- Saving money is as important as earning money which can be achieved through proper tax planning
- Section 80C of the Income Tax Act provides provisions for tax deductions on a number of expenses
- Moreover, there are many investment saving instruments such as PPF, Life Insurance, NPS, Post Office Time Deposit, Tax Saving FDs, EPF’s, etc. which can further reduce your tax liability
In the first part of this topic, we touched upon a couple of tax saving tips and how to claim deductions under Section 80D and 80G of the Income Tax Act. In this section, we will explore some common tax-saving expenses along with tax saving instruments which can be used to further lower your tax liability.
Tax Saving Expenses
When trying to figure out how much you need to invest to maximize your deduction under Section 80C, take into account various expenses such as children's tuition fees, principal and interest payment on home loan, interest repayment of education loan, travel expenses, medical expenses, contribution to employee’s provident fund (EPF), and any life insurance premium you are paying.
- Home Loan
Your Home loan is essentially divided into two parts, the Principal, and the Interest. The good news is that you can reduce the burden of taxes and get a tax benefit on both principal & interest components of your installments.
You can get a deduction on home loan interest repayment of up to Rs.2,00,000 or the actual amount that you have repaid under Section 24 of the Income Tax Act. However, it needs to be mentioned that if you have rented out your property, then there is no said limit of Rs.2,00,000. Additionally, you can also claim a deduction on the principal amount under section 80C up to a maximum of Rs.1,50,000.
- Tuition Fees for Children
When it comes to our children’s academic needs, we spare no expense when it comes to providing them with the best possible education. Thankfully, the income tax laws facilitate a way to compensate for the expenses spent on tuition fees paid (up to 2 children for each parent) under section 80C. The only criteria as such is that the education institute should be based in India. Further, any fees paid towards pre-nursery, nursery class & play-school are also eligible for deduction.
- House Rent
If you’re a salaried person, you will come across a term called HRA i.e. House Rent Allowance. A Tax exemption can be claimed if you live in a rented apartment. However, even if you don’t get HRA, you’re still eligible to receive tax benefits under Section 80GG.
Tax exemption on HRA can be claimed if it is the least of the following:
a) Rent paid in excess of 10 per cent of total income
b) 25 per cent of the total annual Income; or
c) Rs. 5,000 per month.
Total Income = Gross total income less long term capital gains, short-term capital gains under section 111A, deductions under sections 80C to 80U (except 80GG) and income of foreign company under section 115A.
- Pension Funds
One of the best ways to plan for retirement is to start investing in pension funds. Fortunately, under Section 80CCC, you can also reduce your taxes when you contribute to certain pension funds up to Rs. 1,50,000 per annum. Further, you can also avail tax benefits on withdrawal if you withdraw up to 1/3rd of your accumulated pension funds.
- Leave Travel Concession
Certain employees are eligible for Leave Travel Allowance (LTA), which is another component of your salary structure. Also known as Leave Travel Concession (LTC), it is a part of Cost-to-Company (CTC) of employees and exempt under section 10(5) of the Income Tax Act, 1961.
Under LTC, an individual can claim reimbursement of expenses incurred on travel for self and family members for journeys undertaken only within India (actual travel costs i.e., air, rail or bus fare). LTA exemptions can only be claimed for two journeys in a block of 4 calendar years. To avail of the tax exemption, you will have to furnish documentary evidence (tickets, boarding pass, travel agent invoice) of the travel to the employer. Moreover, any other type of expenditure incurred by the employee will be ignored while computing LTC.
Additionally, if for some reason, an employee is unable to make use of this benefit in any block of 4 years by not embarking on any journey, the benefit of this exemption will be carried forward and can be claimed in the first calendar year of the next block as well.
For Instance: If an employer grants LTA of Rs 40,000 and the actual incurred travel cost by the employee is Rs 25,000, exemption will be available only to the tune of Rs 25,000 while the remaining balance amount of Rs 15,000 would be included under the total taxable salary.
Regular Investments for Tax Saving
You should ideally approach tax saving with a holistic mindset. As compared to conventional investments, Tax planning investments are no different. This is why it is vital to get an in-depth understanding of all your investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals.
- Employees Provident Fund (EPF)
An EPF is a retirement benefit scheme that is available to all salaried employees. If your employer has opened an EPF account for you, you and your employer both contribute 12 per cent of your basic salary (into your EPF account. This contribution can be claimed as a deduction under section 80C. Further, the resultant interest income & maturity amount is also exempt from tax.
- Public Provident Fund (PPF)
Besides EPF, PPF also allows tax saving under Section 80C. Just like EPF, you can avail of tax deduction on your contributions as well as the resulting interest income & maturity amounts as it falls under EEE (Exempt-Exempt-Exempt) category.
- Sukanya Samriddhi Scheme
Available only to parents or guardians of a girl child, this is another tax-saving investment which tends to offer a higher rate of return on investment as compared to EPF & PPF. As per Section 80C, tax exemption is available up to Rs.1,50,000 under the scheme while all the payments including interest income & maturity amounts are also fully exempted from taxation.
- National Pension Scheme (NPS)
Offered by the postal department, NPS is also eligible for deduction under Section 80C. To claim tax exemption, you can invest up to Rs 2,00,000 (Rs. 1,50,000 under Section 80C and Rs. 50,000 under Section 80CCD (1B)) every year in your NPS account.
- 5-year post office time deposit account
The Post Office Term Deposit which can be opened with any branch of Indian Post Office allows you to deposit money for a fixed period and earn a guaranteed return through the tenure. Similar to a bank fixed deposit, a five-year deposit qualifies for tax deductions under Section 80C on the sum deposited. However, there is no tax benefit on deposits with less than five-year tenure.
Besides the above-mentioned expenses and investments, you can also save tax on any expenses spent for treatment of handicapped dependent, deduction in case of disabled persons, and any medical expenses incurred on self or a dependent relative suffering from certain specified diseases.
If you haven’t started saving your tax yet, you now have a better idea of where and how to start your tax planning initiatives.