How to Save Income Tax in India
Learn all about how to Save Income Tax in India
Approximately 1.46 Crore people have filed tax returns in the financial year 2018-19. A total of ₹11.17 Lakh Crore has been generated as revenue from such tax collection from the masses, as reported by the Central Board of Direct Taxes (CBDT).
As the CBDT facilitates the more intricate tax collection and related services, individuals should develop an idea regarding how to save tax in India subject to the income tax slab applicable.
Income Tax Slab Rates in India
| Taxable income | Income Tax Rates |
|---|---|
| Up to ₹2.5 Lakh | Nil |
| ₹2.5 Lakh – ₹5 Lakh | 5% of total income exceeding ₹2.5 Lakh |
| ₹5 Lakh – ₹10 Lakh | 20% of total income over and above ₹5 Lakh + ₹12,500) |
| Above ₹10 Lakh | 30% of the total income over and above ₹10 Lakh + ₹1,12,500) |
An additional health and education cess at 4% of the total tax payable is levied. A surcharge of 10% of the total income also has to be paid by people earning higher than ₹50 Lakh annually. Such cess rises to 15% when the income is higher than ₹1 Crore.
Even though such rates might seem overwhelming, the Central Government maintains various provisions under the Income Tax Act of 1961, to ease your annual financial burden.
You can learn comprehensive details regarding how to save income tax in India in this article, which will help you save substantially through numerous waivers and exemptions.
How to Save Tax on Salary in India?
We tend to invest in various items which enhance our quality of life but can also lead to severe financial strain. To ease this burden substantially, the government provides help in the form of income tax waivers on direct taxes levied on your total salary.
Avail a Home Loan and enjoy Tax benefits under Section 80C
Availing a home loan is associated with dual benefits, as it comes with diminished tax liability, along with the satisfaction of owning your own home.
Many government-mandated schemes such as PMAY (Pradhan Mantri Awas Yojana) and DDR (Delhi Development Authority) Housing scheme caters towards making housing affordable in India, while Section 80C and 24(b) diminish monetary liability through reduced tax burden.
- Total annual income spent towards repayment of the principal borrowed amount is eligible for deductions of up to ₹1.5 Lakh under Section 80C.
- Tax exemption on interest section of the home loan is available under Section 24(b), valued up to ₹2 Lakh annually.
Additionally, if you let-out the newly acquired property on rent, the entire interest component is exempt from annual income tax calculations.
Individuals purchasing a property for home construction can also benefit from section 24(b), provided the construction process is completed within five years.
If you are a first-time homeowner, you can claim an additional reduction on your annual tax liability under section 80EEA.
Total waiver of up to ₹1.5 Lakh [in addition to Section 24(B)] can be claimed, providing the stamp duty value of the property is less than ₹45 Lakh.
2. Buy a Health Insurance Policy
With rising medical costs in India, coupled with deteriorating health quality owing to multiple factors, availing health insurance is becoming a necessity. Such insurance policies reduce the financial strain of individuals and their respective families at times of failing health conditions.
Tax benefits are extended by the government to stimulate individuals to avail such insurance policies, which allows them to get quality healthcare at premier medical institutions for zero or low additional charges.
Individuals can claim tax deductions on the portion of their annual taxable income spent towards premium payments under section 80D. Different amounts are exempted from such income tax calculations, depending upon the age of the insured, respectively.
| Eligibility | Deduction Under Section 80D |
|---|---|
| Health insurance for individuals, spouse, children (below 60 years) | Up to ₹25,000 |
| For individuals and parents (below 60 years) | Up to ₹50,000 (₹25,000 + ₹25,000) |
| For individuals (below 60 years) and Senior Citizen parents | Up to ₹75,000 (₹25,000 + ₹50,000) |
| For individuals and parents (both above 60 years) | Up to ₹1,00,000 (₹50,000 + ₹50,000) |
The above rates are as per the Income Tax Act, 1961 as amended from time to time.
Provision for tax benefits on the total amount spent on health check-ups is also present under Section 80D, with a maximum cap of ₹5,000. Such exemptions are included within the premium waivers amounting to ₹25,000.
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3. Undertake Investments
Investments in the capital market and government-mandated schemes can lead to wealth accumulation through higher returns, as well as tax-saving benefits.
You can learn about how to reduce income tax in India under Section 80C by investing in various instruments.
If you are willing to assume the risk factor, you can choose to opt for investment tools of the stock market, such as ELSS (Equity Linked Savings Scheme).
This tool comes in with a three-year lock-in period, and total investments are eligible for tax waivers of up to ₹1.5 Lakh.
Also, if total capital gains are below ₹1 lakh, no tax has to be paid on the profits realised.
You can also choose to invest in 5-year fixed deposits to enjoy such tax exemption benefits, without assuming any risk.
