Income Tax Deductions: How to Save Tax in India

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income tax deductions

Reducing the gross income earned by various means can significantly impact the tax liability of a person. It is why many taxpayers search for methods that can help decrease the amount. This writeup expounds, comprehensively, the reductions that can be made under section 80C and 80D.

Whatever you earn in a given year, from your job or business, investments or rent, or even from horseracing, is liable to be taxed. But the government does give you several options to save on tax if you’re willing to invest your money on what it sees as beneficial, which it has laid out under Sections 80C, 80D and 80G, among others. These include investments in certain government schemes, insurance or a home loan. The benefits of each scheme, however, differs from one another. Let’s find out where you can save on tax, how much and whether they’re the right fit for you.

Check out some of the articles below to find step by step information on company registration, iso registration or income tax related services and avail our resources to help you through the process.We are one of the best online service providers in the market for tax registrations and legal documentation.

Tax deductions under Section 80C

Under Section 80C of the Income Tax Act, there are various tax deductions available, enabling you to lower your taxable income by Rs. 1.5 lakh. For those in the highest tax bracket, therefore, this represents a saving of Rs. 50,000. Some of the investments listed here are good no matter which tax bracket you’re in, others are good for a specific bracket, while a few are no good at all. But these deductions are available not just on investments, but also on life and medical insurance, medical treatment, and loan repayment. Let’s find out about all of them.

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Public Provident Fund

Perhaps the most popular option under Section 80C, you can invest the full Rs1.5 lakh under PPF tax-free. What’s more is that the interest you earn under the scheme, unlike the returns from a 5-year term deposit or National Savings Certificate, are also exempt from tax. It’s available to any citizen of India with a PPF account, which you can open at any post office, State Bank of India, and even some private sector banks. Currently, the rate of interest is 8.8%, but your money will be locked away for 15 years.

Employees’ Provident Fund

With many organisations, you can’t opt out of Employees’ Provident Fund (EPF). But it’s not a bad scheme to be stuck with either. The sum you invest is tax deductible and the returns are tax-free. The rate for the current year is yet to be announced, but it was 8.25% last year and 9.5% in the year prior. If you opt for the scheme, you contribute 12% of your basic salary and your employer matches the contribution. However, you can voluntarily contribute more to the scheme if you wish as well (you’ll get a deduction on a maximum of Rs1.5 lakh, though).

Senior Citizens’ Savings Scheme

Senior Citizen’s Savings Scheme provides senior citizens (60 years, but, if you’ve retired under a voluntary scheme or with superannuation, 55 years) with regular income. The SCSS gives fixed returns of 9%. There’s a lock-in period of five years, but you can withdraw your money after the first year on payment of a penalty. However, all returns are taxed. If the amount is over Rs5,000, it will be deducted at source.

Equity-linked saving schemes

When the stock market performed well, equity-linked saving schemes (ELSS) were very popular. Currently, not just ELSS, the entire mutual fund market is being shunned. Whatever your opinion is of their volatility, ELSS has the potential to give good returns. In the 10 years ended 2012, ELSS gave annual returns of 22%.

National Pension Scheme

Your company will need to be registered for the programme, but, if it is, you can reduce your tax liability by 10% of your basic salary. The deduction is available under Section 80CCD(2). With the NPS, you need to contribute a minimum of Rs6,000 each year. The scheme provides market-based returns, so it isn’t a typical savings scheme. It is a pension plan, so its purpose is to build a retirement corpus. However, you won’t see all the money when you retire, as only 60% can be withdrawn; the remainder will be paid out periodically as a pension annuity. The charges of the NPS are lower than of any other pension plan.

Endowment and unit-linked insurance plans

Endowment and unit-linked insurance plans (ULIPs) aren’t similar schemes, except that they both have an insurance component. However, there’s equal reason to avoid them both. Sold by insurance companies, endowment policies and ULIPs have high charges, are inflexible, and provide inadequate cover. But they’ve been popular because of the tax benefits they offer. However, investment in PPF, coupled with a term insurance plan, is a better alternative to an endowment plan, while investment in mutual funds, coupled with a term plan, makes more sense than buying a ULIP.

Term deposits

The interest you earn on 5-year term deposits is taxable and this is why these investments are less lucrative than the effective yield of PPF, despite their higher interest rates. This is particularly true for those in the higher two tax brackets. However, if you’re put off by the long lock-in period of the PPF or VPF, this might be a better option. With the term deposits, from post office or banks, the lock-in period is five years.

