Paying income tax is a challenging task for many people with many often looking for solutions regarding how to reduce taxable income in India. Reducing one’s tax burden can make a huge difference to their finances. Tax saving through investments in instruments that offer exemptions and deductions under Section 80C is one of the better ways to reduce one’s tax burden each year. If you want to save on your taxes, it’s crucial to look at all the tax-saving options in India. Here are ten things to know about tax saving in India.
Consider life insurance
Purchasing insurance policies come with many benefits but one of the major ones is that they help you save on taxes. When one opts for life insurance, this not only offers life coverage but can also be used as a way to reduce one’s taxes. Through one’s policy, one pays premiums every year which are paid back in a large lump sum amount in case of the demise of the insured person. Premiums paid on the life insurance policy are liable for tax deductions as per section 80C of the Income Tax Act.
Invest in tax saver FDs to get attractive interest
Another option to consider is to invest directly in tax-saver fixed deposits. Fixed deposits offered by different banks can be used as tax-saving instruments. One can invest an amount ranging from ₹1 lakh to ₹1.5 lakhs in these deposits each year and expect to earn interest that will not be taxed. Keep in mind, however, that these fixed deposits come with a five-year lock-in period.
For unlimited investments, consider post office time deposit
A post office time deposit does not vary much from a fixed deposit except for the fact that the person does not have any limits on the amount that they invest in it. The minimum amount one can put in a post office time deposit is ₹200 and it has an attractive rate of interest at 8.5% per annum. Through the five-year lock-in period, one can avail of tax benefits as per Section 80C.
One can also reduce their tax burden through ULIP investments
Unit-linked insurance plans are also tax plans that are market-linked. Under this kind of tax investment plan, investors are offered the benefit of investment as well as protection under the same plan. Financial investments that are carried out under this scheme are also eligible for tax deductions in addition to it providing an opportunity to help one’s money grow.
Save on medical costs and taxes using health insurance
Since the cost of medical treatment, as well as care, is rapidly accelerating, buying health insurance is coming close to becoming a necessity. Health insurance policies help one ensure that they have enough finances to take care of one’s medical expenses. With the premiums one pays towards their health insurance plans, one can reduce their tax burden by amounts ranging from ₹25,000 to ₹50,000, the latter if one is a senior citizen.
For a shorter lock-in period, consider ELSS to reduce your tax burden
Equity-linked savings schemes are a kind of mutual fund that can be used to reduce one’s tax burden. The lock-in period of these funds is just three years, much lesser than that of a public provident fund or a fixed deposit. One of the core benefits of this scheme is that it offers a huge return on investment over the long run, but is subjected to major market movements.
Loans can also be used to reduce taxes
One of the key ways to reduce one’s tax burden can also be through home loans. In fact, home loans are part of the set tax saving options other than 80C. The interest paid towards one’s home loans can be availed for a tax deduction for an amount worth ₹1.5 lakhs, under Section 24 of the Income Tax Act.
Look for E-E-E status instruments
If you want to get the biggest bang for your buck when choosing tax-saving instruments, look for instruments that have an exempt-exempt-exempt or EEE status. EEE means tax will not apply at any stage of investment. Some options are the Public Provident Fund (PPF) and the Employee Provident Fund (EPF), Sukanya Samriddhi Account (SSA), and National Pension Scheme (NPS).
Donations in Voluntary Instruments also apply
There are tax-saving options other than 80C. For instance, a donation made towards charity or for any philanthropic commitments can be claimed for any tax deductions. These include contributions made towards instruments such as the National Relief Fund that can be claimed as per Section 80G. Keep in mind that donations made through cheque or cash can only be claimed for deductions. The Ministry of Finance has specified which organizations one can make both donations and claim tax deductions for.
HUF receipts are also tax exempted
The status of Hindu Undivided Family is given Sikh, Jain, or Hindu families. According to the income tax department, HUFs are a separate tax entity, with a different bank account and PAN both of which are exempted from tax. As per Section 10(2), any amount that is received from these families’ income or estate will be exempted from tax obligations. A person will be allowed to pay their taxes from their salary under their name while depositing their secondary income in a HUF account that is not liable to taxation.
The Bottom Line
When choosing a tax-saving strategy, ensure you find one that best suits your needs. There are a host of tax-saving options in India but ensure you take into consideration the liquidity, safety, returns of the instruments. Being clear about one’s objectives while also linking tax instruments to these objectives is key.