There are many ways you can legitimately save tax under the Income Tax Act.  When you pay for certain expenses like medical insurance or your child’s tuition fees or make investments in specific avenues like the Public Provident Fund (PPF) in a given year, you can avail tax benefits.

Well-known and popular tax saving sections under the Income Tax Act are Section 80C  and 80D. However, there are other avenues you can save tax too.

Here, we explore how to save tax through the many options starting with Section 80C.

1) Equity Linked Saving Scheme

 Equity Linked Savings Scheme (ELSS) are open-ended mutual fund scheme with a lock-in period of 3 years. In ELSS schemes, a major portion of the capital (at least 80%) is invested in equities. ELSS mutual funds are also known as tax saving mutual funds, because they are the only mutual fund schemes in India which qualify for a tax deduction for individuals and HUF (Hindu Undivided Family) under Section 80(C) of the Income Tax Act. Since investments are primarily made in market-linked instruments, the potential  returns could be high and taxable

2) Tax Saver Fixed Deposits (FDs)

When you save in Tax Saver FDs, you can avail a tax deduction on investments up to Rs. 1.5 lakh. Only individual investors and Hindu Undivided Families (HUFs) can invest in this scheme. These FDs offer a lock-in period of five years. This means you can redeem your investments in these funds only after a period of five years.. Also, bear in mind that the interest income you receive on this instrument is taxable.

3) Public Provident Fund

Public Provident Fund (PPF) scheme is a government-backed savings scheme. This is a 15-year savings instrument that can be extended indefinitely in a block of five years by an investor in blocks of five years. Any Indian citizen can open a PPF account at a post office or a bank branch with a minimum deposit of just Rs. 500. As an investor, you can make a minimum of one deposit in the fund every year for 15 years. The minimum amount you can make is Rs. 500 while the maximum investment is Rs. 1.5 lakh.

You can avail a tax benefit on investments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. This is a popular investment option among many investors in the country because it comes with the EEE (Exempt-Exempt-Exempt) tag. In other words, the amount you invest, the interest you accrue, and the final corpus at the time of withdrawal are totally exempt from tax.

4) Employee Provident Fund

The Employees Provident Fund (EPF) is a retirement savings scheme that is available to all salaried employees in the country. Under this scheme, the employee, as well as the employer, contributes 12% of the employee’s salary (basic pay + dearness allowance) towards the fund. Investments up to Rs. 1.5 lakh can be claimed for deduction every year under Section 80C of the Income Tax Act.

5) National Savings Certificate

The National Savings Certificate (NSC) is a fixed-income investment scheme backed by the Government of India. You can start investing in this scheme by opening an account at any post office in the country. NSC comes with a tenure of five years and offers a fixed rate of return. There is no maximum limit on the amount you can invest in this scheme, but deposits up to Rs. 1.5 lakh can qualify for tax deductions under Section 80C of the Income Tax Act.

6) Life Insurance Premium

The premium you pay towards your life insurance policies (term insurance, endowment policies or ULIPs) is eligible for tax deductions. Under Section 80C of the Income Tax Act, life insurance premiums are tax-deductible up to Rs. 1.5 lakh.

7) Home Loan Repayment

In case you purchase a house through a home loan, you can benefit from tax deductions. The repayment you make on the principal amount of the home loan is tax-deductible up to Rs. 1.5 lakh each year.

8) Tuition Fees Payment

Taxpayers in the country who pay tuition fees towards their children’s school or college can avail tax benefits under Section 80C of the Income Tax Act. Once again, the maximum amount eligible for tax deductions is Rs. 1.5 lakh.

9) Sukanya Samriddhi Yojana

Sukanya Samriddhi Yojana is a savings scheme that aims to benefit girl children in the country. Parents with girl children (less than 10 years of age) can open an account in this scheme and invest up to Rs. 1.5 lakh every year.. The plan comes with a lock-in period of 21 years. However, the government allows parents to make pre-mature withdrawals when the girl turns 18. This allows the parent to meet necessary expenses like a college education or marriage. You can avail a tax deduction on the contributions made to the scheme under Section 80C of the Income Tax Act.

10) Senior Citizens Savings Scheme

As the name suggests, the Senior Citizens Savings Scheme (SCSS) is a long-term savings scheme for investors who are 60 years or older. SCSS comes with a tenure of five years. Contributions up to Rs. 1.5 lakh every year are eligible for tax deductions under Section 80C of the Income Tax Act.

Section 80D of the Income Tax Act revolves around the tax deductions you can avail on medical insurance premiums you pay every year. You can avail a highest deduction of Rs. 25,000 per year on the premium you pay for self, your spouse and children. Additionally, if you have paid medical insurance premium on behalf of your parents, you can avail an extra deduction of Rs. 25,000. In the case of senior citizens, the maximum limit of a tax deduction is Rs. 50,000.

1) Payment of interest on education loan

If you have an education loan, you can claim a deduction on the interest amount paid on the loan. This is applicable to education loans for self, spouse or children or student for whom you are a legal guardian. Interestingly, there is no limit on the amount eligible for a deduction. But to claim the deduction, the loan should be taken for higher education purposes only.

