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Do You Really Need To Save Tax?

Usually, this starts to matter when your CTC is Rs 5 lakhs or more per year.
Do you really need to make tax-saving investments?

It is that time of the year again when you start gearing up to make tax saving investments. It sometimes comes as surprise to some people that they may actually not need to make these investments. Here’s why:

Tax saving investments reduce your taxable income

Tax saving investments help if you have large taxable income. Usually, this starts to matter when your CTC is more than Rs 5 lakhs per year.

Not all of your salary is taxable

Many of your CTC components are not counted as taxable.

  1. PF employer contribution is a tax exempted income.
  2. House Rent Allowance: Some rules apply but typically 90% of the rent you pay.
  3. A standard deduction of Rs 50,000 from salary income is available to all employees.

And other components of your salary will help you get a tax break

Your contribution to EPF (listed as a deduction in your salary slip) is counted towards the Sec 80C deduction of Rs 1.5 lakh per year. 

You may have some existing commitments that will reduce your taxable income. 

  1. Home loan principal repayment of up to Rs 150,000 is counted towards Sec 80C deductions.
  2. Payment of tuition fee for your children up to Rs 1.5 lakh can be claimed as deduction u/s 80C for a maximum of  two children.
  3. Home loan interest payments up to Rs 200,000 for a self occupied home can be reduced from your taxable income
  4. Life Insurance premium: Whatever you pay will count towards Sec 80C limit of Rs 150,000.
  5. Medical Insurance premium: Up to Rs 25,000 of premium paid ends up being reduced from your taxable income.

Is your income still taxable?

Only after taking all of the above into account (and there are a few other, less common, breaks that we haven’t listed above)  you  would need to start tax planning and making additional investments.

Where should you invest to save tax?

If your income is taxable after taking all of these into account, you can save tax by investing in Tax Saving (ELSS) mutual funds. Investments in tax saving mutual funds count towards Sec 80C deductions. These are superior to other options because:

  1. Highest historical returns
  2. Minimum lock-in period
  3. Better taxability of returns
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