Income tax is simple, really, once you understand the terminologies involved and laws referred to. And if you make use of the numerous income tax deductions and exemptions available to the taxpayer, you will end up paying a whole lot less - and maybe even none!
Mark Twain once said, “The only difference between a taxman and a taxidermist is that the taxidermist leaves the skin.”
However, there are several ways in which we can reduce our “taxable” income and as a result reduce our liabilities – whilst investing in financial assets that can give us a return down the road or provide us with a safety net in case of ill health or retirement.
If you use these tax-saving provisions smartly for AY 2020-21 (mostly from Section 80C), you might just be able to save your skin from the taxman!
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Tax-saving instruments in India can be divided under two broad categories – income tax deductions and income tax exemptions. These two terms are often used interchangeably. However, they are different things.
Income tax exemptions are those sources of income on which you do not need to any tax. For example, income from agriculture, House Rent Allowance, interest from certain investments etc.
On the other hand, income tax deductions are claimed on gross total income. These involve certain kinds of investments and expenditures that have special tax benefits, like certain mutual fund investments, interest repayments on education loans, medical insurance premiums etc.
The tax benefits that can be claimed are listed in the Income Tax Act. This Act is the one that allows an individual or Hindu Undivided Family (HUF) to invest in tax-saving instruments to reduce taxable income or claim exemptions and thus reduces tax liability.
Pro Tip: You can invest up to ?1.5L ($2,025) in these specified tax-saving products under So don’t forget other Sections of the Act, like 80D, 80E or 24! (We know this may sound like gibberish if you’re new to this. But once you’re done with this article, you’ll be an income tax expert yourself!)
You can claim an income tax deduction for investment made in PPF account under Section 80C. You can invest maximum of ?1.5L ($2,025) in a year. PPF accounts also offer you the benefits of tax-free returns and are free of wealth tax.
You can claim deduction for investments up to ?1.5L ($2,025) in a financial year in tax-saving FDs (keep in mind that not all FDs have tax benefits). The minimum amount of the FD varies from bank to bank and these deposits have a lock-in period of five years. The Section this investment avenue comes under is 80C.
However, interest accrued is subject to tax.
Read more on Tax-Saving Fixed Deposits.
Under, the Income Tax Act, premiums that you pay towards a life insurance (80C) or health insurance (80D) qualify for a deduction. In the case of life insurance, the deduction can be up to ?1.5L ($2,025). For health insurance premiums, the maximum deduction that can be availed is ?25,000 ($335) a year, provided the age of the individual as well as that of the other family members insured is not above 60.
Furthermore, Section 10D makes income on maturity tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.
In addition to this, any payments made towards preventive health check-ups will entitle a taxpayer to a deduction of up to ?5,000 ($67) under Section 80D.
Read more about Tax Benefits of Life Insurance here.
National Savings Certificates are fixed-return, low-risk, Government-backed tax-saving investments that can be purchased by any post office and have five-year maturity periods. The principal invested qualifies for tax savings under Section 80C, up to ?1.5L ($2,025) annually.
Similarly, investment in Post Office Time Deposit of five years also qualifies for deduction under Section 80C. These are saving schemes offered by the Indian Postal Service on which a fixed interest is paid. As in the case of FDs, the interest accrued is subject to taxation.
Various deductions can be availed if you are in the process of buying a new house. These include deduction for interest paid on housing loan (maximum of ?2L ($2,685) under Section 24, deduction on principal repayment (maximum of ?1.5L ($2,025) under Section 80C, deduction for stamp duty and registration charges and additional deductions.
There are many terms and conditions associated with claiming these benefits, such as the amount of loan, duration for which house cannot be sold, year in which deductions can be claimed etc. More on Home Loan Tax Benefits here.
Investments in mutual funds qualify for tax deductions of up to ?1.5L ($2,025) under Section 80C in a financial year. However, the tax benefit is only available to ELSS or tax saving mutual fund schemes. ELSS have the shortest lock-in period among all 80C investments – of three years.
