- How to save tax by investing in Life Insurance Policy?
- How to Save Tax By Investing in ELSS?
- Public Provident Fund (PPF)
- How to save tax through Sukanya Samridhi Yojana?
- How to save tax with National Savings Certificates NSC?
- Tax-savings fixed deposit
- Senior Citizen Savings Scheme
- School Tuition Fees
- Tax savings with NPS under section 80CCD (1B)
- Health Insurance premium under section 80D
- Repayment of an education loan under section 80E
- Rent paid and no HRA received
- Interest component on home loan
- Interest earned from savings bank account
- Medical expenses towards disabled dependent
- Treatment of specified diseases u/s 80DDB
- Donations made to charitable institutions
- How to calculate the gross adjusted total income?
How to save tax or rather how to plan your investment is a question that bothers each one of us. While tax planning is crucial, effective investment planning is also essential. The ideal time for investment planning to ensure you save income tax is the beginning of the financial year. This will ensure you don’t pay more taxes and save taxes in India along with year long returns on investments.
While we all aim to save taxes in India why only few of us succeed. The answer could be lack of knowledge or struggles in fitting the best-suited choice in your investment planning. In this article we have listed each of the tax saver investment options in India to help you compare and take a well-informed investment decision.
While planning on how to save tax in India, you must also ensure that your goal is not just tax saving. The goal must be to invest in the best-suited investment option along with income tax saving. We have listed the tax saving options for 2020-21 in this article.
How to save tax by investing in Life Insurance Policy?
Life Insurance is one of the most important investment products in India. It ensures that one’s family is financially independent in the case of an event of death. By purchasing a life insurance policy, the taxpayer can avail of the benefit under the income tax act.
Under section 80C of the income tax act, the premium paid towards the purchase of a life insurance policy qualifies for deduction up to Rs. 1.5 lakh. Furthermore, as per section 10(10D) income on the maturity of the policy tax free if the premium is not more than 10% of the sum assured. In the case wherein the money goes to the nominee’s of the person insured, the same remains as tax exemption in the hands of the nominee.
In terms of the deduction under section 80C, the taxpayer can claim 20% of tax deduction on the premium paid. The following conditions also apply:
1. The taxpayer purchases a life insurance policy on or before 31st March 2012
2. The policy is in his own name or in the name of their spouse or child
In case the life insurance policy purchase date is after 1st April 2012, the premium is eligible for tax deduction up to 10% of the sum assured.
How to Save Tax By Investing in ELSS?
Equity Linked Savings Schemes are mutual fund investment schemes that invest a large percentage of their portfolio in equity. Furthermore, the fund has a mandatory lock in period of 3 years which is the shortest amongst all the investment products.
Investment in ELSS funds qualifies for deduction under section 80C of the income tax act up to a maximum of Rs. 1.5 lakh. Further, both lump sum investment and the amount invested through a systematic investment plan (SIP) qualifies for the deduction. Since ELSS funds invest a large amount in equity, there is always some inherent risk.
ELSS funds provide the dual benefit of capital appreciation and tax-savings which makes it one of the most popular investment products amongst investors.
In general, taxpayers who want to claim tax deductions of up to Rs 1.5 lakh under Section 80C provisions and are willing to take some risk should consider investing in ELSS. Moreover,these mutual funds are equity-oriented mutual funds. It invests a minimum of 60% of their portfolio in equity and equity-linked instruments. This makes it crucial to keep their investment position for a long period of time in order to reap the benefit of the returns.
The Public Provident Fund has always been a popular investment option amongst the taxpayer. One of the major reasons for this popularity is the fact that PPF falls under the category of exempt-exempt-exempt tax status. An investor can open a PPF account with a bank or post office.
Taxpayers can claim a deduction under section 80C of the income tax act for the amount invested by them during the financial year. The maximum amount eligible for deduction is Rs. 1.5 lakhs. Since PPF falls under the exempt category, the interest and maturity amount is exempt from tax.
PPF account comes with a lock-in period of 15 years and it allows the investors the following options at the end of the maturity period:
- Withdrawal of proceeds from the account
- Continue for another 5 years
How to save tax through Sukanya Samridhi Yojana?
Sukanya Samriddhi Yojana has become one of the most important investment schemes. It was launched in 2015 by the government of India as a part of the Beti Bachao Beti Padhao campaign and had a major impact on the general public. The scheme allows a fixed income investment through which the taxpayer can invest regular deposits and at the same time earn interest on it. Investing in Sukanya Samriddhi Yojana also qualifies as an eligible deduction under section 80C of the income tax act.