Infrastructure bonds

Various companies in the infrastructure segment issue bonds toward the end of the year. By January last year, Infrastructure Finance Corporation of India, Rural Electrification Corporation, PTC India Financial Services, L&T Infrastructure and SREI Infrastructure Finance. If you invest in infrastructure bonds, you can get an additional deduction of Rs20,000 under Section 80 CCF. The bonds from L&T Infrastructure had tenures of 10 and 15 years, with buyback options at the end of 5 and 7 years, respectively, and an interest rate of 8.7%.

Term insurance

The fact that you get a tax deduction on term insurance is a bonus. Term insurance is absolutely necessary if you have a family that is dependent on your future earnings.

Interest repayment on education loan

Claim a full deduction on the interest you pay on your child’s education loan under Section 80E. If you’re in the 30% tax bracket, on a loan of Rs5 lakh and interest rate of 13.5% for five years, you’ll reduce your tax liability by Rs20,500 each year.

Tax Deductions Beyond 80D

Around tax-saving time, most of us are so focussed on Section 80C that we forget there are other avenues for tax saving. Here’s an introduction to the others:

Medical insurance

Under Section 80D, you can reduce your tax liability by up to Rs35,000 by buying medical insurance. However, the maximum premium to insure yourself, spouse or kids is Rs15,000. Only if you’re paying your parents’ insurance premium do you get an additional deduction of Rs20,000 (if they’re over 60 years) or Rs15,000 (if they’re under 60 years).

Premium Paid for Medical Treatment of Disabled

According to the Income Tax Act, if you are paying a premium to LIC or any other insurance company (approved by the Income Tax board) for the medical treatment of a dependent physically disabled person, you can avail exemption under the section 80DD. Here, the dependent should be none other than your spouse, children, parents or sibling. If the person is suffering from 40 per cent of any disability, a fixed sum of Rs. 50,000 can be claimed in a year. Similarly, if the disability is 80 per cent, the fixed sum goes up to Rs. 1,00,000 per year. For initiating the process of deduction you need to submit the medical certificate issued by a medical authority along with the return of income.

Medical Expenses

If you have incurred expenses for the medical treatment of self or your dependents, you can claim a deduction of up to Rs. 40,000 or the actual amount paid, whichever is less, under the section 80DDB. For a senior citizen, the maximum exempted amount is Rs. 60,000, or the amount actually paid for medical expenses. To claim a deduction under this section, you need to submit a medical certificate from a doctor working in a government hospital.

Interest on Loan

The interest paid on loan taken for pursuing higher education of self or any dependent is exempted from tax under section 80E. An education loan can be taken for wife, children and minors for whom you are the legal guardian. This deduction is applicable for a period of eight years or till the interest is paid, whichever is earlier. The deduction is only approved for higher studies, which means full-time graduate or postgraduate courses in engineering, management or applied sciences, pure sciences including mathematics or statistics. However, from 2011 onwards, the scope of this exemption has been extended to cover all fields of studies including vocational studies pursued after completing the senior secondary examination or equivalent. No exemption is applicable for part-time courses.

Donations to Charity

One often donates on philanthropic grounds to help the destitute. Such an amount can be donated to trusts, charitable institutions and approved educational institutions, and qualifies for deduction under Section 80G. The exemptions can be up to 50 per cent or 100 per cent of the donations made. Funds in which the donations are eligible for tax exemptions include the National Defence Fund, Prime Minister Drought Relief Fund, National Foundation for Communal Harmony, National Children’s Fund, Prime Minister’s National Relief Fund, etc.

Rental Allowance

If a salaried or self-employed person staying in a rented house does not receive any kind of HRA, they can claim a deduction under this section (80GG). However, you cannot avail any such benefit if you, your spouse and/or your child owns any residential accommodation in India or abroad. You can claim the least of the following under Section 80GG: 25 per cent of the total income, or Rs. 2000 per month, or excess of rent paid over 10 per cent of total income.

Party Contributions

Any monetary contribution to any political party or electoral trust is eligible for tax exemption under 80GGC. Thus, your contribution, as a matter of appreciation for their work, will serve both the purposes.

