5 Ways A Salaried Individual Can Save Income Tax
The question that then arises is, “How to save on the exorbitant amount of taxes?” A layman’s answer will always be investment. Investments help in cutting the amount of tax and the money that would ordinarily be used to supplement a luxurious life-style is then used for beneficial means like an early retirement plan.
8 in every 10 Indians today invest in tax saving investments that not only help them in cutting down tax outputs but also help them in enhancing and supplementing their tax savings.
The Income Tax Act of 1961 provides several incentives that can save you tax. It allows for a deduction from your taxable income that reduces your tax liability significantly. These apply to all types of taxpayers, businessmen, professionals, or salaried individuals.
To avail these tax deductions, you need to do your income tax return planning properly. Making last minute investments is neither the answer nor a long-term solution.
For one, you do not fully comprehend the plans you invested in. So, how will you be able to gain benefits from it?
There are several ways for a salaried person to save tax. Let us enumerate top five.
Tax Saving Under Sections 80C, 80CCC, and 80CCD
To encourage savings into correct resources, the government provides deductions for money saved under Sections 80C, 80CCC, and 80CCD.
Maximum total deduction under these sections is ₹150,000.
The government has specified several ways to invest under these sections that can save you tax.
- The Public Provident Fund Scheme or PPF was a tax saving scheme inaugurated by the Ministry of Finance in 1968.
- 5 Year Tax Saving Term Deposits give fixed returns as well as tax savings.
- Equity Linked Saving Schemes or Equity based Mutual Funds are transparent instruments that offer high liquidity and tax-free profits.
- Pension Plans under the New Pension Scheme or NPS is a voluntary pension plan where the investment is made in a market fund. The lump sum is given at the end of the term, and its value is dependent on funds performance in the market.
- Contributing to EPF of Employee Provident Fund is a mandatory investment.
- Life Insurance Policy because under Section 10 (10D), sum assured as well as any bonus paid at the time of the demise of the insured, maturity, or surrender of the policy, is tax-free.
- NSC or National Savings Certificate are issued as a tax saving investments method by the Indian Post Office with a lock-in period of 5 years.
Saving Tax Under Sections 80D, 80DD, and 80DDB
Different amount of exemptions are allowed if an individual invests in a health plan for himself or his family.
Section 80D allows deductions for premiums made against a health policy taken for self, spouse, and kids.
Section 80DD gives tax benefits for expenses incurred on a dependent handicapped individual, conditioned to the handicap being medically 40% or above.
Section 80DDB provides tax benefits for expenses incurred for certain specified diseases.
Save Tax by taking a Home Loan
Under Section 80C, payments made against repayment of the principal amount are eligible for tax benefits.
The interest you pay on the home loan is also tax deductible under Section 24. The maximum deduction of ₹200,000 is allowed, and in certain cases, the limit is exempted.
According to the Budget 2016, a home loan can give you an additional tax benefit of ₹50,000 under Section 80EE!
Restructure Your Salary Components
There are several components of your salary which can save you tax.
- HRA under Section 10(5).
- Transport Allowance was ₹800 per month, but from AY 2016-17 it has been raised to ₹1,600.
- LTA under Section 10(5).
- Medical Reimbursements of maximum ₹15,000 under Section 17(2).
- Food coupons are exempted for a maximum of ₹50/meal.
- Other allowances could be related to telephone, education, uniform, etc.
Bonus received is taxable in the FY it is received.
However, you can save tax on it by giving your employer your tax investment particulars so as to prevent them from deducting excess tax on your bonus.
Also, you can check if the bonus payments can be made the subsequent year in case you are anticipating a reduction in tax rates and modification in the income slabs.
For better tax planning, plan ahead and not just before March 31st. File your returns on time.
Give your investment and loan details to the employer in advance to prevent excess tax deduction.
Review Form 16 that you get from the employer properly.