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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. 

  1. 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:

    Tax Exemption

    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

    Tax Deduction

    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

    Tax Rebate

    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

    TDS

    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

  2. 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

    Tax Planning

    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. 

  1. High-Risk Appetite

    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

  2. Moderate Risk Appetite

    The funds can be partially invested in ELSS and the rest in guaranteed return vehicles like Bank Fixed Deposit

  3. Low-Risk Appetite

    Funds are ideally invested in Government-sponsored schemes like SCSS, SSY, and PPF. This is in addition to the contribution in EPF and VPF

Section 80C

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. 

  1. Investment Options

    Different investment options are as follows:

    Provident Fund

    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. 

    Life Insurance

    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. 

  2. Expenditure Activity 

    Following is the list of expenditure activities:

    Tuition Fee

    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.

    Stamp Duty

    Registration Fee and other expenses related to purchasing of house property are eligible for deduction.

Section 80D

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:

  1. 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
  2. Subsets of Section 80D

    Here is a rundown to subsets of Section 80D:

    Section 80DD

    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

    Section 80DDB

    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

Section 80E

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. 

Section 80EE

It applies to first time home buyers with a maximum limit of Rs.50000 over and above Section 24. 

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.

Section 80G

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. 

Standard Deduction

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.

Conclusion

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. 

FAQ's

Written By: Paisawiki - Updated: 19 March 2021