Understanding the various strategies for saving taxes can prove invaluable when filing income tax returns. This article aims to explain the most prevalent and effective methods that salaried employees can adopt to reduce their tax liabilities within a given financial year. The Indian government offers numerous incentives to encourage higher savings rates and decreased taxable income.
While some of these methods are straightforward and widely utilized by professionals across the nation, others may require an employee to obtain their employer's approval to restructure their salary payout. Let’s dive in and explore the top methods that can help you to reduce your taxes.
Tax Saving Tips
1. Calculate your Salary
Calculating your salary accurately is crucial in ensuring that you save on taxes. Fortunately, using a salary calculator is a straightforward and convenient method to accomplish this. A salary calculator is an online tool that factors in various deductions such as taxes, insurance, and retirement contributions to calculate your net salary. By utilizing a salary calculator, you can estimate your take-home pay and better understand how your income is allocated toward taxes. This can help you plan your finances, identify opportunities to save on taxes and optimize your income. Therefore, it is highly recommended that you take advantage of salary calculators to accurately calculate your salary and make informed financial decisions.
2. Claiming Medical and Leave Travel Allowance for Tax Benefits
Many salary structures include provisions such as Medical Allowance and Leave Travel Allowance, but employees often fail to claim these allowances. As a result, these unclaimed allowances are paid out (after tax deductions) at the end of the financial year, leading to a slight increase in pay. However, by claiming these allowances through the submission of relevant bills and documents, you can save on taxes.
For instance, you can claim medical bills up to ₹ 15,000 in a financial year, which can translate into a tax saving of ₹ 5,000 if you fall in the highest tax bracket (above ₹ 10 lakh per year). Similarly, you can avail of leave travel allowance up to twice in a four-year block, but you must furnish all travel documents to claim the allowance. It's important to note that this allowance only applies to domestic travel on direct routes.
3. HRA & Home Loans
House Rent Allowance (HRA) is a tax-saving benefit available to anyone residing in a rented house or paying rent to their parents. However, if you or your spouse own a house in the same location, this benefit cannot be utilized. To claim HRA, you must provide rental receipts to your human resources department. The amount that can be claimed as an exemption is the lesser of the following three:
- The actual HRA received from your employer
- The rent that you pay minus 10% of your salary (basic + dearness allowance),
- 50% of your basic salary for people living in a metro city or 40% of your basic salary for people living in a non-metro city.
As rent constitutes a significant expense every month, availing of HRA can provide substantial tax savings.
4. Education Expenses
To reduce your taxable income, you may deduct the tuition fees paid for your own or your children's education. Please note that school fees typically encompass more than just tuition, including expenses such as library and transportation fees, which are not eligible for tax savings. In contrast, only the tuition fees component qualifies for tax deductions. Additionally, interest paid on education loans taken for yourself or your dependent can also be claimed as a deduction from your taxable income.
5. The investments made under Section 80C
One of the most widely used tax-saving methods in India is investing in options that qualify for deductions under Section 80C of the Income Tax Act. This provision enables you to save a portion of your income tax liability by investing in eligible options. The investments made during a financial year under Section 80C can entitle you to a deduction of up to Rs. 1.5 lakh. Various investment options, such as Public Provident Fund (PPF), Equity-Linked Saving Scheme (ELSS), National Savings Certificate (NSC), and others, are eligible for tax savings under Section 80C.
6. National Pension System (NPS)
Contributions made towards your National Pension System (NPS) account are eligible for a deduction under Section 80CCD of up to Rs 1.5 lakh. However, it is important to note that the NPS account has a lock-in period that extends until your retirement.
7. Under Section 80EE
As per Section 80EE of the Income Tax Act, first-time home buyers are eligible to claim a tax deduction on the interest paid towards their home loan. This deduction can amount to a maximum of ₹50,000 and is separate from the deductions provided under Section 80C and Section 24 of the Income Tax Act. By taking advantage of this deduction, eligible taxpayers can significantly reduce their tax liability while fulfilling their dream of owning a home.
8. Plan for Long-Term Capital Gains
When you sell your capital assets for a profit, the gains are subject to taxation under capital gains. Capital assets include property, with the exception of jewellery, artwork, and other similar assets. This category encompasses shares, mutual funds, and real estate. The duration of asset ownership determines the income tax on capital gains. Assets held for 36 months or less are considered short-term, while those held for longer periods are long-term. Shares, mutual funds, and zero-coupon bonds are deemed long-term assets after a minimum of 12 months.
There are ways to save on taxes. For long-term capital assets, you can consider utilizing indexation benefits. Usually, the larger the profit becomes, the more indexation benefits you can avail of. The government provides this benefit to account for the impact of inflation on the purchase. However, if indexation is used, a 20% tax is levied, whereas if the value is not adjusted for inflation, the tax is set at 10%. It's essential to keep in mind these factors while assessing tax liabilities on capital gains.
9. Keeping Money in a Savings Account
Under Section 80TTA of the Income Tax Act, interest earned on savings accounts is exempted from tax up to ₹ 10,000. However, senior citizens enjoy an extended limit of ₹ 50,000. Therefore, keeping money in a savings account can lead to tax savings. Nevertheless, it is important to do the math and ensure that this is the most suitable option for you.
Tax savings can be achieved if you understand the process and take advantage of all available deductions. It's important to stay organized and up-to-date on current regulations so you don't miss out on any potential tax benefits. With the right strategies, you can save a significant amount of money each year. Take the time to research your options, consult a professional, and make sure you're taking advantage of every opportunity to reduce your taxes. It's worth the effort!