The government of India determines the rate of interest on a quarterly basis and is payable on maturity. The scheme comes with a lock-in period of 21 years and will mature after the expiry of 21 years. A minimum deposit of Rs. 250 is mandatory per year for 15 years. Failure to pay the minimum amount in a year will lead to disconnection of the account. To re-activate the account, the investor must pay a penalty of Rs. 50 needs along with the original Rs. 250 deposit.
In order to open a Sukanya Samriddhi account, below is the eligibility criteria that need to be satisfied:
- Only girl children can claim the benefits of this scheme.
- The girl child cannot be more than 10 years of age. A grace period of one year allows the parent to invest with 1 year of the girl child being 10 years of age.
- Lastly, the age proof of the daughter
How to save tax with National Savings Certificates NSC?
A government of India initiative, a national savings certificate is a fixed income investment scheme that aims at the small and middle-income investors to invest and earn handsome returns. Investors consider it a low-risk investment and as secure as the Provident Fund. The investors can invest as per their income profile and investment habits.
Investment in NSC qualifies for deduction under section 80C of the income tax act up to Rs. 1.50 lakh. Apart from providing the benefit of tax exemption, it provides the investor with complete capital protection and guaranteed interest. The following are some of the features of the NSC:
- 6.8% annual interest as a guaranteed return.
- Deduction under section 80C up to Rs. 1.5L
- Investment can be made as low as Rs. 1,000 (or multiples of Rs. 100). The investor can increase his/ her investment amount as per convenience.
- On maturity, the investor receives the entire maturity value. However, the taxpayer will have to pay tax on the maturity amount.
- NSC does not allow an early exit. Although an investor can use it as collateral security in case of loans from the Bank or NBFC.
Fixed deposits are considered one of the safest investment products. It’s safer than equity investments in terms of risk and returns. The banks decide the interest rates and depend on several factors. The following are some of the features of a tax saving fixed deposit:
- Investment in tax saver fixed deposit eligible for deduction under section 80C while calculating the taxable income.
- A minimum lock-in period of 5 years
- Senior citizens can get a higher interest rate on investment
- In the case of a joint account, the primary holder can avail the benefit of tax deduction while calculating the taxable income
- Tax saver fixed deposits do not allow any premature withdrawal. However, once the 5 year lock-in period has been completed, investors get access to premature withdrawal. The terms and conditions for premature withdrawal vary from bank to bank.
A Senior Citizen Savings Scheme is an income tax saving scheme for senior citizens who are resident in India. The scheme is available for investment through banks and post offices and offers one of the highest rates amongst the various savings schemes.
Depositors can make an investment with a minimum amount of Rs. 1000 and in multiples thereof. The scheme also provides the facility of investment through cash provided the investment amount is less than Rs. 1 lakh. The deposits made into the scheme matures after a period of 5 years. The depositors also have the option to further extend the maturity period by another 3 years.
Investment in Senior Citizen Savings Scheme qualifies as a deduction under section 80C up to Rs. 1.5 lakhs from the taxable income. The interest on such deposits is fully taxable and liable for tax deduction if the interest is above Rs. 50,000. Deposits made into a Senior Citizens Savings Scheme account are compounded and paid out annually.
School Tuition Fees
The income tax act provides a deduction under section 80C of the income tax act for payment for school fees of children. Tuition fees paid to any registered university, college, school, or educational institution qualifies for deduction up to Rs. 1.5 lakh.
However, only the tuition fees qualify for deduction under the income tax act. Any other fee like donation, development fee, etc. even if paid to such an institution does not qualify for the deduction.
The income tax act allows both the parents to claim the deduction to the extent of the amount paid by them. So if the total fee paid by the parents is Rs 1 lakh, of which the father has paid Rs 40,000, while the mother has paid Rs 60,000, both can claim the amount individually as per the payment made by them.
Tax savings with NPS under section 80CCD (1B)
NPS or National Pension Scheme has become a popular income tax saving investment product. It is an investment scheme that is available to both government and private employees. It enables the depositor to build a corpus for their retirement along with a regular monthly income. The amount invested by the depositor is invested in several schemes including the equity markets.
There are two types of NPS accounts, Tier-1 & Tier-2. A tier-1 account has a lock-in period until the subscriber reaches the age of 60 years. The contributions made by the subscriber to tier-1 are tax-deductible under section 80CCD(1) and 80CCD(1B). Tier-2 accounts are voluntary in nature which allows the subscriber to withdraw the money when they like. However, contributions under tier-2 accounts are not eligible for a tax deduction.
