Saving tax every year requires systematic and well ahead of time planning. Before you can begin to save tax, you should know these 4 basic points about saving on income tax.
#1. If you pay rent then you can use it to save tax
House Rent Allowance (HRA) is a key source of tax saving. HRA forms part of the salary you receive from your employer and is subtracted from your gross income.
Lowest of the three is deducted:
(i) Actual HRA provided by the employer
(ii) 50% of Basic plus Dearness Allowance if situated in Delhi, Mumbai, Chennai or Kolkata; otherwise 40% Basic plus DA.
(iii) Actual house rent paid, minus 10% of Basic + DA
Make sure you take rent receipts from your house owner. If the annual rent paid is in excess of Rs. 1,00,000, copies of registered lease agreement and home owner’s PAN card must be submitted.
#2. You can save tax and grow wealth at the same time
Certain tax saving mutual funds such as ELSS Funds, EPF, PPF, NSC, etc. made in accordance with section 80C of the Income Tax Act, give tax rebate. No tax has to be paid at the time of investing, earning and redemption, subject to a maximum limit as prescribed under the section. More on these investments here.
#3. Some expenses are tax deductible
There are certain personal expense allowances provided by your employer which are eligible for exemption from tax. Some of them are:
1. Medical Expenses including preventive health check-ups
2. Medical Insurance Premium
3. Education Loan Interest
4. Housing Loan Interest and Principal
5. Life Insurance Premium
6. Dependents Healthcare
The exact amount of tax deduction from different tax saving instruments varies.
#4. Doing good can save you taxes too
Donating to a charitable cause can help you save tax. Section 80G of the Income Tax Act allows you to deduct up to 10% of your adjusted gross income by donating to certain charities.