April 26,2023

Tax Saving: How to Save Income Tax in India – Tips & Strategies

Taxing is essential to being a responsible citizen, but nobody wants to pay more taxes than is necessary. Tax planning and tax-saving strategies are critical components of personal finance. In India, taxes are levied on income, investments, and assets. Understanding the various tax-saving options available to minimise tax liability is essential.
Understanding tax-saving options and planning your investments at the beginning of each financial year can help you reduce your tax liability. Claiming tax deductions for investments, insurance, education loans, and charitable donations can help you save taxes.

Understand Tax Saving Options

Individuals must first understand the available tax-saving options to save taxes in India. The government offers various tax-saving instruments, including the PPF, NPS, ELSS, and tax-saving fixed deposits, each with different returns, risks, and lock-in periods. Tax-saving options are also available under various sections of the Income Tax Act, such as Section 80C and Section 80D, which provide tax deductions for investments and medical insurance.

The Income Tax Act’s Section 80C enables tax savings

Taxpayers in India can avail themselves of multiple popular tax-saving options under Section 80C of the Income Tax Act to reduce their tax liability. People can claim deductions of up to Rs. 1.5 lakh in a single financial year. It helps how to save income tax. Under Section 80C, here are some popular ways to save money on taxes:
  • Public Provident Fund (PPF): The Public Provident Fund (PPF) is a government-supported, tax-free savings scheme with a lock-in period of 15 years. However, one can avail partial withdrawals and loans against PPF investments after a certain period. PPF deposits enjoy a tax exemption status, which implies that the interest earned on PPF investments is tax-free.
  • Equity-Linked Savings Scheme (ELSS): ELSS or Equity-Linked Savings Scheme is a mutual fund primarily investing in equities and equity-related securities. It has a lock-in period of three years, which means the investor cannot sell or redeem their units before this time. The returns on ELSS investments are exempted from taxation, making it an attractive investment option for individuals looking for tax-saving options under Section 80C of the Income Tax Act.
  • National Savings Certificate (NSC): The NSC is a five-year savings plan backed by the government. The interest earned on a National Savings Certificate (NSC) is taxable but can be deducted under Section 80C. The principal amount invested in NSC qualifies for tax deductions under Section 80C of the Income Tax Act. The interest earned on NSC is taxable per the individual’s income tax slab.
  • Tax-saving Fixed Deposits (FDs): Many financial institutions and banks offer fixed deposits (FDs) to help individuals save taxes. These FDs, commonly known as tax-saving FDs, come with a lock-in period of five years. While the interest earned on these FDs is taxable, individuals can claim deductions under Section 80C of the Income Tax Act on their investment in these instruments.
  • Unit-Linked Insurance Plan (ULIP): A Unit-Linked Insurance Plan (ULIP) is a hybrid financial product offering investment and insurance benefits. The investment component of a ULIP is directed towards various asset classes, such as stocks, bonds, or a combination of both, depending on the investor’s preference. One of the primary advantages of ULIPs is that they provide tax-free returns, making them a popular tax-saving option.

Other ways to save on taxes

In India, there are many other ways to save money on taxes besides Section 80C. Here are some common ways to save tax in India:
  • Medical insurance under Section 80D: The Income Tax Act’s Section 80D allows individuals to claim deductions for medical insurance premiums paid for themselves, their spouse, and dependent children. Medical insurance premium payments made for self, spouse, and dependent children are eligible for tax deductions up to Rs. 25,000 under Section 80D of the Income Tax Act.
  • Interest on a home loan under Section 24: Section 24 of the Income Tax Act allows taxpayers to claim a deduction of up to Rs. 2 lakhs for interest paid on a home loan for a self-occupied property. Taxpayers can claim a deduction of up to Rs. 2 lakhs on the interest paid on a home loan for a self-occupied property under Section 24 of the Income Tax Act.
  • National Pension Scheme (NPS) under Section 80CCD: The National Pension System (NPS) is a tax-saving investment option available to individuals under Section 80CCD of the Income Tax Act. Contributions to the NPS are eligible for tax deductions under Section 80CCD, providing an excellent opportunity to save taxes. With the NPS Tier-1 account, individuals can avail of an additional tax benefit of up to Rs. 50,000 over and above the Rs. 1.5 lakh limit under Section 80C.
  • Deductions for donations under Section 80G: Section 80G of the Income Tax Act provides an additional incentive for taxpayers to contribute to charitable organisations. Individuals can claim a tax deduction for donations made to eligible philanthropic institutions under Section 80G of the Income Tax Act. Taxpayers can reduce their tax liability while contributing towards social welfare by donating to qualified charitable organisations under Section 80G.
  • Education loan interest under Section 80E: Section 80E of the Income Tax Act allows taxpayers to claim a deduction for the interest paid on education loans. Individuals can reduce their tax liability by taking advantage of the tax benefits offered under Section 80E of the Income Tax Act.
  • Capital gains under Section 54: Section 54 of the Income Tax Act provides tax relief to individuals who sell their houses and make long-term capital gains. Taxpayers can avail themselves of a tax exemption under Section 54 of the Income Tax Act if they invest the sale proceeds in a new residential property. When an individual sells a house and makes a profit, they can claim exemption from capital gains tax by investing in a new residential property as per the rules under Section 54 of the Income Tax Act.

Ways for business owners and professionals to save on taxes

Business owners and professionals can use several strategies to minimise their tax liabilities. There are various tax-saving strategies that they can adopt to achieve this objective. Business owners and professionals can save considerable money on taxes using these strategies.
One of the most effective tax-saving strategies for business owners and professionals is to invest in tax-saving instruments such as the Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), and National Pension System (NPS).
Another tax-saving strategy for business owners and professionals is to claim deductions for expenses incurred during their business or profession. They can claim deductions for expenses such as rent, salaries, utilities, travel, and depreciation of assets.

Common tax-saving mistakes to avoid

Saving money on taxes is a crucial financial objective. Still, it’s critical to avoid common mistakes that can result in penalties and financial loss. Some common mistakes to avoid include:
  • Failing to file tax returns.
  • Overlooking tax-saving opportunities.
  • Investing solely to save on taxes.
  • Not keeping accurate records.
  • Not seeking professional assistance.
Not filing tax returns on time can result in fines or legal action, even if no tax is due. Individuals should pay close attention to tax-saving opportunities to prevent overspending. Making investment decisions solely to save taxes can lead to unfavourable outcomes.

Conclusion

Tax savings are a significant financial goal for Taxpayers, and several ways exist to lower tax liability. People have several ways to save money on taxes, such as investing in tax-saving instruments and taking deductions for expenses and health insurance. In conclusion, saving on taxes is a significant financial goal that can help people pay less and save money.

Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.

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