“A penny saved is a penny earned”.
As rightly said, the above saying underlines the importance of savings. The money saved can be used in tough times such as any emergency medical situation. It can also be used to create more money by the way of investment. That is why it is said a penny saved is a penny earned because you start earning more with your saving.
You can invest your money in different ways such as stocks, shares, mutual funds or you can come up with a profitable idea and start a business of your own.
Let us look at a few options, where you can save your money by reducing your Taxable income in India.
There are various kinds of income tax deductions that can be used to reduce the taxable income in India. There are 19 ways in which tax deductions can be availed, ranging from public provident funds to life insurance and loans.
Tax deduction refers to claims made to reduce your taxable income, arising from various investments and expenses incurred by a taxpayer. Thus, income tax deduction reduces your overall tax liability. It is a kind of tax benefit which helps you save tax. However, the amount of tax you can save depends on the type of tax benefit you claim.
Various Types of Tax Deductions in India
You can reduce your taxable income by increasing your deductions. There are many investment options and forms of expenditure which can help you get reductions on your taxable income. The Indian Income Tax Act provides many provisions for this. Mentioned below are a number of different tax deduction options.
1. Public Provident Fund (PPF)
By contributing to your PPF account, you can get tax deduction under Section 80C, the Indian Income Tax Act, 1961.
2. Life Insurance Premiums
You can get income tax deduction for paying premium towards life insurance policies for self, spouse and child under section 80C of the Indian Income Tax Act, 1961. The amount received on maturity of the policy is free from tax. However, it is subject to the terms and conditions mentioned in your policy.
3. National Saving Certificate (NSC)
The amount invested in NSC is eligible for tax deduction under section 80C of the Indian Income Tax Act, 1961. National Saving Certificates is one of the highly secured modes of investments in India. But, the interest earned from NSC is taxable. As an NSC is a cumulative scheme, interest is reinvested and qualifies for tax deduction.
4. Bank Fixed Deposits (FDs)
You can get tax deduction by investing in fixed deposits for a tenure of 5 years, under section 80C of the Indian Income Tax Act, 1961. Many banks in India offer tax saving fixed deposits. However, the interest accrued on FDs is subject to tax
5. Senior Citizen Savings Scheme (SCSS)
Senior citizens can get tax deduction by investing in Senior Citizen Savings Scheme offered by banks. These schemes are eligible for tax deduction under Section 80C of the same act. The interest earned from these schemes is entirely taxable.
6. Post Office Time Deposit (POTD)
Investing in a five-year POTD, you can get tax deduction under Section 80C. However, interest accrued on the same is fully taxable.
7. Unit-linked Insurance Plans (ULIP)
Investing in ULIPs for yourself, spouse and your children, you can get tax deductions under Section 80C.
8. Home Loans
Equated monthly instalments paid to repay the principal amount of your home loan are eligible for income tax deductions under section 80C of the same act.
9. Mutual Funds & ELSS
Investing in mutual funds and equity-linked savings scheme, you are eligible for tax deductions under section 80C, the Indian Income Tax Act, 1961.
10. Stamp Duty and Registration Charges for a Home
Stamp duty and registration fee paid for transferring property are entitled for income tax deduction under section 80C, the Indian Income Tax Act, 1961.
11. Retirement Savings Plan
You can also get income tax deductions by investing in retirement plans offered by LIC or other insurance providers. Contribution to the National Pension Scheme is also eligible for tax deduction.
12. Tuition Fees
Tuition fee paid for your children’s education qualifies for income tax deduction under section 80C. However, the fee needs to be paid for full-time education in an Indian university, college and school for any two children. Tuition fee does not include any donations or development fee towards education institutions.
13. Medical Insurance Premiums
Health insurance premium paid for self, spouse and children qualifies for income tax deduction under section 80D of the Indian income Tax Act, 1961. The deduction allowed under this section is Rs. 25,000 for youngsters and Rs. 30,000 for senior citizens.
14. Infrastructure Bonds
Investing in infrastructure bonds, you become eligible for income tax deductions under section 80CCF of the Indian Income Tax Act.
15. Charitable Contribution
Donating for charitable tasks will help you reduce your taxable income under section 80G of the Indian Income Tax Act, 1961. However, make sure that you declare the whole contribution before 31st December each year.
16. Treatment of Disabled Dependents
Under section 80DD of the Indian Income Tax Act, 1961, you can get income tax deductions for medical expense incurred in the treatment of any disabled dependent of yours.
17. Deduction for Preventive Health Check-ups
An amount of Rs.5000 spent for preventive health check-ups of an individual or his/her family members qualifies for tax deduction under section 80D of the Indian Income Tax Act, 1961.
18. Interest Paid on Education Loan
You can get tax deduction on the interest paid for an educational loan under section 80E of the Indian Income Tax Act, 1961. The loan can be taken to pursue higher education by the employee, or for his/her spouse, children or a student to whom the employee is a legal guardian.
19. Deduction on House Rent Paid
An employee can get income tax deduction for the house rent paid, if the employee or his/her spouse does not own residential accommodation at the place of employment. This deduction is usually applicable for salaried taxpayers under section 80GG of the Indian Income Tax Act, 1961.
Various Types of Tax Deductions in India
1. TDS Exemption
While filing returns, if a taxpayer finds out that his or her tax liability is much below what has actually been paid, then the individual can claim refund of the excess TDS already paid during the financial year. However, should the taxpayer feel that the final tax liability is going to be nil or less than the TDS rate applicable on certain income, then he or she can apply for a lower rate of TDS or no TDS under Section 197 / 197A.
2. House Rent Allowance
If rent is actually being paid, the individual can get an exemption as per the House Rent Allowance and that will be the least of the following –
Actual House Rent Allowance received
Actual Rent paid (minus 10% of salary)
40% of salary (50% in case of Mumbai, Chennai, Kolkata, Delhi)
3. Leave Travel Allowance or Leave Travel Concession
In case an employee furnishes valid proof in forms of bills that account for expenditure during travel and leave (for official or personal reasons), this allowance can be exempted.
4. Transport Allowance
Tax exemption on this is allowed up to a maximum of INR 800 per month and the exemption will be valid only for the expenditure done by the employee in commuting from the residence to the place of work.
5. Children Education Allowance
Allowed for a maximum of two children of the employee, the exemption is INR 100 per child per month.
6. Hostel Subsidy
Allowed for a maximum of two children of the employee, the exemption is INR 300 per child per month.
7. Interest paid on Housing Loan (or Income/Loss from House Property)
As per Section 24, the tax exemption for interest paid is already INR 200000. In addition to that, if a house has been procured for the first time and the total cost of property and amount of loan do not exceed INR 4000000 and INR 2500000 respectively, an extra deduction of interest up to another 1 lakh can be availed.