The government levies tax at different rates based on your net taxable income. Paying taxes is important because it is a direct revenue collection for the government. However, the Income Tax (IT) Act provides several deductions that reduce your tax liability while filing your income tax return (ITR).
Such deductions will help you save a significant amount when done correctly in a timely manner. When you undertake accurate tax planning, these deductions are subtracted from your gross income. Tax is then levied on the balance amount as per the current rates.
Here are seven effective ways to save your taxes:
1.Sections 80C, 80CCC, and 80CCD
These sections in the Income Tax Act offer tax deductions to encourage more people to save higher amounts. When these savings are invested in tax-saving instruments, you not only reduce your tax liability but can also enjoy capital appreciation. Some of the financial instruments that offer tax benefits under these sections include:
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- Five-year fixed deposits (FDs)
- Life insurance plans
- Equity mutual funds
- Employee Provident Fund (EPF) contributions
- Pension plans
When you invest in the aforementioned instruments, you need to bear in mind that the total deduction is capped at INR 1.5 lakh per annum. An additional deduction of INR 50,000 is available under section 80CCD when you invest the same in the National Pension Scheme (NPS). This deduction was introduced in Budget 2015.
2.Sections 80D, 80DD, and 80DDB
The Income Tax Act also offers deductions when you purchase a health plan for self or your family members. These sections provide different health insurance tax exemptions depending on the type of policy.
- Section 80D
An amount of INR 25,000 is allowed as a deduction when you buy the policy for self, spouse, or dependent children. If you are a senior citizen, the section 80D medical insurance tax benefit increases to INR 50,000.
- Section 80DD
Tax benefits under this section are available to individuals and Hindu Undivided Family (HUF) for dependent family members of people who are differently-abled. The deduction if the disability is over 40% but less than 80% is capped at INR 75,000. The benefits are capped at INR 1.25 lakh per year if the disability exceeds 80%.
- Section 80DDB
This section offers tax benefits for the treatment of an individual suffering from specific diseases. Such deductions are available only to individuals and HUFs. Moreover, this health insurance tax benefit is available only if the treatment is for self or dependent family members such as spouse, parents, siblings, or children. The deduction is the least of actual expenses or INR 40,000 per year.
The principal on home loans is eligible for tax benefits under section 80C. Additionally, section 24 allows a maximum deduction of INR 2 lakh paid as interest on the home loan.
If you have availed of an education loan for higher studies for self, spouse, or children, you may claim deduction under section 80E. The deduction is available only on the interest paid on the loan amount.
5.Rajiv Gandhi Equity Saving Scheme (RGESS)
If your annual income is less than INR 12 lakh, section 80CCG allows a deduction when you invest in specific mutual funds or equity shares under the RGESS. However, such deduction is allowed only to first-time investors and may be slightly complex.
6.Long-term capital gains (LTCG) through property sale
Assume that you hold a property for a long-term. You sold the property during the financial year and earned long-term capital gains. You may claim exemptions on these LTCGs when the profits are invested in specific instruments.
7.Donations under section 80G
If you contribute to the National Relief Fund or donate to a philanthropic purpose, you may claim exemption under section 80G. The eligible charitable organizations are listed by the Finance Ministry. In some instances, you may get a 100% deduction and in other instances, the deduction may be capped at 50% of the donated amount.
There are additional ways to save taxes under sections 80GG, 80U, and 80GGC. However, most of these are not applicable to most individuals and are not beneficial when you are planning your taxes.