2) Payment of interest on a home loan

If you are currently paying interest on a loan you have taken to purchase or build residential property, you can claim a tax deduction under Section 80EE of the Income Tax Act. Under this specific section, you can claim a deduction of up to Rs. 50,000 each year on interest payments of the loan. In essence, if you combine the benefits under Section 80C and Section 80EE, you can avail a tax benefit on the repayment of principal and interest components of your home loan.

3) Donations

When you do good, you get back good. This is clearly evident in the tax laws of the country. The government allows Indian citizens to avail tax deductions on charitable donations they make every year under Section 80G of the Income Tax Act. The amount you can claim as a deduction depends on the entity you donate. You can claim a 100% tax deduction on the amount given to individual bodies such as the National Defence Fund or the Prime Minister’s National Relief Fund and such other bodies. But for other entities, you can claim only 50% of the amount donated as a deduction. Hence it can be a good idea to ensure you know the tax benefits you can avail before you donate.

4) Rent paid for accommodation

In case you are staying in a rented accommodation, you can claim a tax deduction under Section 80GG of the Income Tax Act. This deduction is applicable only to you if you are not salaried or if you don’t receive the House Rent Allowance (HRA) as part of your salary.

The eligible deduction amount will be the lower of:

1. a) 5,000 per month
2. b) 25% of adjusted total income
3. c) Rent paid less than 10% of total income

But if you or your spouse own the house in which you are currently living, you cannot claim this deduction. 

5) Interest on savings account

The interest you earn on your bank savings accounts is tax free up to Rs. 10,000 every year under Section 80TTA. But in the case of senior citizens, this limit has been raised to Rs. 50,000. This is applicable for interest on savings accounts, fixed deposits, post offices or cooperative societies under Section 80TTB.

Start your tax-planning right at the beginning of the financial year to maximize benefits. Many taxpayers postpone this crucial aspect until the end of the year. When one delays planning taxes, it could err in purchasing the wrong investment products.

Ideally, tax planning should be an organic perk of investing and not the other way around. One should Identify financial goals and invest to achieve them. And through this process, one can avail tax benefits every year.

The first step is to check if one has already made any payments towards insurance premiums or children’s tuition fees. Deduct that amount from Rs. 1.5 lakh to find out how much one need to invest to avail the benefits under Section 80C.

Select the best tax-saving instrument based on goals and risk appetite.One can invest in ELSS funds as ELSS could help one achieve potential reasonable returns in the long term. Also one can avail all the benefits available under the other section.

Conclusion

It is duty to pay tax. But it is also right to reduce tax outgo as much as one  can legally. So, invest wisely and get the most out of the tax saving options available.

1) How much tax one can save?

There is no single answer to this question. The amount of tax one can save depends on personal income slab and the tax paid every year. However, there are individual sections in the Income Tax Act like Section 80C, where one can avail deductions on a maximum investment of Rs. 1.5 lakh every year.

Similarly, the maximum tax benefit on health insurance premiums under Section 80D is Rs. 50,000. And there are certain exclusive sections like Section 80G, where one can claim tax benefits on any charitable donations during the year. So, identify all the tax saving options available and one can make the most of them.

2) What is the 80C limit for 2019-20?

As per the Income Tax Act, the maximum amount one can invest to gain tax benefits under Section 80C is Rs. 1.5 lakh.

3) Who qualifies for standard deduction?

Standard deduction is a fixed amount deducted from your salary income before your income tax is calculated. A standard deduction of Rs. 50,000 is provided to salaried employees.

Standard deduction is essentially a flat amount removed from your salary income before the taxable income is calculated. The standard deduction was a segment of the Income-tax Act, until former finance minister, P. Chidambaram, removed it during the Union budget of 2005-06. At the time, the standard deduction permitted the salaried class to deal with expenses that didn't fall under the scope of the income tax rules.

4) How does income tax work in India?

As citizens, we want the government to provide good hospitals, schools, transport systems and infrastructure. The government does all these activities through the revenues they earn. And income tax is one of the major sources of the government’s revenue. So, even though we may not want to pay tax on the income we earn, it is important to pay income tax and file income tax returns annually (and on time) to ensure the government can build and maintain public infrastructure.

5) What is legal tax avoidance in India?

Legal tax avoidance means one can avoid or reduce tax outgo every year through legal means. The Indian Government has clearly defined who should and should not pay tax. For instance, those who earn less than Rs. 2.5 lakh every year don’t have to pay tax. Besides, there are many exemptions and deductions under which one can reduce income tax payments.

6) How to save taxes in India?

Indian citizens can legally save tax when they pay towards certain expenses or invest in specific investment avenues. The Income Tax Act clearly specifies the different sections and sub-sections under which one can save tax every year.

The most popular option among taxpayers is Section 80C. Here, one can claim tax deductions on investments up to Rs. 1.5 lakh in avenues like Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS), National Pension Scheme (NPS), life insurance premiums, Employee Provident Fund (EPF) and tax saving mutual funds among others.

One can also claim a tax benefit of Rs. 25,000 every year on health insurance premium paid for self, spouse and dependent children. This is applicable under Section 80D of the Income Tax Act. One can save an additional amount of Rs. 25,000 if one pays health insurance premium for their parents too. The deduction limit for senior citizens is Rs. 50,000 in this section.

In the same way, one can avail many more tax benefits under various tax sections of the Income Tax Act.

The information given here is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme