How to Save Tax in India – Tax Saving Options and Tips

Every year begins on a good note, with new resolutions, promotions, hikes and what not. Fast-forward to the month of April, everybody is in a frenzy due to ITR filing and the end of the financial year. Employees are stuck in the offices with processing revenue and data for the company while also worrying about their individual tax filing. That’s when every Indian unifies on a single thought – how to save tax in India? This blog discusses about the ways and provides tips to do so!

Check out this video by Entri in Malayalam!

Introduction – Tax in India

Every year we see millions of people – including us and our acquaintances – scrambling to file their income tax returns while trying to minimise their tax liability, at the end of the financial year. There’s no doubt that planning taxes for the year is a hectic task, but, with the right knowledge and strategy paired along with timely decisions can help in decreasing the tax amount you are liable for. Before going into detail about that, let us skim through what is exactly the point of tax.

India follows a tax system which is deducted on income, wealth, and property. The individual income gets a levy by the income tax and the central government does the same on corporates. The wealth tax gets to levy individuals and corporates based on the net value of assets they hold. Now, why are these taxes levied?

The government utilises these funds to get for the smooth functioning of the country. The taxes you spend are used to build roads, railways, airports, buildings, etc. all for the citizens to make use. The percent of tax levied is based on the income earned as per the various tax slabs in India. Whether you’re a salaried individual, a freelancer, a business owner, or earn an income from your investments, you must pay taxes to the government as per the Income Tax Act within the stipulated time.

Now, searching for options to save the tax amount is a fair thing to do. Who wouldn’t want to miss out on such tax-saving strategies and options that literally saves their money from being paid as a tax. This blog, gives you options on how to save tax in India and strategies that will not leave a big hole in your purse!

Income Tax Slabs

Before diving into the strategies for tax deductions, let us understand how the tax slab is in India under the New Regime for individuals under the age of 60 years.

Evidently, an income up to 3 LPA is free of tax deduction, which is seen as a major move to help the lower earning class in India.

Tax Saving Options Under Different Sections

Here is the list containing the different tax saving options that are under various sections. We’ll be discussing some of the most popular options used by Indians to lessen their tax-burden:

• Section 80C: Common Tax Saving Option

The most popular and common tax saving option availed by Indians is the Section 80C, which allows exemption up to 1.5 lakhs. Basically, the existence and purpose of 80C is to encourage people to invest and thus save money. These are the instruments under Section 80C for you to invest and save money:

• • PPF

The Public Provident Fund is government-backed long-term savings scheme that helps you save money and earn interest without paying tax on it. You get to invest from ₹500 to 1.5 lakh and earn a fixed interest rate that is compounded yearly. Well, you might think, what’s so great about this. Well, the best part is that the amount you invest, the interest you earn, and the money you get after a lock-in period of 15 years is all tax-free. That’s why it is a great long-term investment and a suitable option for retirement.

Check your PPF returns here.

• • Home Loan Principal Repayment

This instrument is the part of your EMI that pays off the actual amount borrowed, excluding the interest. Under Section 80C, you get to claim a tax deduction of up to 1.5 lakh per year. However, this is only applicable if you have taken a loan for the buying or building a house and if it is not sold off within 5 years of purchase. Basically, it lets you save up on some money while you purchase or build an asset.

• • 5 Year Tax Saving FD

This special FD lets you invest a lumpsum amount for a period of 5 years which is qualified for a tax deduction. This low-risk option is offered by banks and is a good option for disciplined investing, even though your interest may be taxed. On the whole, this option guarantees safety for your investment.

Check FD Returns here.

• • EPF

If you are an employee or an employer, you must have heard about the Employee Provident Fund. Each month a certain amount is credited to a PF account from both the employer and employee. This amount makes eligible to for a tax deduction up to 1,5 lakh. The amount credited into the PF account accumulates over the years with interest and when you withdraw it at your retirement, it is completely tax-free. It’s a safe and automatic way to build your retirement fund and save on some taxes as well.

• • NSC

Ever heard of people depositing money in the post-office? The National Savings Certificate is a government-backed savings scheme through the post-offices. With a maturity period oof 5 years and a guaranteed interest rate, the amount you invest qualifies for a tax deduction. While the interest is taxable, since the money is reinvested – except during the final year – it automatically qualifies for a deduction too. NSC is regarded as a safe, low-risk option for those looking to save and reduce their tax burden.

• • Life Insurance Premiums

These premiums paid for a policy taken for yourself, your spouse, or your children qualify for a tax deduction under Section 80C, up to 1.5 lakh. Short term policies and traditional life policies are inclusive in this bracket. The motive is to take up policies that can provide financial stability in the case anything happens to you. To qualify for the tax benefit, the premium should be less than 10% of the sum assured for.

