Prudent taxpayers never look at tax liability as a burden, instead they focus on using various provisions under the Income Tax Act to maximise tax savings through tax-benefit investments. Depending on a taxpayer’s annual income, he or she can choose various tax benefit investment options and plan income tax savings accordingly. In this article, we will talk about various investment options that help taxpayers save reduce their tax outgo.
The first step to saving income tax is to know about the various deductions allowed under the Income Tax Act for tax benefit investments. Depending on the tax saving options you choose, these can help reduce your taxable income. By submitting proof for several eligible expenses or tax benefit investments, you can be eligible for deductions and plan your income tax savings accordingly. Different sections of the Income Tax Act are dedicated to different tax benefit investments, which you should know about.
The other important thing taxpayers need to keep in mind is the preferred tax regime. In Union Budget 2020, the Centre offered a new tax regime parallel to the old regime to taxpayers. Under the new regime, taxpayers save taxes due to lower tax slabs but without any deductions and exemptions. On the other hand, the old tax regime still carries the tax exemption reliefs and deduction benefits. In this article, we will understand how can a taxpayer same taxes using various provisions under the old tax regime.
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“Effective tax planning involves making informed decisions to optimize financial health, rather than evading taxes. The first and foremost step is choosing the right tax regime. Evaluate whether the old or new tax regime is more beneficial for you. The old regime allows for various deductions and exemptions, while the new regime offers lower tax rates with a standard deduction of Rs 75,000 and employer’s contribution to NPS up to 14% of basic salary,” says Akhil Chandna, Partner, Grant Thornton Bharat.
“An individual opting for the old tax regime may utilize deductions under sections such as 80C (Rs 1,50,000 – investments in PPF, ELSS, NSC, life insurance premiums, etc.), 80D (health insurance premium), 24(b) (Rs 2,00,000 – interest paid on home loans), 80E (interest paid on education loans), and 80G (donations), and can significantly reduce their taxable income. Additionally, an extra deduction of Rs 50,000 is available for employees’ contributions made towards the NPS,” he adds.
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Take a look at these tax-saving tips one-by-one:
National Pension System (NPS)
NPS is one of the popular investment cum retirement saving options available for people today. NPS also comes with a range of investment options and a choice of pension funds to subscribers. Employees contributing to NPS are eligible for following tax benefits on their own contribution:
Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of Rs 1.50 lakh under Sec 80 CCE.
Tax deduction up to Rs 50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs 1.50 lakh under Sec 80 CCE.
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Public Provident Fund (PPF)
Like NPS, PPF also helps build a retirement corpus through continuous savings for 15 years while saving on annual taxes. Currently, PPF offers 7.1% interest rate annually. One of the most preferred long-term tax-saving investments available today, it offers tax deduction benefits under Section 80C up to a maximum of Rs 1.5 lakh annually.
Unit Linked Insurance Plan (ULIP)
ULIP is an insurance plan that gives dual benefits such as growth of money to fulfil long-term goals and a life cover to give family financial protection in the event of the policyholder’s death. Under Section 80C of the income tax laws, a tax deduction of up to Rs 1.5 lakh can be claimed on premiums paid towards a ULIP.
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Equity-linked savings scheme
ELSS is a type of mutual fund, also known as tax-saving mutual fund. ELSS allows a taxpayer to claim deduction of up to Rs 1.5 lakh annually under Section 80C of the Income Tax Act, 1961.
Health insurance
You can avail a deduction of up to Rs 1 lakh under this section for health insurance premium. When you are planning an income tax saving plan, keep in mind that it includes the dual benefit of health coverage and tax deduction.
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Sukanya Samriddhi Yojana (SSY)
Sukanya Samriddhi Yojana (SSY) has been one of the popular investment product for parents who want to save for their girl child. SSY currently offers an annual interest rate of 8.2%. Just like PPF, the interest earned is tax free and there is an annual cap of Rs 1.5 lakh on the investment.
