The Income Tax Act of 1961 is the governor and implementer in India. The IT Department is administered under CBDT which comes as a part of the Revenue Department under Finance Ministry of the Indian Government. An individual or a Hindu Undivided Family needs to file income tax as per the slabs mentioned by the finance minister for the year in concern.
At the end of the financial year, we have to submit documents regarding the income tax to be paid for that year. The tax that is charged by an individual is defined in four segments of the tax slab. If the income exceeds that the tax is levied automatically. In order to prevent paying a huge amount of taxes, the government gives a leverage of investments via which an individual can save tax as well as save for his/her future.
In order to save tax one can investment in various forms like mutual fund or insurance, PF, PPF, etc. Here are some of the common forms of investment.
Financial Market Investments:
Investments are basically saving money for the future that also helps to achieve long or short term financial goals. But one does not invest as per only benefits but also because it saves tax. Investment can be done in different ways as given below:
Funds: Mutual funds or Equity Linked Schemes helps you save money and gain benefits of saving taxes on income under 80C section of the Income Tax Act. These schemes come with the shortest lock-in tenure as compared to provident fund and fixed deposits. Also, they give you good returns on your amount invested.
ULIPs: Better known as Unit Link Insurance Plans, this scheme is available in market that provides dual benefits of insurance as well financial market trading. So the investments done under this scheme not only help you save tax but also give you a chance of high returns.
By investing in insurance, an individual can not only helps you secure your life for future and also save tax. Insurance investments are mostly done in two ways:
Health: With the increase in the expense of medical treatments, having a health insurance has become important. This health insurance gives dual benefits of medical expense and tax. As per the Income tax rule, you can cut your taxes by Rs. 15,000 -20,000 if you go for health insurance.
Life: This kind of insurance is a good form of investing and securing your life as you keep paying the premium every year. In case of any mishappenings, your immediate family can be financially supported. And all those premiums you pay under life insurance are covered under Section 80C of the Income Tax Act.
Borrowing money in the form of loans can help you save tax. Following are the types of loans that you can get:
Buying house or construction loan: If a person has taken a loan for either purchasing a new home or even for the construction of the old one, it can be shown as a part of investment and can be claimed as tax benefit under 80C starting from Rs.1,00,000 of the principal amount. And Rs.1,50,000 as interest under the section 24 of the Income Tax Act.
Loan for Home Renovations: Not many are aware of the fact that one can take loan for home renovation and save taxes.
Apart from the above specified heads for tax saving, some alternative instruments are also present in the market to save tax as mentioned below:
Tax Saving Deposits: The fixed deposits are the easiest form of savings. One can make a fixed deposit of up to 1,50,000 to save tax and they are available with all banks across the country as tax saving FDs. These deposits are having a lock-in period for 5 years.
Deposits in Post Office: The Time Deposit in Post office works the same way as the bank’s tax saving deposit but the major difference is that the amount can be as low as Rs.200 and the interest can be as high as 8.5% per annum. But the lock-n period remains the same for 5 year in order to claim tax benefit.
NSC’s: The National Saving Certificates (NSC) can be invested in post office with the investment as low as Rs. 100. They have two options of lock-in period – 5 years and 10 years and the benefits can be claimed for tax too.
PFs: The Provided Funds (PF) is also considered to be a great instrument for tax saving as they are done with the long horizon of saving for 15 years. The returns are subjected to an interest of 8.7% per annum and can invest from Rs. 500 – Rs 1,50,000 per annum. The deposits can also be claimed under Section 80C of IT act.
Deductions as Per Medical:
Allowances for Medical: If the tax payer has gone under any sought medical aliment, then this can be claimed under Section 10 of IT Act. The deduction can be up to Rs 15000 for one year. But this benefit can only be claimed by producing medical bills.
Disabled Dependants: The medical deduction can be claimed for a disabled dependant if it requires medical treatment. It can be claimed under Section 80DD varying from Rs. 50,000 to 100000, conditional on the severity of the disease. This is applicable to spouse, kids and the dependants upon the person claiming tax.
Allowances for Leave Travel: In most of the government organisation, the Leave Travel Allowance is given to its employee. This also seeks tax benefit under Section 10(5) of the Income Tax Act. But the benefits can only be claimed to the amount submitted by you. For example: if a company provides a limit of Rs. 25,000 and the claimant produces bills worth Rs. 20000 then the benefit will only be for Rs. 20,000 and not for those extra Rs. 5,000 which you cannot produce bill for.
HRA: This benefit is provided only to the salaried individual under Section 10(13A). If an employee lives in a rented apartment then he/she can claim house rent allowance. This is calculated on the actual rent paid minus 10% of salary and 50% of basic salary for those living in metro cities. (40% of the basic salary for those living in non-metro cities).
Fee for Education: If the claimant have children studying in school, then their tuition fees can be claimed under sections 80C and 10(14) of the Income Tax Act. The allowance of Rs. 100 per month for each child and up to two children is given for deductions and a permit up to Rs. 1,00,000 for tuition fee.
Social Cause Donations: If a person has a habit to donate for social cause anywhere in India then one has the right to even claim it under section 80G. The benefits can be claimed from 50% to 100% depending upon the scheme one invest. Since, all the charitable trust does not get covered in it so while donating, one has to keep a check on it and make donation if they want to claim deductions on it.
Stamp Duties on Registry of New House: If a person has purchased a new house then it is sure that a decent amount had been paid on stamp duty for getting the documents of the house to be registered. The entire amount is directly eligible for tax benefit under Section 80C.
Gains from Capital: The capital gains can be claimed under section 54, 54EC, 54F of the act. If a lot of profit has come from a huge sum of money that was invested in an asset for long term and then we are supposed to pay tax on it. But if this huge profit or gain is reinvested within period of time then you are not liable to pay tax. For example if u sold a house and the amount that is received from its sale is invested in purchasing another property within 2 years of the sale then this amount is exempt from income tax.
Tax Computation Example: Lets’ take an assumption that the taxable income of a person is Rs. 5,50,000 then the tax liability that a person has to pay is Rs. 35,000.
Now further if the person invests in life of insurance of Rs. 30,000 then the liability comes down to Rs. 5,20,000 (Rs 5.5 lakhs - Rs 30,000). And so the tax liability becomes Rs 29,870.
After that if the payer submits medical bills of worth Rs. 12,000 as medical allowance. After this, the taxable income comes down to Rs.5,08,000 and taxes that are due will be Rs. 27,398.
Now if we add HRA as Rs. 83,000, it will bring the taxable income down to Rs. 4,25,000 and giving a new tax liability of Rs. 15,965 which almost half lesser where the individual started.
So we can see from the above example that if we keep investing from time to time, the burden of paying tax keep reducing and our pockets start getting lighter.
Thus in order to save tax the only option is to start planning way in advance and keep investing round the year so that the complete burden does not come on the last days. This also allows the person to avail good opportunities as and when they come by investing.. In this way, the person who has to pay tax will not be running at the end of the financial year to calculate all the tax liability and put in a hefty amount too.
If the claim is not filled at the beginning of the year, the tax starts deducting from one’s salary towards the ending month of financial year. Thus with the above heads that are mentioned one can easily make all the necessary investment which suits ones pocket and is also saving good amount of tax for them. So the Individual or the Hindu Undivided Family should make sure to keep all the above things handy in mind, so that round the year the benefits that keep coming time to time from various financial institutions or the banks. A part from this an individual should also keep in mind that if he or she is not assessed to any tax then they must fill proper Forms 15G and 15H if they have invested in instruments like Fixed deposits in banks which are done for saving purpose but not for tax savings. Hence it is clear to be aware for all the things related to your hard earned income it’s saving and deductions.