Tax Saving Tips
Any prudent financial planning exercise figures out two primary objectives. The first is to foresee life goals and milestones in the short term as well as long term. The second is to project money growth for a sizable corpus, to ensure a contented and comfortable life in retirement after completion of an active earning phase of life. To define the contours of this framework, one has to choose options judiciously with the right financial vehicles in sync with present financial resources and future projections. The other important factor that weighs heavily is to make enough provisions to comply with Income Tax liabilities, which are mandatory for any earning Indian citizen. The principle of money saved is money invested, fits the bill to a tee. Proper tax planning can not only help to fulfil the goals but also in tax saving within the opportunities provided under IT Act, 1961. It is not out of place to get an insight into the Income Tax regime in India, to plan the best recourse to tax-saving permitted by law.
What is Income Tax in India?
Every Indian citizen, either Resident or NRI earning in India, has to pay a part of it as Income Tax to the Government as a means to raise revenue. The Central Boards of Direct Taxes administer income Tax under the Department of Revenue, Ministry of Finance, Government of India, and governed by IT Act, 1961. The Government determines the rate of taxation, and provisions are passed by the Parliament after the presentation of the Union Budget in February, to be effective during the coming financial year. Total income during the financial year is reckoned for income tax as Gross Annual Income. The income categories within the ambit of Income Tax are:
- Salary and Pension
- Profit, actual or possible, in business or profession
- Income from other sources like interest on deposits
- Capital gains by dealing in capital assets like Gold, House property, Equities, Securities, Mutual Funds, to name a few, both in short and long terms
- Rent from house property
- Betting, Racing, Lottery and such as
Applicable Income Tax Rates in India
Having learned about income categories that are considered taxable, it is imperative to learn about the rates at which individuals are taxed for income. There are three broad classes of rate, determined by age. The following grid explains how the income tax rate is distributed over different income range:
|Income Tax Slabs Applicable in FY 2019-20 (AY 2020-21)|
|Income Range (Rs)||Rate percentage|
|Under 60 Years||Over 60 under 80 Years||Over 80 Years|
|0 – 2.5 Lakh||Nil||Nil||Nil|
|Above 2.5 Lakh – 3 Lakh||5%||Nil||Nil|
|Above 3 Lakh – 5 Lakh||5%||5%||Nil|
|Above 5 Lakh – 10 Lakh||20%||20%||20%|
|Above 10 Lakh||30%||30%||30%|
|Education & Health Cess||4%|
|Section 87A||100% rebate for taxable income less than Rs.5 Lakh limited to a maximum of Rs.12500.|
|Surcharge||10% for income above Rs.50 Lakh to Rs. 1 Crore|
|15% for income above Rs. 1 Crore|
Eligibility for Tax Saving in India
The provisions for tax saving across sections under the IT Act, 1961 applies to individuals both Resident and NRI, besides HUF. The income reckoned for income tax in respect of Resident Indian covers domestic as well as global earning. At the same time, in the case of NRI, it is confined to income within the borders of India only. The other eligibility criteria pertain to income more than the minimum threshold for taxation at Rs.2.5 Lakh, for a person below 60 years of age and Rs.3 Lakh for senior citizens.
How to Save Tax in India?
Financial planning determines only the parameters of short- and long-term investments for protection, financial stability of the family in the absence of the breadwinner, set life goals, milestones to fulfil the dreams and aspirations of the family. And ultimately, create wealth to seal the future of comfort and peace post-retirement. However, going a step further, proper tax planning can supplement the cause of a successful financial plan by substantial Income Tax savings. It also makes sense to unravel the different nuances of Income Tax Rules, especially with tax-saving provisions to steer the investments and contributions in such a way that it effectively reduces income tax liability to the maximum extent possible.
Know Tax Saving Jargon
To effectively channelize resources for tax saving, it becomes incumbent upon the taxpayer to understand the meaning of the technical terms and jargon used in Income Tax parlance. This helps in gauging its financial impact and the likely benefits. Some of the major ones in regular use confined to tax-saving are:
It is determined by the source of income, rather than getting adjusted on total income. Agriculture income and Long-Term Capital Gains are classic examples of tax exemptions which do not attract Income tax
These are claimed on total gross income, thereby reducing taxable income to that extent. Life and Health Insurance, Interest on Education Loan, Standard Deduction meets this description
Unlike the previous two, it is claimed from the total tax payable. Rebate of Rs.12500 for taxable income below Rs.5 Lakh is a rebate allowed under Section 87A
It stands for Tax Deducted at Source based on rates defined in IT Act, 1961. TDS from any payment made by a company or an employer, referred to as deductor, is deposited to the IT Department
Tax Saving Avenues
Having understood the different terms used to describe tax saving avenues, it becomes incumbent upon the taxpayer to check up the various sections which permit the reduction of tax liability.
