Q1 Why is tax saving important?
As your career grows and you earn more, tax-saving measures should become an essential part of your tax planning every year. Since higher incomes are subject to higher tax rates, it is prudent to save up as much of your hard-earned income as possible. Tax saving options come in the form of exemptions, deductions, and allowances that a citizen can avail to reduce his tax burden. It is crucial to plan your finances and investments carefully to ensure that you fully utilize the tax provisions available to you. You can reduce your tax burden through financial and investment planning in several ways.
Q2 What are some simple ways to save on tax?
- Life, Term, and Health insurance [LTH]
You can get better returns for lower premiums if you start tax saving through life, term, and health insurance IF you begin at a young age, i.e., the premium amount will be less. You can save some money and also claim tax exemption.
- Profit from selling shares or Equity Mutual Funds
Maximum tax-free gains of up to Rs. 1 Lakh if you invest in stocks or mutual funds and sell. The profit is 100% non-taxable of up to Rs. 1,00,000
- Interest Income on Saving Account
(Tax saving under Section: 80TTA/ 80TTB senior citizen) Max tax saving limit is Rs. 10,000 under TTA and Rs. 50,000 under TTB.
- Tax saving options under Section 80C
LIC, PPF, ELSS, House loan repayment, Tuition fees, Sukanya Samriddhi, NSC, etc.
- Tax Savings on Additional Contribution to NPS
Income Tax Section: 80CCD (1B) Max Tax-free Amount: Rs. 50,000
- Money received from Provident Funds (after 5 years)
You will save tax on investments in Provident Account from the year of investment, i.e., there will be no taxing on the interest you receive from EPF/ PF investments (note that Interest received on Fixed Deposit is still taxable).
Q3 What other investment modes help in tax saving?
Types of tax-saving suitable for individuals depend on their short-term and long-term goals. However, there are a few standard tax-saving options that solve the financial needs of most tax-paying people:
- Section 80C – This is one of the most popular deductions availed by taxpayers under the Income Tax Act of 1961. To benefit from Section 80C, taxpayers can invest in a variety of options, for example, Life insurance, Term insurance, equity-linked savings schemes (ELSS), Public Provident Fund (PPF), and National Savings Certificate (NSC), and a few tax-saving fixed deposits.
- Section 80D – Another valuable tax-saving investment is under Section 80D, which allows deductions for the premiums we pay towards health insurance for ourselves and specific family members.
- HRA or Housing loan interest exemption – If you are a taxpayer living in a rented home, you can implement tax savings by availing the House Rent Allowance or HRA exemption on your rent or living in your own home. You can avail housing loan interest exemption.
- Section 80E – For taxpayers who have taken out education loans, a helpful way of implementing tax savings is to take advantage of Section 80E. This provision allows taxpayers to claim deductions on the premiums paid towards their education loans for eight years.