more, then it is considered as severe disability and the maximum deduction that can be claimed is Rs 1.25 lakh.
Section 80DDB offers a deduction for the medical expenses incurred for the treatment of specified illnesses such as cancers, chronic kidney diseases etc. This deduction can be claimed for the expenses incurred on self or the dependent. For individuals below 60 years of age, whether self or dependent, the maximum deduction allowed is Rs 40,000. For senior citizens aged 60 years and above, the maximum deduction that can be claimed is Rs 1 lakh. The list of diseases for which deduction can be claimed under this section is specified in the Income tax Act.
6. Individual with 40% Disability (Section 80U)
Under Section 80U of the Income Tax Act, individuals who have been certified to be at least 40% disabled by relevant medical authorities according to government rules, can claim tax benefits. Any person suffering from the following ailments can claim tax benefits under Section 80U. These are Blindness, Low vision, Leprosy-cured, Hearing impairment, Locomotor disability, Mental retardation, and Mental illness. A person suffering from at least 40% disability, can claim a tax deduction.
7. Donations made towards charitable institutions (Section 80G)
Contributing to charity can also help you save tax. If you donate to specified government notified funds under section 80G you can claim up to 100% of the donation as a deduction from your gross total income thereby reducing your taxable income and consequently the tax payable.
8. Interest earned on balances in savings accounts (Section 80TTA)
Interest earned on balances in savings accounts held with banks or post offices is taxable under “Income from other sources”. However, interest earned from these sources up to Rs 10,000 in a financial year can be claimed as a deduction from gross total income under section 80TTA. However, senior citizens cannot claim this deduction as they are eligible to claim deduction under section 80TTB.
9. Interest Paid on Educational Loan (Section 80 E)
Under Section 80E of the Income Tax Act, the amount you spend in repaying the interest of your education loan can qualify as a deduction from your total income.
The loan should have been taken for the education of self, spouse, children or a student for whom you are the legal guardian and should have been taken from a bank or an approved financial institution.
The total amount paid in repaying the loan interest in a financial year is regarded as the deduction amount and there is no cap on the maximum amount you can claim as a deduction. You will have to acquire a certificate from the bank that differentiates the principal from the interest component of the education loan you have repaid.
10. Contributions made to political parties (Section 80 GGC)
Section 80GGC of the Income Tax Act allows individuals to claim tax deductions on contributions made to political parties registered under Section 29A of the Representation of the People Act, 1951 and electoral trusts.
Should you choose to contribute to a political party, tax deductions can be availed on 50-100% of the contribution amount. According to Income Tax Act regulations, you can donate up to 10% of your gross earning to any political organisation of your choice.