Many of us know the rush of the end of the financial year when we scramble to submit documents that could help reduce the income tax that needs to be paid on that year’s earnings. The most common scenario is the submission of rent receipts, and various insurances but is that the only way you can save on taxes?
If you were to take a closer look at all the instruments available to you for this purpose you’d realize that we are spoilt for choice when it comes to saving on income tax. So the very first question we need to ask is how much can you save on tax; To understand that first you need to understand the slabs.
The income tax slab is a way of categorizing taxpayers based on their annual income. It has four segments where a limit is provided and income exceeding that limit is taxed at a predefined amount. The whole exercise of investing is indulged in for two main purposes and they are to create savings for the future or for a rainy day or to save on income tax.
The most popular ways of Tax Planning which help a taxpayer
to save tax legally are as follows:-
- Save Tax under Section 80C, Section 80CCC, Section 80CCD
There are many instruments which are
specified by the Govt through which tax planning can be done and these
investments can be claimed as a deduction to save tax. The most popular
instruments for investing for the purpose of tax planning to save tax are:-
All Tax Planning Options to save
tax specified above are over and above the Rs. 1,50,000 deduction allowed under
Section
80C, 80CCC
& Section
80CCD as specified above.
An additional deduction of Rs.
50,000 under Section 80CCD has also been introduced for Investment in National
Pension Scheme (NPS). This additional deduction has been introduced vide
Finance Act 2015 (Budget 2015) and is applicable from Financial Year 2015-16
onwards.
- Save Tax under Section 80D, Section 80DD, Section 80DDB
The Income
Tax Act also allows for deductions to save tax if the expenditure has been
made by the taxpayer for insuring his own health or the health of his relatives.
Different amount of deductions are allowed under each of these sections which
help in tax saving depending on the type of Insurance Policy which is as
follows:-
The
Deduction allowed under Section 80D is Rs. 15,000 and Rs. 20,000 (for Senior
Citizens). Keeping into account the rising cost of Medical Expenses, Budget
2015 has increased the deduction allowed to Rs. 25,000 & Rs. 30,000
(for Senior Citizens).
Government
of India has in order to provide some relief to those who have a dependent with
disability or sever disability provided some relief’s from Income tax under
section 80DD of the Income Tax Act, 1961
Deductions
of expenses on medical treatment of specified ailments (such as AIDS, cancer
and neurological diseases) can be claimed under Section 80DDB. The maximum
amount of deduction allowed from gross total income on condition that no
medical reimbursement is received from any insurance company or employer for
this amount. In case of reimbursement the amount paid should be reduced by
the amount received if any under insurance from an insurer or reimbursed by an
employer.
- Tax Planning through Home Loan
If you have taken a Home Loan, you are
allowed to claim deduction for repayment of principal amount of home loan u/s
80C.
Moreover, you are also allowed to claim
deduction of interest paid on home loan under section
24. The maximum deduction allowed in some cases is Rs.2,00,000 and in some
cases there is no maximum limit of claiming this deduction for payment of
interest on home loan.
Tax planning for the purpose of saving tax
by taking a Home Loan is highly advisable as the Deduction allowed for
repayment of home loan can be claimed under 3 different sections resulting in
huge tax savings to the taxpayer.
- Save Tax through Education Loan u/s 80E
If a taxpayer has taken an education loan
for the higher education of himself or spouse or children or the student of
whom he is the legal guardian, he can claim deduction under Section 80E and
save taxes.
This deduction is only allowed for the
repayment of interest and not for the repayment of principal amount of
education loan. There is no maximum limit for claiming deduction under section
for the repayment of interest on education loan. Deduction under Section 80E is
only available for Individual taxpayers and not to HUF
- Tax Planning under Section 80CCG: RGESS
A taxpayer having annual income of less than
Rs. 12 Lakhs p.a. is allowed an additional deduction under Section 80CCG
for investing in Shares of specified companies and specified Mutual Funds. This
Deduction is called the Rajiv
Gandhi Equity Saving Scheme.
- Tax Planning of Long Term Capital Gains
If any Long Term Capital Gain is arising to
a taxpayer from the sale of any Long Term Capital Asset, he can claim exemption
from paying such Capital Gain Tax if he invests the amount of gain from sale of
property in specified instruments. Any Asset is considered as a Long
Term Capital Asset if that asset was held by the taxpayer for more than 3
years.
This Exemption
is considered very beneficial while doing the Tax Planning to save income tax
of a taxpayer.
- Income Tax Deductions for Donations u/s 80G
If a taxpayer makes a donation for charity,
social or philanthropic purpose or makes a contribution towards National Relief
Fund, then this donation can be claimed as a deduction
u/s 80G.
The Finance
Ministry of India has pre-specified the organizations to which the taxpayer
can make the donations and deduction allowed depends on the purpose for which
the donation has been made.
In some cases, 100% of the donation made is
allowed to be claimed as a deduction whereas in certain cases only 50% of the
donation made is allowed to be claimed as a deduction for the purpose of saving
taxes.
Donations made in kind are not allowed to
be deducted. Only the deductions made through cash or cheque are allowed to be
deducted.
- Long Term Capital Gains from the Sale of Equity Shares
To encourage the public to invest in equity
shares and mutual funds, the govt has exempted income tax on the long term
gains arising from the sale of equity shares, provided that these shares were
held for a period of more than 1 year). If the shares are held for a period
which is less than 1 year, tax would be levied @ 15%.
There are several other ways to save tax as
well (like Section 80GG,
Section
80U, Section
80GGC etc.) but they can’t be applied in case of a common man to help him
do his Tax Planning.