Tax Saving Sections in IT Act, 1961 for Financial Year 2019-20 Particulars Exemption Limits Section 10 (13A) House Rent Allowance As per norms Section 24 Interest on Home Loan Rs.2 Lakh Section 80C, 80CCC, 80CCD EPF, VPF and PPF Rs. 1.5 Lakh in aggregate Life Insurance Premium Contribution to Annuity Sukanya Samriddhi Senior Citizen Savings National Savings Certificate Tax Savings Deposit - Bank Tax Savings Deposit – PO ELSS and Mutual Funds Pension Fund Tuition Fees for 2 Repayment of Home Loan Stamp Duty for Registration NPS and APY Section 80CCD (1B) NPS with PRAN Rs.50 K Section 80D, 80DD, 80DDB Health Insurance Rs.1 Lakh Disability Rs.1.25 Lakh Outgo for Treatment Rs.1 Lakh Section 80E, 80EE, 80EEA, 80EEB Interest on Education Loan Actual First Time Home Buyers Rs.50 K Additional HL after April 2019 Rs.1.5 Lakh Purchase of Electronic Vehicle Rs.1.5 Lakh Section 80G, 80GG Relief Fund, Rent Rs.60 K Section 87A Taxable income up to Rs.5 L Rs.12.5 K Section 80 TTA, 80 TTB Interest on Savings Account Rs.10 K Interest on Deposits Rs.50 K for SC Section 80U Self-Disability Rs.1.25 Lakh
The primary aim of this exercise is to reduce tax liability. There are several strategies to maximize tax savings and, in turn, minimize tax payout:
- The first step is to analyse the existing tax-saving vehicles with relation to the financial profile
- Reduce the total of the existing outgo from the projected limits in available tax-saving avenues
- Focus on sections which will fetch maximum savings and help retain greater earnings
- Start investing right at the beginning of the financial year to prevent hasty decisions
- Allocate resources in tax-saving vehicles in harmony with financial planning goals, already set considering risk appetite
- Young earners in the age bracket below 30 years, blending life and health insurance is ideal
- It is imperative to try and exhaust the available deduction limits, Rs.1.5 Lakh in Section 80C for instance
- It is not a bad idea to seek the assistance of professional tax consultant to rationalize investment, as they are conversant both with the math and rules and regulations of IT Act, 1961
Income Tax Savings Sections- How to Save Tax?
Among the various sections of IT Act, 1961, an effective tax saving avenue is Section 80C with an overall aggregate deduction limit of Rs.1.5 Lakh in a Financial Year. However, before proceeding into the details of different tax-saving vehicles, it is not out of place to have a glimpse of options matching the risk appetite of the taxpayer.
An investor with aggressive intent can opt for either Mutual Fund ELSS or the Life Insurance ULIP, where investments are deemed to provide highest yields through market-linked instruments, most of it in Equity
Moderate Risk Appetite
The funds can be partially invested in ELSS and the rest in guaranteed return vehicles like Bank Fixed Deposit
Funds are ideally invested in Government-sponsored schemes like SCSS, SSY, and PPF. This is in addition to the contribution in EPF and VPF
It is by far the most popular means of tax-saving offering multiple options, yet convenient to access and in sync with the regular desires of taxpayers. The investment activity in this Section can be categorized as Investment and Expenditure, depending on where the funds are directed.
Different investment options are as follows:
It is the statutory deduction from salary by the employer at a fixed percentage of the basic pay every month. The deduction is normally a maximum of 12%, and the employer contributes a similar amount. A part of the employer’s contribution is earmarked towards pension. The maturity of EPF is on retirement at 60 years. The amount deposited with EPFO earns guaranteed interest declared by the Government from time to time. The current rate of interest for 2019-20 is 8.5%. VPF is the amount contributed by the employee over and above the statutory deduction voluntarily, getting accumulated in the same fund.
Public Provident Fund (PPF)
It is one of the most popular Government-sponsored schemes used for tax savings. A PPF account can be opened in any bank as well as Post Office, for an initial term of 15 years which can be extended for another 5 years on the specific request of the account holder. A minimum annual deposit of Rs.500 keeps the account active. The maximum deposit permitted in a year is Rs.1.5 Lakh. The current rate of interest payable from 1st April 2020 is 7.1% per annum.
It is the front runner among earners in India, as far as investment goes. That there are policies of different flavours, make a choice eclectic. There are 24 insurers in the country offering tailored products to suit every need and preference. The common type of life insurance plans delivered across insurers is Term for pure protection, Endowment for steady savings, ULIP for wealth creation, Child plan for meeting education needs, and finally Retirement Plans for a contented life, post-retirement. The advantage with life insurance is that it covers for dual benefit – life risk and steady or rapid growth of money, depending on the chosen plan.
Mutual Fund (ELSS)
Equity Linked Savings Scheme, as the name suggests, is solely directed towards high yield volatile equity market. There is a lock-in of three years in this vehicle, but the trick is to stay invested in the long term for the best benefits. Returns are considered Long Term Capital Gains (LTCG) and are taxed at 10%, if over the exemption limit of Rs.1 Lakh.
Five Year Tax Saving Bank/Post Office Fixed/Time Deposit
All commercial banks offer tax saving deposits, which are very similar to other fixed deposits in their portfolio. There is a five-year lock-in, which reduces its liquidity. It is a safe investment offering interest of 5.90% and 6.7% per annum at current rates in Bank and Post Office, respectively.
Sukanya Samriddhi Account
It is designed for the benefit of the girl child, opened in the name of minor girl up to 10 years of age. The term of the account is 21 years, but the amount can be deposited only till completion of 14 years. Partial withdrawal is allowed as the girl reaches18 years. The minimum deposit is Rs,1000 and maximum Rs.1.5 Lakh in a year. The applicable rate of interest from 1st April 2020 is 7.6% per annum.
Senior Citizen Savings Account
This is a government-sponsored account specifically designed for retired persons over 60 years of age. Relaxation is permitted for retired Defence personnel at 50 years and persons retired under Voluntary Retirement Scheme from 55 years to 60 years of age, the cumulative deposit in this account cannot exceed Rs.15 Lakh, interest rate from 1st April 2020 is 7.4%. Though the annual deposit of Rs.1.5 Lakh maximum is tax-free, the interest payable quarterly is taxable.
National Savings Certificate (NSC)
It is issued at Post Office for a 5-year term. The investment can be as low as Rs.100, and in multiples thereof. There is no upper limit of investment, but as an 80C deduction instrument, the tax benefit is limited to Rs.1.5 Lakh. The current rate of interest payable from 1st April 2020 is 6.8%. Interest payable is taxable, except for the last year, but as it is reinvested for compounding, it is also eligible for tax saving deduction under 80C.
National Pension System (NPS)
This Central Government Scheme was launched in 2004, specially designed for its employees. Subsequently, it was opened for all citizens in 2009. It primarily focuses on retirement benefits with maturity at 60 years of age. There are two types of accounts, of which Tier I is by default, and Tier II is optional. The minimum initial deposit in Tier I account is Rs.500, and the Tier II account is Rs 1000. 60% of the accumulated corpus can be withdrawn after 60 years, with the remaining 40% invested in an annuity for pension payment. Self-contribution in NPS is recorded in 80CCD (1) and is considered integral to the overall limit of Rs.1.5 Lakh in 80C. Additional Rs 50000 can be deposited under section 80CCD (1B) as an employer contribution, not exceeding 10% of salary under 80CCD (2), increasing the limit of tax-saving deduction to a cumulative Rs. 2 Lakh.
Following is the list of expenditure activities:
Up to 2 children pursuing regular courses in school, college or university are eligible for tax saving deduction under Section 80C. Infants in the pre-school nursery are also eligible.
Repayment of the principal of Home Loan
The EMI of home loan comprises of the principal plus the interest component. The principal component repaid during the financial year qualifies for tax saving deduction under 80C.
Registration Fee and other expenses related to purchasing of house property are eligible for deduction.
