How to Save Income Tax for a Salaried Person
Income tax can be a big financial worry for people who earn a salary in India. But the government offers many ways for taxpayers to lower their taxable income, which can help save a lot of tax. Knowing about these tax-saving methods and planning ahead can help people earn more money by reducing their tax bill. In this blog, we will look at different ways that salaried individuals in India can save on their income tax.
Utilize Section 80C: Tax Saving Investments
Section 80C is one of the most popular ways to save on taxes. It allows you to deduct up to Rs.1.5 lakh each year from your taxable income, provided you invest in specific financial products. The following investments are eligible for this deduction under Section 80C:
- Employee Provident Fund (EPF): Your contributions to the EPF are taken out of your salary automatically, and these contributions can be claimed as a tax deduction under Section 80C.
- Public Provident Fund (PPF): A long-term savings plan that provides competitive interest rates and tax advantages, with a maximum annual investment limit of 1.5 lakh.
- National Savings Certificate (NSC): A fixed-income investment that provides both tax savings and guaranteed returns.
- Tax-saving Fixed Deposits (FDs): These are deposits that are kept for a fixed period, usually 5 years, and you can claim a tax deduction for them under Section 80C.
- Life Insurance Premiums: When you pay for life insurance policies for yourself, your spouse, or your children, you can get tax deductions for those payments.
- Sukanya Samriddhi Yojana (SSY): If you have a daughter, you may consider investing in this government-supported program, which provides tax benefits.
By investing in these instruments, you can easily reduce your taxable income by up to Rs1.5 lakh.
Take Advantage of Section 80D: Health Insurance
Section 80D allows you to deduct the amount you pay for health insurance from your taxes. The amount you can save depends on your age and the kind of insurance you have.
- For Self and Family: A deduction of up to Rs.25,000 is allowed for premiums paid for self, spouse, children, and parents (up to Rs.50,000 for senior citizens).
- For Parents: You can claim a deduction of up to Rs.25,000 for the premiums you pay for your parents` health insurance. If your parents are senior citizens, the deduction can be up to Rs.50,000.
Health insurance is a necessary cost, and this part helps in two ways - protecting your family`s health and lowering the amount of money you have to pay in taxes.
Maximize Section 10(13A) for House Rent Allowance (HRA)
If you reside in a rented property, you are eligible to claim HRA exemptions under Section 10(13A). The amount of HRA that is exempt from tax depends on the following factors:
- Your salary
- The rent paid
- The city of residence
- The amount of HRA received
The exemption is calculated based on the lowest of the following three:
- Actual HRA received
- Rent paid minus 10% of basic salary
- 50% of the basic salary (for metro cities) or 40% (for non-metro cities)
Make sure you have a rent agreement and proof of rent payments (like rent receipts) to claim this exemption.
Invest in National Pension Scheme (NPS) - Section 80CCD(1B)
The National Pension Scheme (NPS) is a great option for saving towards retirement while also reducing tax liability. Under Section 80CCD(1B), salaried individuals can claim an additional tax deduction of Rs.50,000 for investments made in NPS. This deduction is in addition to the Rs.1.5 lakh limit under Section 80C.
NPS is a voluntary plan that helps you save for retirement over a long time. It not only helps you save on taxes but also gives you a secure future when you retire.
Claim Deductions Under Section 24(b) for Home Loan Interest
If you have a home loan, you may be able to get a tax break on the interest you pay, and this is covered under Section 24(b). The highest amount you can deduct for home loan interest is:
- Rs.2 lakh per annum for self-occupied property.
- No limit on interest paid for a rented property, though the total amount of deduction depends on the annual rent received and the home loan principal.
This can help reduce your tax liability significantly, especially if you`re paying substantial home loan interest.
Tax Benefits on Education Loan Under Section 80E
If you have taken an education loan for higher studies, you can claim tax deductions on the interest paid under Section 80E. The loan should have been taken for your own studies, or for the studies of your spouse or children, to be eligible for this deduction.
The key benefit of this section is that the deduction is available for a maximum of 8 years or until the interest is paid, whichever comes earlier.
Claim Tax Benefit for Donations Under Section 80G
Charitable donations can also help reduce your taxable income. Under Section 80G, contributions to eligible charitable organizations, funds, or NGOs may be eligible for tax deductions. The deduction can be up to 100% or 50% of the donation amount, depending on the charity and the type of contribution. Some donations are subject to a ceiling, so it`s important to keep receipts and proof of donation.
Use of Salary Structuring
Many people who are paid a regular salary can lower their taxes by organizing their pay in a way that makes the most of their allowed deductions and exemptions. Typical parts of arranging your salary include:
- House Rent Allowance (HRA): As discussed earlier, this can provide tax exemptions if you live in a rented accommodation.
- Special Allowance: This can be broken down into various tax-free components such as transportation, mobile reimbursement, and other allowances.
- Gratuity and Bonus: Properly structuring salary to include these elements in a tax-efficient manner can further reduce taxable income.
Consider Long-Term Capital Gains (LTCG) Tax Benefits
If you buy things like stocks, mutual funds, or real estate and keep them for a long time, you can get benefits from long-term capital gains tax. For example:
- Equity Mutual Funds & Stocks: LTCG over ?1 lakh is taxed at 10% without indexation.
- Real Estate: Long-term capital gains on property held for over 2 years are taxed at 20% with indexation.
By holding assets for longer periods, you can significantly reduce the amount of tax payable.
Explore Tax-Free Income Sources
Another way to save income tax is to focus on income sources that are not subject to taxation. Some typical examples include:
- Dividends received from Indian companies (up to Rs.10 lakh).
- Interest from tax-free bonds.
- Agricultural income (subject to certain conditions).
- Gratuity (up to Rs. 20 lakh) on retirement.
If structured properly, these sources can significantly reduce your tax burden.
Conclusion
Saving income tax as a salaried person in India is not about avoiding taxes but about using the various legal options provided by the tax laws. By planning wisely and making use of allowed exemptions, deductions, and tax-saving investments, you can reduce the amount of income that is taxed and keep a larger portion of your earned money.
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