All investments amounting up to ₹1.5 Lakh can be claimed for tax waiver under Section 80C as well.
4. Park your Money in Government Schemes
Numerous government-mandated schemes offer high returns on total investments along with tax waivers. Individuals can claim up to ₹1.5 Lakh spent on such investments as tax waivers on total annual income, under Section 80C of the Income Tax Act.
Tax exemptions can be availed by investing in the following tools:
- Senior Citizen Savings Scheme (SCSS)
- Sukanya Samriddhi Yojana (SSY)
- National Pension Scheme (NPS)
- Public Provident Fund (PPF)
- National Pension Scheme (NPS)
5. Opt for Life Insurance Plans
Life insurance policies enjoy tax waivers on both premium payments and the amount disbursed on maturity, respectively.
Income Tax Act contains provisions under Section 80C for premium payments, and Section 10(10D) for the sum assured received on maturity or premature demise of the insured, whichever is earlier.
Nonetheless, the tax benefits of up to ₹1.5 Lakh spent on annual premium can be claimed under Section 80C, provided it is less than 10% of the total sum assured, if the policy is taken after 1st Aril 2012.
In case the policy was availed before 1st April 2012, claims under Section 80C can be made if the total premium payments do not exceed 20% of the sum assured.
Sum assured realised on such life insurance policies is also exempt from any tax calculations under Section 10(10D), provided it conforms to the above-stated rules.
Purchase or renewal of life insurance cover, along with annuity payments on such policies through yearly salary is eligible for tax waivers of up to ₹1.5 Lakh under Section 80CCC as well.
Under section 80CCD(1), the only certain pension funds under section 23AAB are eligible for waivers of up to ₹1.5 Lakh.
Also, if individuals decide upon investing in Unit Linked Insurance Plans (ULIP), the insurance section enjoys tax waivers, as stated above.
The portion of investment channelled to the stock market also does not attract any long-term capital gains (LTCG) tax.
However, ULIPs come with a minimum lock-in period of five years, prior to which, no money can be withdrawn from the scheme.
6. Claim Exemptions if you live on Rented Premises
Tax exemptions under House rent allowance (HRA) are granted under Section 10(13A). Your salary break-up must include an HRA component to avail compensation against the same.
However, the total tax exemption on rent paid is calculated as the minimum value of three components, stated as:
- Annual HRA received.
- 50% of the yearly salary if the individual is residing in a metro city (40% in case of non-metro cities).
- Total annual rent – 10% of the basic salary.
In case your monthly income does not include the HRA component, you can claim tax benefits on yearly rental expenses under Section 80GG. The total deductions on income tax are calculated against the minimum value of the following conditions –
- Rent payment of up to ₹5,000 per month.
- 25% of the gross total income.
- Total rent minus 10% of basic salary.
Thus, you can learn about how to save tax in India on salary through house rent allowance by keeping in mind the above-stated points.
7. Donate to Charity
Donations made to specific organisations in cash are eligible for tax waiver amounting to ₹2,000 under Section 80G of the income tax act. Wire and bank transfers, on the other hand, enjoy complete or partial tax exemptions, respectively.
If you are donating to an organisation facilitating scientific research or rural development, you are eligible to enjoy deductions under Section 80GGA.
Partial waivers in case of cash donations are granted, while transfers made through cheque or draft enjoy complete tax waiver.
8. Support a Political Party
All donations made to political parties or contribution to electoral trusts are eligible for tax waivers, under Section 80GGC of the Act of 1961.
The entire amount donated to your preferred political party is exempted from any income tax calculations, provided the organisation is registered under Section 29A of the Representation of People Act of 1951.
Such donations have to be made through wired or banks transfers itself, cash deposits are not allowed.
Few other Tax Saving options in India
All these above methods will give an inclusive idea about how to save tax in India. Apart from this, several other pointers should be kept in mind while looking for tax saving methods, such as:
All these points will substantially reduce your total taxable income for a stipulated financial year, as well as help you know more about the various government-mandated provisions. Make sure you submit the income tax return form and Form 16 provided by your employer to get subsequent proceeds.
FAQs about Saving Income Tax in India
Can I submit an income tax return (ITR) form online?
Yes, you can fill and submit your ITR form online by visiting the official portal of the Income Tax department of India.
Do I have to pay tax on the accrued interest on my savings account?
You can claim tax waivers on interest earned on savings accounts, provided the total interest income is less than ₹10,000. Such a tax rebate is given under Section 80TTA of the Income Tax Act.
What if my income is below ₹5 Lakh?
The interim budget of 2019-20 announced that total applicable tax on individuals lying in the income slab of ₹2.5 – ₹5 Lakh can claim the entire taxable amount under Section 87A. Thus, your tax liability effectively becomes zero.