A point to note here – many of us may be investing in mutual funds to ensure retirement benefits and a safety net in old age. However,not all retirement mutual funds or for that matter not all mutual fundsoffer Section 80C tax benefits. So if your aim is to increase retirement savings whilst claiming tax benefits, make sure to read the scheme details carefully before investing.
Extra Crunch: Here are the 10 Things to Consider Before You Start Investing in Mutual Funds
If you are above 60, you can invest in these Government-backed savings instruments. The deposit matures after 5 years from the date of account opening but can be extended once by an additional 3 years. For January-March 2020, the interest rate is set at 8.6%, making this scheme the one with the highest interest rate among various small savings schemes in India.
Investments up to ?1.5L ($2,025) are eligible for deduction under section 80C of the Income Tax Act. The amount invested is tax-deductible, but the interest earned is not tax-exempt.
You can apply for this scheme post-retirement, above the age of 60. For defence personnel or those who opt for a voluntary retirement scheme, the age limit is dropped to 50 and 55 respectively. An individual can operate more than one account individually or jointly, subject to the ?15L ($20,139) deposit limit in all accounts put together. A joint account is allowed only with one's spouse. An individual cannot open a joint account with their son or daughter.
Tuition fees spent on educating your children are tax-deductible. The limit is ?1.5L ($2,025) for a year under Section 80C and only full-time education courses in schools and colleges from recognised institutions are permitted. If both parents are taxpayers, then they can claim deductions for four children. For individual taxpayers, the limit is two children.
An education loan taken on behalf of your spouse, children, adopted children, student for whom the taxpayer is the legal guardian are applicable for deduction under Section 80E.The deduction allowed is the total interest part of the EMI paid during the financial year. There is no limit on the maximum amount that is allowed as deduction. But the principal repayment has no tax benefit.
Good faith donations made to “charitable organisations” qualify for tax benefits under Section 80G. The organisations should be notified by the Income Tax Department. Some donations can be claimed 100% or 50%, depending on the organisation. However, effective from the assessment year 2018-19, a person can avail a maximum deduction of ?2,000 if the donation is made in cash.
Charitable organisations include temples, churches and mosques that carry on both charitable and religious work. Charitable organisations also include non-profit organisations such as educational institutions, sports academies, animal welfare organisations and other community development organisations. These contributions can also be made towards orphanages, old age homes or women and child care organisations, too.
Under Section 80DD of the Income Tax Act, 1961, you can get income tax deductions for medical expense incurred in the treatment of any disabled dependent of yours. The limit of deduction ranges from ?75,000 ($1,012) to ?1.25L ($1,688) depending on the kind of disability involved.
Salaried employees can avail a standard deduction of ?50,000 ($674) on their gross salary to bring down their taxable income.
This can be availed under Section 80GG by salaried professionals living in rented apartments. The HRA is usually calculated as a percentage of basic pay (check your monthly pay slip for these details).
The exemption available is the least of the following amounts:
To avail the HRA exemption, remember to submit relevant documents like rent agreement or rent receipts to your employer,
Read more on How to Claim HRA Exemption.
Withdrawal by an employee from the EPF is not taxable after 5 years of continuous service.
The amount received on the maturity of PPF account and the yearly interest credited to the PPF balance are tax-exempt.
Withdrawal from NPS on maturity or premature closure up to 40% of the amount received on such withdrawal remains tax-free for all. And in case of partial withdrawal from NPS, up to 25% of the contributions made by the individual will be tax-free.
Employer’s contribution to NPS up to 10% of their basic salary and dearness allowance is also tax free.
Interest received from post office savings account balance up to ?3,500 ($47) annually per individual are free from tax.
From this financial year, taxpayers can opt for the Old Income Tax Regime (where you can avail tax exemptions and deductions) or the New Regime (lower income tax rates but you cannot avail tax exemptions and deductions) that was introduced in Budget 2020. Which alternative will see you paying less tax? You can find out using this Income Tax Calculator.
PS: So much reference to 80C, 80D, 80E, 80G... The Income Tax Act is the governing legislation when it comes to income tax deductions and income tax exemptions. You can read the actual Act and its Sections on the official Income Tax Department website here.
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