Tax saving strategies
Tax evasion is a crime but tax planning is an assessee’s right!
Once the financial year is over and if either the assessee or the income tax department arrives at tax liability, then the assesse must pay the tax. Not paying such tax is a crime. But the assesse, before the completion of financial year, can estimate his taxable income, tax liability and then contribute in tax saving schemes to reduce tax burden. This is called tax planning and is allowed by the Income Tax department through various sections such as 80C, 80D, 80E. Below is a list of important savings schemes and deductions that you can take advantage of:
1. Deduction on school/college fees paid for the education of children: we all know that most parents, irrespective of financial burden, do not compromise on the education of their children. The government also, with an aim to help produce great citizens, allow tax deductions to parents for payment of their child’s school or college fees.
For example, Mr. Kumar paid Rs 50,000 towards his daughter’s college fee and Rs 25,000 for his son’s school fee in the financial year 2021-22. While filing income tax return for that assessment year, He can deduct a total sum of Rs 75,000 from his taxable income. If he is in 20% tax bracket, he can reduce his tax by Rs. 15,000.
2. Interest on student loan taken for education
3. Deduction on rent paid
4. Fixed deposit for a term of 5 or more years in a bank or post office
5. PPF (Public Provident Fund): Public Provident Fund is a government established savings scheme with a tenure of 15 years. It is available at most banks and post offices in India. Its rate changes every quarter but is currently 8%. The interest earned on PPF is also tax-free income.
- EPF: Under the EPF Act. 12% of the pay of employees in the organised sector is deducted towards Employees Provident Fund.
- ELSS Funds: These are mutual funds which invest a minimum of 80% of their assets in equity. They have a lock-in of 3 years. The returns on ELSS funds are subject to Long Term Capital Gains Tax (LTCG) at 10%, over and above an exemption limit of Rs 1 lakh.
- NSC (National Saving Certificate): A National Savings Certificate has a tenure of 5 years and a fixed rate of interest. The rate is currently 8%. The interest on NSC is also automatically counted towards the Rs 1.5 lakh 80C limit and is tax-deductible if no other investments are using up the limit.
- Senior Citizens Savings Scheme (SCSS): This scheme has a tenure of 5 years and is available to those above 60. The interest rate for SCSS is higher than prevailing FD rates and is currently 8.7%. Though this interest income is taxable, it is still considering that senior citizens have additional tax exemption and 80TTB deductions.
- Life Insurance Premiums: Premiums paid for different types of insurance policies including ULIPs (Unit Linked Insurance Premiums), term insurance and endowment policies are tax deductible up to Rs 1.5 lakh. However the insurance cover must be at least 10 times the annual premium.
- Health Insurance Premiums: A deduction up to Rs 25,000 is available for health insurance premiums paid under Section 80D. For senior citizens, this limit is increased to Rs 50,000. A person contributing health insurance for himself and senior citizen parents can avail of the combined deduction up to Rs 75,000 per annum.
- National Pension System (NPS): A deduction of up to Rs 1.5 lakh is available under section 80CCD for contributions to NPS. This is over and above the Rs 50,000 deduction available under Section 80CCD(1B).
- Home Loan Repayment: Repayment of the principal amount on a home loan is tax deductible up to Rs 1.5 lakh per annum.
- Deduction for the interest paid on home loan: If you have a home loan, the interest payable on it is tax deductible up to Rs 2 lakh per year under Section 24 of the Income Tax Act. If you let out the house on rent, there is no upper limit for interest as tax deduction. However the total loss that can be claimed on the broader head of income from house
property is capped at Rs 2 lakh.
- Deduction on interest paid for loan taken from reconstruction of home: As per Section 24(b), deduction is allowed for interest paid on loan taken for reconstruction of property. The deduction amount cannot exceed Rs 30,000 if it is a self-occupied property.
- Sukanya Samriddhi Yojana: Parents of a girl child below the age of 10 can get this deduction. This account has a tenure of 21 years or until the girl marries after turning 18. It has an interest above prevailing rates (currently 8.5%) and the interest income is tax-free.
- Deduction for bank interest: Interest earned on savings accounts is tax free up to Rs 10,000 per year under Section 80TTA. For senior citizens this limit is Rs 50,000 for both FD and savings account interest together under Section 80TTB.
- Donations to charitable organizations: You can get a tax deduction on charitable donations. There is no upper limit but different rules restrict the tax deduction amount available on your charitable contributions. For most donations to NGOs, the limit is 50% of the donated amount and up to 10% of your adjusted total income. NGOs under this section
are required to have an 80G certificate for you to be able to claim this deduction. They must also quote their PAN number on the donation receipt.
In addition to tax benefits, charity also brings other benefits such as greater self-esteem, release of happy hormones, better relations and respect in social circles.
- Contribution to registered political parties: Under Section 80GGB contributions, other than by way of cash, such as cheque, DD, bank transfers are tax deductible.
- Medical treatment under section 80DDB for specified diseases is tax deductible.
- Deduction for physical disability: Under section 80U persons suffering with at least 40% disability can claim deduction upto Rs. 75,000.
- Deduction on long term capital gains under Section 54: This section provides exemption towards capital gain arising on sale of residential house property if the amount is used for purchase or construction of a new residential house.
The taxpayer should purchase another house within a period of one year before, or two years after the date of transfer of old house or should construct another house within a period of three years, from the date of transfer.
- Deduction on long term capital gains under Section 54F: Under this section any gain arising to an individual from the sale of any Long Term Asset other than Residential Property shall be exempt in full if the entire net sales consideration is invested in
- Purchase of residential house within 1 year before or 2 years after the date of transfer of
such an asset or in
- Construction of 1 residential house within 3 years after the date of such transfer.
24. Tax free agricultural income: Income derived from agricultural activities is exempt from tax.
25. Avoiding late fees and penal Interest: Tax return filed after the due date (called belated return) attracts a penalty and interest. Under Section 234F of the Income Tax Act, there will be below set of penalties;
Where total income does not exceed Rs. 5 Lakhs
Where total income exceeds Rs. 5 Lakhs
Late fee if return is filed after
due date, but before December 31 for that assessment year
Late fee if return is filed after
due date, but before March 31 for that assessment year
Apart from the above late fees, interest under Section 234A, would be levied at 1% per month, calculated from the due date until the date of tax payment. Hence it is very important that tax return is filed in a timely manner. It is our objective that you shall either pay least amount of tax, or get the maximum refund due, by applying all deductions legally allowed by the Income tax act.
Happy tax planning and tax return filing!!!