• • ELSS

Primarily a type of mutual fund, Equity Linked Savings Scheme invests in stocks while providing tax benefits under Section 80C, up to 1.5 lakh. Additionally, it has the shortest lock-in period of 3 years among all the 80C options. Due to its investments in equity markets, the returns can be considerably higher than traditional options, but they carry risk. ELSS is popular for those looking to save tax while aiming for higher long-term growth through the stock market.

Check Mutual Funds Returns here.

• Section 80CCD(1B): NPS Contribution

This option is another popular one due to an additional tax deduction of up to ₹50,000 for contributions made to the National Pension System. Since this is well above the 1.5 lakh limit of Section 80C, it is considered a great way to save more on taxes. You can open and NPS account and contribute regularly, which is then invested in a mix of equity, government bonds, and corporate debt, giving you market-linked returns. It’s a smart option for building a retirement corpus while enjoying extra tax savings.

• Section 80D: Medical Insurance Premiums

This section provides with tax deductions for the premium you pay for you and your family’s medical/health insurance. You get to claim up to ₹25,000 per year for you, your spouse, or your children; an additional ₹25,000 if you pay for your parents’ insurance which can go up to ₹50,000 if they are above 60 years of age. It is considered as a helpful way to prioritise your family’s health and save on taxes at the same time.

• Section 80E: Education Loan Interest

Section 80E allows you to make a claim on the interest paid on an education loan taken for higher studies. This loan can be either for yourself, your spouse, your children, or any child to whom you are a legal guardian. There’s no specific upper limit on the amount you can claim, but remember,  the tax deduction is only for the interest part of the loan. You can avail this benefit for up to 8 years starting from the instance you begin repaying the loan.

Check Education Loan EMI here.

• Section 24(b): Home Loan Interest

Allows you to claim a tax deduction on the interest paid on a home loan for buying, building, or renovating a house (not to b confused with Home Loan Principal Repayment from 80C which is for the principle). Is the property is self-occupied you can claim up to 2 lakh and if it is rented out, there is no upper limit on the amount you can claim. Additionally, this is only applicable if the construction or purchase is completed within 5 years.

Check Home Loan EMI here.

• House Rent Allowance (HRA) under Section 10(13A)

HRA allows salaried individuals who live in rented houses to claim tax exemption on the HRA they receive from their employer. It is calculated based on your salary, the rent you pay monthly and the city which you dwell in. You cannot avail this benefit if you are living in your own house. It helps in managing your housing costs by reducing the taxable income.

Common Mistakes To Avoid

When it comes to planning tax, it is common to make some mistakes, especially if you are doing it for the first time. There’ll always be some things that everyone tends to overlook and we have listed some of the most common mistakes that you can avoid to gain maximum benefits.

Delaying Investments

There is no doubt that there are a lot of procrastinators among our friends and families and miraculously, they might get the job done within the specified time. However, the same should not be done when it comes to investing with tax deductions in mind. Making tax-saving investments at the end of the financial year leads to bad financial decisions like putting your money into products that doesn’t suit your goal or locking funds in low-return instruments just to save tax.

Instead, plan your choices and investments at the beginning of the financial year. If needed, spread them out through many months so that you get relieved from financial stress, choose better products and align investments with your long-term goals.

Not Securing Receipts

Physical bills are usually not encouraged nowadays, due to environmental reasons. However, it would be wise to collect and secure digital bills and receipts that helps you in claiming deductions. These include premium receipts, loan agreements, rental agreements, etc. Try to maintain a dedicated folder or a digital folder to secure your bills and receipts.

Investing blindly

Many people invest in products just because it provides tax benefits. They proceed investing without considering its risk, lock-in period, or purpose. Imagine, you invested in a 5-year lock FD when you actually needed liquid cash the next year. To prevent such mishaps, ask yourself some questions before committing:

• Is it safe or market-linked?
• What is the lock-in period?
• Does it align with my financial and long-term goals?

Weigh the answers and then commit to the investment.

Not Reviewing the Tax Regime

Many people are unaware that there are two regimes to choose for your financial year. And these, can be changed every year as well, according to the changes in your income, exemptions, or deductions change. This is why a thorough comparison is required every year to choose the best one. Check out a tax calculator or consult a tax professional to decide which regime aligns with your goals.

Conclusion: Make The Right Choices

Tax planning can be a bit of a hassle if not approached in the right way. The end result may lead to bad financial decisions and less savings. By making sure you understand the sections and the instruments, you get to avoid the common mistakes and choose the right strategies that would benefit you. Making smart choices can you lead you to growing your wealth relieve you of the yearly March rush. Plan your financial year now!