Disability Exemption

A resident of India suffering from any kind of specified disability is eligible to claim tax deduction under section 80U. In order to enjoy this opportunity, one should be suffering from not less than 40 per cent of the following diseases: blindness, low vision, mental illness, mental retardation, hearing impairment. The deduction provided is flat Rs. 50,000, irrespective of the expense incurred. If the disability is severe, the deduction can be up to Rs. 1 lakh. One needs to provide a copy of all the certificates issued by a medical authority in order to avail this benefit.

Stock Market Investment

The Finance Act 2012 introduced a new Section 80CCG to offer 50 per cent tax break to new investors who invest up to Rs. 50,000 and whose taxable income is less than or equal to Rs. 10 lakh. It has been introduced for budding investors entering the equity markets for the first time and is a once-in-a-lifetime benefit.

Gain from losses in stocks

Believe it or not, the losses you made in stocks this year can bring down your taxable income. If you have made any long-term capital gains from the sale of property, gold or debt funds, you can set them off against short-term capital losses in stocks and reduce your tax liability. The short-term capital losses can be set off against both short-term capital gains as well as taxable long-term capital gains. This can be especially useful for someone who has booked profits in gold ETFs and physical gold this year.

Suppose you made a long-term capital gain of Rs 6 lakh by selling gold ETFs. The tax payable on this amount is Rs 60,000. If, on the other hand, you sold some stocks within a year of buying and made a short-term loss of Rs. 3 lakh, you can set this off against the gains from gold ETFs. So the gain from gold will be reduced to only Rs. 3 lakh and the payable tax will be Rs. 30,000.

The losses that have not been adjusted can be carried forward for up to eight years. Besides, only short-term capital losses from stocks can be adjusted against other gains or carried forward. So, the stocks you bought more than a year ago will not be eligible.

Family Finances

When parents invest in the name of their children, the income earned is clubbed with that of the parent who earns more and is taxed at the applicable rate. However, there is a small deduction of Rs. 1,500 available per child, with a maximum limit of two children. So, if you open a fixed deposit in your child’s name, interest of up to Rs. 1,500 will not be clubbed with your taxable income.

Incidentally, if you are living in your parents’ house, you can pay rent to them. If your parent has no other income or pays a lower tax, this can bring down your tax liability significantly. However, the rent will be taxable as the income of the parent after a 30% standard deduction.

This means, you can safely pay a senior citizen parent up to Rs. 3.57 lakh a year without adding to his tax liability. Very senior citizens (above 80) can be paid up to Rs. 7.15 lakh. If the house is jointly owned by both parents, divide the rent between the two.

If you are eligible for any of these nine deductions, make sure you claim it in the tax return. Why leave any money on the table for the taxman? If you have already filed your return, you can still avail of these deductions by filing a revised return. However, if the tax department has already finished the assessment, you won’t be allowed to revise your return.

Tax on Bonus

A bonus from your employer is fully taxable in the year in which you receive it. However, request your employer for the following: If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year. Produce your tax investment details well before, to prevent your employer from deducting tax on bonus before handing it over.

Leave Travel Allowance (LTA)

Use your LTA for your holidays, which is available twice in a block of four years. In case you have been unable to claim the benefit in a particular 4-year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.

Salary Restructuring

Restructuring your salary may not always be possible so as to save tax in India. But if your company permits, or if you are on good terms with your HR department, restructuring a few components could reduce your tax liability. There may be many expenses that you are incurring because of your job. If you leave your job today, many of your expenses will end. Such as, you wear a uniform just for the sake of your job. You travel to the office daily only for the job. You may be entertaining clients and spending over them to fulfill your job.

If you leave the job such expenses would end. It means, these are forced expenses and your employer should pay for them. Such expenses should go to the account of employer expense. Since you are only medium of such expense this should not be part of your income.

These perks and allowances or non taxable if incurred actually. However, you need to give proof of these expenses to avail tax-free allowances.

A. Opt for food coupons instead of lunch allowances as they are exempt from tax up to Rs.60,000 per annum.

B. Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred for these allowances to reduce tax.

C. Opt for the company car instead of using your own car to reduce high perquisite taxation.

Pithily put, the schemes under 80C and 80D vary a lot. Public Provident Fund, Employees’ Provident Fund, Senior Citizens’ Savings Scheme, Equity-linked saving schemes, National Pension Scheme, Rental Allowance, Medical Allowance and interest on loans are just a few of them a taxpayer can take advantage of.

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    A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.

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