Health Insurance: In present-day modern society, purchasing suitable health insurance has become a necessity. Considering the health hazards arising from lifestyle habits and the ever-increasing cost of healthcare, it is one investment that pays in the long run. The health coverage provided to self, spouse, children as well as dependent parents qualify for tax saving deduction under this section. There are many types of health insurance plans. Option for the individual as well as Family Floater is available. Specific disease Health Insurance and Top-up Health insurance are the other types. Choosing the best combination for an overall tax saving limit of Rs.1 Lakh makes sense. The current tax saving scenario is tabulated below:
Section 80D for Health Insurance for FY 2019-20 (AY 2020-21)
Section 80D for Health Insurance for FY 2019-20 (AY 2020-21) Scenario Self + Dependents Parents Total Deduction Below 60 years Rs.25000 Rs.25000 Rs.50000 Self below 60 and Parent above 60 years Rs.25000 Rs.50000 Rs.75000 Self and Parent both above 60 years Rs.50000 Rs.50000 Rs.1 Lakh
Subsets of Section 80D
Here is a rundown to subsets of Section 80D:
This section covers tax-saving deduction for the rehabilitation of disabled dependents by incurring medical expenditure or payments made for their maintenance with limits as follows:
- 40% or more but less than 80% Disability: Rs.75000
- 80% or more severe Disability: Rs.1.25 Lakh
Medical expenditure for specified critical diseases for self or dependent
- The person below 60 years of age: Rs.40000
- Senior Citizen over 60 Years of age: Rs. 1 Lakh
Interest on Education Loan - Deduction is allowed for repayment of interest on Education Loan for higher studies covering self, spouse, and dependent children. The benefit covers all fields of study, and the tax-saving deduction can be availed of for consecutive 8 years, beginning from the commencement of repayment.
It applies to first time home buyers with a maximum limit of Rs.50000 over and above Section 24.
Interest on Home Loan - It applies to self-occupied house only, for an overall limit of Rs.2 Lakh spread over different dates of disbursement of the loan.
Donations and Charity - It covers charity and donations to the relief fund and Charitable Organizations without any limit. However, there are different parameters, of which the most common is 50% of the donated amount and up to 10% of the adjusted total income. Donation above Rs.2000 is required to be in a mode other than cash.
Section TTA and TTB
- It pertains to the commonest feature for individual interest earning from Savings Account and Fixed Deposit. TTA pertains to Savings Account with a deduction for interest earned restricted to Rs.10000
- In the case of senior citizens, interest on deposits in both Savings and Term Deposits are clubbed for a combined limit of Rs.50000 under TTB
Section 10 (13A)
It relates to the payment of rent and receipt of House Rent Allowance (HRA). There are calculation norms for arriving at the eligible deduction as a component of tax saving.
This was introduced in the year 2018 instead of a deduction for Medical and Transport Allowance. It is applied across the board for Rs. 50000 for FY 2019-20.
The Income-tax regime in India works on the principle of higher tax for higher income. The slab rates are also accordingly designed. No matter, however high the income is, all eligible individuals and HUF can judiciously invest and ensure maximum tax savings within the ambit of law, prescribed by the IT Act, 1961.
Ans: Under Section 80GG, one can claim the deduction even if the person is self-employed.
Ans: It pertains to self-disability. The deduction limit is Rs.75000 for 40% or more but less than 80%. Above 80% for severe disability, it is Rs.1.25 Lakh.
Ans: Contribution of the employer to NPS subject to maximum 10% of salary, within the overall additional limit of Rs.50000.
Ans: It is necessary when the rent paid exceeds Rs.1 Lakh in a year.
Ans: No, they are tax-exempt under Section 10 (10D).
Ans: The maximum amount permitted is Rs.5000.
Ans: For policies purchased after 1st April 2012, it should not exceed 10% of the sum assured. For disabled individuals, it is 15% from 1st April 2013.
Ans: There are two options. First, to continue with the old regime with tax-saving features and the new regime, with lower slab rates but all tax-saving sections stands withdrawn.
Ans: All salaried and self-employed individuals need to pay advance tax on yearly projected income.
Ans: Yes, it is compulsory within 31st July considering Gross Income adjusted with tax-saving deductions to arrive at tax payable amount tallied with Form 26AS.