As per the provision of section 80CCD, an individual can claim a deduction up to Rs. 1.5 lakh by investing in NPS. Additionally, a new sub-section 1B was also introduced. It offers an additional deduction of up to Rs. 50,000/-for contributions made by individual taxpayers towards the NPS.
The taxpayer can claim a tax benefit to the extent Rs. 25,000 in respect of the following:
- Premium paid to keep in force health insurance covering self, spouse, or dependent children.
- Any contribution to Central Health Government Schemes.
- Any other scheme may be notified by the central government as eligible for deduction.
In order to take care of one’s medical emergencies, medical insurance is considered as the safest investment option. This allows the taxpayer to avail of the benefits on two fronts. Firstly, the insurance policy takes care in the case of a medical emergency. Secondly, the tax benefit under the income tax act for investing in an investment product.
Apart from the above, an additional deduction for the insurance of the parents is available to the extent of Rs. 25,000 if they are less than 60 years of age or Rs. 50,000 if they are more than 60 years of age. If the individual and the parent are both above 60 years of age, the maximum deduction under this section will be Rs. 1,00,000.
The following table shows the summary of the deductions under various categories:
|Nature of expenditure||Expenditure made for||Eligible deduction|
|Amt paid to keep in force eligible health insurance.|
Contribution towards Central Health Government SchemeExpenditure towards preventive health check-up
|Self, spouse, and dependent children|
For (b) & (c) , if the age of the above persons is above 60 years of age and they are resident in India
|Amt paid to keep in force eligible health insurance.Preventive health check-up||Parents|
If the age of the above persons is above 60 years of age and they are resident in India
|Amount paid on account of medical expenditure for self/spouse/parents who are of the age of 60 and above, being a resident in India, and no payment has been made towards the health insurance||Rs. 50,000|
Repayment of an education loan under section 80E
The income tax act provides benefit on repayment of loan as a tax deduction under section 80E of the act. Once an educational loan is availed, the interest paid on the education loan qualifies for a tax deduction. The deduction is for a maximum of 8 years, or repayment of the interest, whichever is earlier.
Depending on who pays the EMI for the education loan, the parent or the child can claim the tax exemption. However, the deduction under section 80C is available only if the loan has been taken from a financial institution and not family members. You can claim a tax deduction starting from the year in which the repayment starts.
The income tax authorities provide a moratorium period of up to one year to the borrower from the date of completion to start repaying the loan. This allows the taxpayer sufficient time to manage their finances and claim the deduction once they start repaying the loan.
For example, if the taxpayer repays their education loan in 5 years from the date of repayment, the tax deduction would be available for this 5 year period only. As per section 80E, this benefit can be claimed for a period of 8 years so the taxpayers should avail this benefit. Borrowers should note that their repayment may exceed 8 years, but in such cases, they won’t get the tax deduction under Section 80E beyond the 8th year.
Rent paid and no HRA received
Generally, a taxpayer receives House Rent Allowance, or HRA, as a part of an individual’s salary. However, there can also be a case wherein it does not form part of the salary of the employee. In such a case, standard HRA deduction cannot be claimed and the taxpayer would not be able to claim the benefit even if they are paying the rent. Further, in such cases a taxpayer must claim a tax benefit under section 80GG.
In order to provide the taxpayer with benefit even in a case where they are not received the HRA, section 80GG was introduced. As per this section, A taxpayer can claim the deduction of rent paid even in a case wherein they do not receive HRA. The taxpayer must satisfy the following conditions:
- The individual is self-employed or salaried.
- HRA has not been received at any time during the year for which deduction is being claimed under section 80GG.
- You, your spouse, or the HUF in which you are a member does not hold any residential accommodation at a place where you currently reside.
In order to claim deduction under section 80GG, form 10BA needs to be filed for payment of rent. The lower of the following will be considered as a deduction under this section:
- Rs. 5,000 per month.
- 25% of the total Income (excluding long-term capital gains, short-term capital gains under section 111A and Income under Section 115A or 115D and deductions under 80C to 80U.
- Actual rent less 10% of Income
Interest component on home loan
In order to claim the interest component paid on a housing loan as a deduction, certain conditions need to be met as specified below:
- A home loan must be taken for the purchase or construction of a house.
- Construction of the house must be completed within 5 years from the end of the financial year in which the loan was taken.
- The interest component paid as a part of the loan can be claimed as a deduction under section 24 up to Rs. 2 lakh. This is applicable in the case of a self-occupied property. In the case of a let-out property, there is no upper limit for claiming interest.
