Saving Smarter, Not Harder
How to Increase Your Post-Tax Savings
These are the following avenues to cut your tax liability and increase your savings.
As the end of the financial year approaches March 31, our attention invariably shifts to taxes. Yes, taxes are a certainty but you can look at avenues to cut your total liability.
Tax planning is an essential aspect of personal finance management, which requires a comprehensive understanding of the Income Tax Act of 1961, to avail of all the deductions, exemptions, and rebates provided under the Act.
Invest in Tax-Saving Instruments
Section 80C of the Income Tax Act provides an extensive range of investment options, offering up to Rs 1,50,000 in tax deductions.
By strategically choosing tax-saving instruments, you can not only save on taxes but also secure your financial future. Some of the popular tax-saving instruments under this section include:
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Public Provident Fund:
PPF is a secure, long-term investment option backed by the Government of India. It offers attractive interest rates, tax-free returns, and a maturity period of 15 years. Investments in PPF are exempt from tax, making it a lucrative option for risk-averse investors seeking stable returns.
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Employee Provident Fund:
EPF is a retirement savings scheme for salaried employees, where both the employee and employer contribute 12% of the employee's basic salary every month. Contributions to EPF are tax-deductible, and interest earned is tax-free, providing a secure retirement corpus for employees. You can also contribute more than 12% to the EPF as a Voluntary Provident Fund contribution.
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National Savings Certificate:
NSC is a government-backed savings scheme with a fixed maturity period of 5 years. Investments in NSC qualify for deductions under Section 80C, and the interest is compounded annually. The scheme is ideal for conservative investors looking for a fixed-return investment with tax benefits.
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Tax-saving Fixed Deposits:
Tax-saving FDs are special fixed deposit schemes offered by banks, with a lock-in period of 5 years. These FDs provide a fixed rate of return and are eligible for deductions under Section 80C. However, the interest earned is taxable, making it a suitable choice for investors in lower tax brackets.
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Equity-Linked Savings Scheme:
ELSS is a type of equity mutual fund that invests primarily in stocks, providing the potential for higher returns compared to traditional tax-saving instruments. With a lock-in period of just 3 years, ELSS offers greater liquidity and flexibility. Investments in ELSS are eligible for deductions under Section 80C, but the returns are subject to long-term capital gains tax.
Health Insurance Premiums Eligible For Tax Breaks
Health insurance is crucial for financial security and can provide substantial tax benefits.
Under Section 80D, taxpayers can claim deductions for premiums paid towards health insurance policies for themselves, their spouses, children, and parents.
Taxpayers can claim deductions of up to Rs 25,000 for premiums paid for themselves, their spouse, and dependent children.An additional deduction of up to Rs 25,000 is available for premiums paid for parents below 60 years of age, and up to Rs 50,000 for parents aged 60 years or above.
Buying health insurance not only protects against unforeseen medical expenses but also reduces tax liability.
House Rent Allowance:
HRA provided by employers to their employees is partially tax-exempt under certain conditions, as per the Income Tax Act, 1961.
HRA is a component of an employee's salary that covers the cost of rented accommodation. The tax exemption on HRA applies to individuals living in rented houses.
The amount of HRA exemption is the least of the following three conditions:
- Actual HRA received from the employer.
- 50% of the basic salary plus dearness allowance (for metro cities - Delhi, Mumbai, Kolkata, and Chennai) or 40% of the basic salary plus dearness allowance (for other cities).
- Rent paid over 10% of the basic salary plus dearness allowance.
To claim HRA exemption, employees must submit rent receipts or a rent agreement as proof of rent payment to their employer.
If an individual lives in their own house or does not pay rent, the HRA received is fully taxable.
Also, if the annual rent exceeds Rs 1,00,000 annually, the employee must provide the landlord's PAN (Permanent Account Number) to the employer to avail of the HRA exemption.
Home Loan Benefits
Home loans offer various tax benefits to borrowers that can significantly reduce their tax burden:
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Deduction for Home Loan Interest:
Section 24(b) allows taxpayers to claim a deduction of up to Rs 2,00,000 per financial year for interest paid on a home loan for a self-occupied property. This deduction can significantly reduce the overall cost of homeownership and encourage taxpayers to invest in residential properties.
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Deduction for Principal Repayment:
The principal amount repaid on a home loan is eligible for deductions under Section 80C, subject to the overall limit of INR 1.5 lakh. This benefit can be combined with other tax-saving instruments under Section 80C to optimize tax savings.
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Deduction for First-time Home Buyers:
Under Section 80EEA, first-time homebuyers can claim an additional deduction of up to Rs 1,50,000 for interest paid on a home loan, provided the loan is sanctioned between April 1, 2019, and March 31, 2023. T This additional deduction encourages first-time homebuyers to invest in residential properties and reduces their tax burden.
Can I claim HRA and home loan tax breaks simultaneously?
You can claim tax exemption simultaneously if you meet the following criteria:
You live in a rented house: To claim HRA exemption, you must be living in a rented property and paying rent for that property. If you are living in your own house, the HRA exemption is not applicable.
The property that has a home loan is not the same property you are currently living in: If the property you own (with a home loan) is in a different city or location, or if it is under construction and not available for occupation, you can still claim HRA exemption for the rented house you currently live in.
You rent out the property on which you have a home loan: If you have taken a home loan for a property but have rented it out and live in a different rented property, you can claim both HRA exemption for the rent you pay and tax benefits on the home loan for the rented-out property.
In such cases, you can claim tax deductions on the home loan principal repayment under Section 80C and interest payment under Section 24(b) (up to Rs 2,00,000 for self-occupied property or no limit for a let-out property).
And, you can also claim HRA exemption based on the actual rent paid, subject to the conditions mentioned earlier.
Claim Deductions for Education Loan Interest
Section 80E of the Income Tax Act allows taxpayers to claim deductions for interest paid on education loans taken for higher education. This deduction is available for a maximum of 8 years or until the interest is fully paid, whichever is earlier.
The deduction applies to loans taken for self, spouse, children, or a student for whom the taxpayer is a legal guardian.
By availing of this deduction, you can support your child’s higher education and also reduce your tax liability.
While these are avenues available to reduce your tax liability, you must focus on income generation as a means of generating wealth. Nobody has got wealthy by saving on taxes, but once you become wealthy, there are more options to save taxes.
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