Imagine you’ve come home after a dog day afternoon and are keen to refuel your energies with a well-deserved triple-scoop ice cream. When you open the freezer, you realize that one of the scoops is missing because someone else ate it. You wouldn’t feel great, right? This is essentially what income tax can do to you too.
While income tax is a familiar term, not many are aware of tax-saving options. However, there are several ways you can save taxes. Sweat not if you are not aware of them. This piece is intended to give a snapshot of the different options that can help you pay less tax.
How to save taxes?
The Income Tax Act of 1961 has multiple provisions that can help you claim tax deductions.
- The most popular provision is Section 80C. Under this section, you can claim tax deductions up to Rs 1.5 lakh. You are eligible if you invest in Provident Fund (PF), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS), Unit-Linked Insurance Plan (ULIP), among others. Besides, you can also claim tax deductions for children’s tuition fees, repayment of principal for home loan, stamp duty and registration charges for house property and so on.
- Under Section 80CCC, you can claim deductions for premium paid for annuity plans.
- Section 80CCD gives you the privilege to claim deductions for contributing to your pension account.
- Another section is 80D, under which you could claim deductions for payments towards medical insurance premiums and health check-ups.
- Section 80 CCG is applicable for people investing in listed shares or mutual funds for that financial year. This is also known as the Rajiv Gandhi Equity Savings Scheme.
- Section 24 of the Income Tax Act allows deductions for interest on home loans.
- Section 80DD and 80U are for disabled people. The former allows deductions when the individual is differently-abled, while Section 80U allows deductions in case a family member is a disabled person.
- Section 80DDB allows you to claim deductions on payments made for treatment of specified diseases. The patient could be an individual or a dependent.
- You could even claim deductions for interests paid on your, your spouse’s or your children’s educational loans under Section 80E.
- There are also provisions that allow you to claim deductions on donations. Section 80G is for general donations, while Sections 80GGA, 80GGB and 80GGC are for different categories of donations.
- Even the rent you pay can be claimed under Section 80GG.
Tax-exempted incomes
While there is a limitation to the amount of deductions under each section, there is no limit when it comes to tax exemption. If you wonder whether there are some incomes that are exempted from taxes, the answer is yes! For example, your pension is exempted from taxes, whether commuted or uncommuted. Salaried individuals even get exemptions for house rental allowance (HRA), leave travel allowance and leave encashment. The gratuity that you get when leaving a company is also tax exempted.
Tax benefits with Mutual funds
When it comes to exemptions, mutual fund investments also have certain tax exemptions:
- The dividend payouts from the mutual fund house are tax exempted.
- Equity funds are exempted from tax if you sell it after 12 months.
- When it comes to debt funds, they don’t offer indexation. Instead, they offer the benefit of double indexation. (Indexation is when you adjust your purchase price for inflation using a Price Index. Say, you buy a debt mutual fund on March 29 of a year and sell it on April 3 of the next year. Your investment spans two financial years, while your actual holding period is only 1 year 5 days. This is how you could explore the option of double indexation.
Importance of early tax planning
December to March is considered to be the tax season. However, tax planning needs to be a continuous process. In fact, like investments, the earlier you start planning for your taxes, the better. With early tax planning, you could span your tax-saving investments throughout the year instead of making a lumpsum investment. With early tax planning, you could truly explore the potential of rupee cost averaging and power of interest compounding. Thus, you not only save taxes but also see your money grow if you invest for the long-term.
Additionally, with early tax planning, there are greater chances of you effectively utilizing the tax ceiling of Rs 1.5 lakh under Section 80C. Planning your taxes in advance gives you more time to optimize and rectify your errors, if any. That’s because last-minute planning can turn out to be a damp squib, i.e., your returns might not be as good as your expectations.
Bottom line
Taxes play a vital role in any nation’s success. That said, these tax-saving tips can help you save money at the end of the year. You could invest in mutual funds and claim tax exemption and deduction (in case of ELSS).