- In the case of interest being paid towards a home loan taken during a pre-construction period, the pre-construction interest paid can be claimed as a deduction in five equal installments starting from the year in which the property is acquired or construction is completed. However, the maximum limit is still capped at Rs. 2 lakh.
Interest earned from savings bank account
The income tax act provides deductions with respect to interest earned from savings bank accounts. Individuals and HUF can claim the tax deduction under section 80TTA on the interest earned. This deduction is applicable for taxpayers other than those who are senior citizens. In the case of senior citizens, section 80TTB is applicable.
The maximum deduction under section 80TTA is Rs. 10,000. This is not on an individual basis but as a total of all the interest earned from the savings bank account that one may have. The taxpayer will have to pay tax on any interest over and above Rs. 10,000. The will be as per the applicable slab to the assessee under “Income from Other Sources”. For example, Mr. Amit earns a total interest Rs. 15,000 from his savings bank account. Mr. Amit can claim only Rs. 10,000 was a deduction under section 80TTA. The taxpayer will have to pay tax on the balance Rs 5000 under income from other sources.
For senior citizens, section 80TTB was introduced on 1st April 2018. As per section 80TTB, senior citizens can claim deduction up to Rs. 50,000.
Medical expenses towards disabled dependent
As per the provisions of section 80DD, a taxpayer can claim a deduction if they are looking after disabled dependents. This deduction will help in reducing the tax liability of the person who is taking care of someone disabled in the family who is dependent on them.
As per section 80DD, disabled dependents are defined as spouses, children, parents, or siblings(brother or sister). In the case of a HUF, a disabled dependent can be any member of the HUF. In order to claim a deduction under section 80DD, a deduction should not have been taken under section 80U. The following are a few of the disabilities:
- Low vision
- Hearing impairment
- Mental illness
The following are the medical expenses against which a taxpayer can claim deductions:
- Any expenditure made towards medical treatment, nursing, training, rehabilitation of a dependent person with a disability.
- Any amount paid as a premium for a specific insurance policy designed for such cases as long as the policy satisfies the conditions mentioned in the law.
Treatment of specified diseases u/s 80DDB
A deduction under section 80DDB is allowed to a taxpayer wherein a case they have contracted diseases such as cancer, neurological diseases such as dementia, motor neuron disease, parkinson’s disease, AIDS etc. All such disease entails expensive treatment costs and the expenses done can be claimed as a deduction under section 80DDB.
The deduction under section 80DDB is allowed for the medical treatment of a dependent who is suffering from a specified disease by individuals or HUF. The deduction is up to ₹ 40,000 or the amount actually paid (whichever is lower). This limit goes to ₹ 1 lakh in the case of senior citizen taxpayers or dependents.
Donations made to charitable institutions
Section 80G provides a deduction to the taxpayer with respect to the amount paid by them to an approved charitable organization. The donations made to such organizations should be made via cheque or online transfer. Cash transfers, above than Rs. 2,000 do not qualify for deduction under this section. It is very important to take the stamped receipt from the organization wherein the donation has been made in order to claim the deduction.
Depending on the type of organization where a donation has been made, the tax deduction under section 80G can be either 50% or 100% of the donation amount. However, the same is restricted to 10% of the adjusted gross total income of the taxpayer. An Adjusted gross total income can be defined as the gross total income.
There are basically the following four buckets in which donations can be categorized to claim the deduction.
a) Donations with 100% deduction without any qualifying limit, such as the National Defence Fund set up by the Central Government.
b) Donations with 50% deduction without any qualifying limit such as the Jawaharlal Nehru Memorial Fund or the Prime Minister’s Drought Relief Fund
c) Donations with 100% deduction subject to 10% of adjusted gross total income such as Government or any approved local authority, institution, or association to be utilized for the purpose of promoting family planning
d) Donations with 50% deduction subject to 10% of adjusted gross total income such as any institution which satisfies conditions mentioned in Section 80G(5).
How to calculate the gross adjusted total income?
Refer to the following table to calculate the gross adjusted total income:
|Gross total income||XXXX|
|(-) Deductions u/s 80C to 80U (except section 80G)||XXXX|
|(-) Exempt income||XXXX|
|(-) Short term capital gains on the sale of shares u/s 111A||XXXX|
|(-) Long term capital gains||XXXX|
|(-) Income covered to in sections 115A, 115AB, 115AC, 115AD and 115D||XXXX|
|Gross Adjusted total income||XXXX|