Here is a look at 5 ways one can save income tax and improve one’s overall financial fitness.
1.Investment in tax-saving instruments
To encourage saving by citizens, the government has provided certain tax deductions on the amounts invested in specified instruments under section 80C of the Income-tax Act, 1961. Some of the popular specified investment instruments for the purpose of tax planning are:
- Employees’ Provident Fund (EPF)
- Public Provident Fund (PPF)
- Fixed deposits (tenure of 5 years or more)
- Life insurance policies
- ELSS mutual funds
- National Pension Scheme (NPS) and other pension plans
Investing in these instruments wisely can serve the dual purpose of meeting financial goals and tax savings (up to an investment limit of Rs 1.5 lakh per financial year) concurrently. However, tax savings will be available only if an individual opts for the old tax regime.
If one opts for the new tax regime, which offers concessional tax rates, one will have to forgo many of the tax deductions and exemptions available under the old tax regime like the section 80C benefit. For those who have opted for the new tax regime, investments in the above the instruments will only help in achieving their financial goals and not in tax savings.
2.Selection of appropriate components in the salary structure offered by employer
In case of a salaried individual, one can evaluate the salary structure offered by the employer and opt for those salary components which help maximize tax benefits. For example, one can opt for House Rent Allowance (HRA) in case they are paying rent, telephone/ internet expense reimbursements, education allowance, food coupons etc. Accordingly, one can claim appropriate deductions/exemptions while computing taxable income (as per the specified conditions).
3. Increase in retirement fund contribution
Salaried individuals can look at making additional contribution towards ‘Voluntary Provident Fund’ in addition to EPF, if the investment limit of Rs 1.5 lakh is not exhausted. This additional contribution will also be deductible from taxable income subject to conditions. Further, the employer’s contribution to NPS (subject to 10% of salary) will provide an additional deduction to the employee.
However, do keep in mind that employee’s own contribution to EPF and PF should not exceed Rs .
1.5 lakh is not exhausted. This additional contribution will also be deductible from taxable income subject to conditions. Further, the employer’s contribution to NPS (subject to 10% of salary) will provide an additional deduction to the employee.
However, do keep in mind that employee’s own contribution to EPF and VPF should not exceed Rs 2.5 lakh in a financial year or else income tax will be payable on the interest accretion on the excess provident fund contributions.
4. Tax benefits on a home loan
If a housing loan is availed from a financial institution such as bank or NBFC or housing finance company to acquire/ construct a house property, then the interest and principal paid on the loan taken can be claimed as a deduction from taxable income, subject to specified limits under the tax provisions. However, the tax savings can be claimed only if old tax regime is opted for. Do keep in mind that the deduction on principal repayment amount is subject to the overall Rs 1.5 lakh limit under Section 80C.
5. Protecting oneself with health insurance
Income tax provisions provide for deductions against premiums paid towards health insurance for self, spouse, dependent children and dependent parents. Hence, one can buy health insurance for oneself and family members to help manage medical expenses in case of health emergencies and at the same time, avail tax benefits for premium paid towards these policies (Rs 25,000 for self, spouse and dependent children; Rs 50,0000 for senior citizen parents, as applicable).
Similarly, if senior citizens are not covered under any health insurance policy, then also they can claim deduction of up to Rs 50,000 for medical expenses made during the year.