The intricacies of the tax system are something that many books have been written about. If there’s a takeaway from it, it is this: when it comes to taxes, we give what we must and save what we can. It is our duty as citizens to file our taxes accurately and responsibly. We must also plan our own long-term finances in a way that is sustainable and helps us meet our life goals. It is for this reason that there are various provisions under the Income Tax Act of 1961 that enable us to save on our taxes.
In order to understand why we should be saving on our taxes, it’s perhaps necessary to understand why we should be saving at all and the reason is simple; savings are essentially the lifeblood that allows us to reach any financial goal in our life.
Whether it’s a vacation, education, insurance or investment, savings make it that much easier for us to secure these for ourselves. One should start saving as early as possible in order to plan their finances and goals appropriately. Traditionally, according to the 50-30-20 rule, 50% of your income should be spent on necessities, 30% on discretionary purchases/personal spending and 20% should go to your savings. Given the economy and the need to account for inflation, we believe that 30% should go into savings while 20% would be for personal spending.
It is the time of the year when you will file your Income Tax Returns for the financial year 2020-21 and assessment year 2021-22.
Let’s dive into 5 important provisions that will help you with tax saving.
1. Under Section 80C
Section 80C is a popular section amongst taxpayers since it allows them to reduce their taxable income by making tax-saving investments (investment made specifically for the purpose of availing a deduction on taxes). This section allows a maximum deduction of Rs 1.5 lakh every year from a taxpayer’s total income.
You can choose to invest in Public Provident Fund (PPF), Employee Provident Fund (EPF), Life insurance premiums, equity-linked saving schemes, principal amount payment towards home alone, pension plans including the National Pension Scheme.
2. Under Section 80D
Section 80D allows for a deduction on the premium paid for medical insurance. An individual or HUF can claim a deduction of Rs. 25,000 on insurance for themselves, their spouse, and dependent children. An additional deduction of Rs. 25,000 for the insurance of their parents is allowed if the parents are below the age of 60. If the parents are above the age of 60, the deduction amount is Rs. 50,000. If both spouses work and buy medical insurance, both sets of parents can be insured and the deduction will lead to great tax savings.
3. Under Section 80DDB
Section 80DDB allows for a deduction on medical expenditure for oneself or dependent relatives. For individuals and HUFs below the age of 60, a deduction of up to Rs. 40,000 is allowed for such medical expenses. For senior and super senior citizen individuals/HUFs, a deduction of Rs. 1 lakh is allowed for medical expenses. Reimbursements for medical expenses by an insurer or employer can also be reduced from the deduction the taxpayer can claim under Section 80DDB. Since every household has medical expenses, this is a section that will help taxpayers save without having to go out of the way.
4. Under Section 80G
This section allows for deductions on donations towards social causes. Certain donations qualify for a 100% deduction whereas some donations qualify for a 50% deduction with a qualifying limit or cap on how much can actually be deducted from your taxes. Section 80G is not just a great tax-saving investment but also includes the element of doing social good. Lots of High Net Worth Individuals (HNI) make use of this section in order to save taxes but it is by no means restricted to HNIs since, when used correctly, it is a great way to save taxes and make a positive impact on society at the same time.
You can choose to donate to fund set up by Central/State governments ad several institutions that are mentioned in Sec 80G(5). Organisations usually mention this prominently so watch out for the disclaimer.
5. Under Section 24
Section 24 allows for a deduction on home loan interest up to Rs 2 lakh if the house property is self-occupied or vacant. However, if the house is rented, the entire interest amount can be deducted from the income generated from the property. This section is another popular tax-saving technique used by a lot of Indians since it allows them to own property and generate tax-free income from that property as well.
You can avail an additional deduction of Rs. 50,000 for an amount deposited to a National Pension Scheme (NPS). Availing a deduction on interest paid for an educational loan is another smart way to save tax. Under Section 80E, this deduction is a great way for parents to save on their children’s education.
One can also save on interest income up to Rs 10,000. Interest generated from a savings account with a bank, savings account with a cooperative society carrying on the business of banking, and savings account with a post office are applicable for deductions.
Though these are the most used deductions claimed by taxpayers due to the deduction amounts, it’s important to note that not all these ways might be applicable to you. Choose the sections applicable to you and make the most of them. When it comes to tax saving, every little bit can count. Handling your taxes effectively has a positive impact on your disposable income, your savings and, consequently, your financial goals as well. So, read up, make decisions that suit your needs best and save smart.
The author is Lizzie Chapman, CEO and co-founder, ZestMoney. The views expressed in this article are those of the author and do not represent the stand of this publication.
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