Popular Schemes for Tax Saving in India
Here are some of the most popular options for tax saving in India -
Term life insurance plans
Term insurance plans are protection-oriented life insurance plans that help in providing financial security for your family in your absence. You can also enjoy the term insurance tax benefits on premiums paid and the death benefit received.
Savings-oriented life insurance plans
Endowment and money-back plans help you create a secure corpus for your financial goals. The tax benefits of endowment and money-back plans are the same as those of other life insurance plans, as you can claim deductions on the premiums paid, and the policy benefits are tax-free too. You can also enjoy insurance coverage during the policy tenure.
ULIPs
ULIPs are life insurance plans with a market linked investments component. They offer the dual advantage of life insurance protection along with the opportunity to grow your wealth through market-linked investments. The tax benefits of ULIPs include deductions on premiums paid under Section 80C, and an exemption on policy benefits subject to provisions of the Income Tax Act.
Other avenues
Besides life insurance plans, some of the other avenues which offer offer tax benefits under Section 80C and 10(10D) are -
- Equity Linked Saving Scheme of mutual funds
- 5-year fixed deposits
- Public Provident Fund
- National Pension Scheme , etc.
New Tax Regime v/s Old Tax Regime
- Choosing the right tax regime depends on the deductions and exemptions you qualify for.
- The old regime may be more beneficial if you have significant tax-saving investments.
- The new tax regime could be better if you don't opt for tax-saving instruments.
Effective tax planning enables you to leverage deductions, exemptions, and benefits to reduce tax liability and increase disposable income.
This article explores how to save income tax through various investments and strategic planning
Capital Gains Tax Strategies
Short-Term Capital Gains
The determination of short-term capital gains depends on the holding period of the asset. The applicable tax rates vary based on the date of sale, with changes effective from July 23, 2024. Below are the key details:
Listed Equity Shares or Equity Mutual Funds
For sales made up to July 22, 2024: Gains from assets held for less than one year are taxed at 15%.
For sales made from July 23, 2024: Gains from assets held for less than one year are taxed at 20%.
Land, Buildings, and Unlisted Equity Shares
Regardless of the sale date, gains from assets held for less than two years are taxed at individual slab rates.
Other Capital Assets
For sales made up to July 22, 2024: Gains from assets held for less than three years are taxed at individual slab rates.
For sales from July 23, 2024: The holding period is reduced to less than two years, with taxation at individual slab rates.
Specified Mutual Funds (Debt Mutual Funds)
Regardless of the sale date, gains are taxed at individual slab rates.
These changes impact the taxation of short-term capital gains, particularly for equity shares, mutual funds, and other capital assets.
Long-Term Capital Gains
The classification of long-term capital gains (LTCG) depends on the holding period of an asset. This classification is crucial as it determines the applicable tax rates. Below are the revised tax provisions, effective from July 23, 2024:
Listed Equity Shares or Equity Mutual Funds
For sales made up to July 22, 2024: Gains from assets held for more than one year are taxed at 10% on profits exceeding ₹1,00,000.
For sales made from July 23, 2024: Gains from assets held for more than one year are taxed at 12.5% on profits exceeding ₹1,25,000.
Land, Buildings, and Unlisted Equity Shares
For sales made up to July 22, 2024: Gains from assets held for more than two years are taxed at 20%, with the benefit of indexation.
For sales made from July 23, 2024: Gains from assets held for more than two years are taxed at a reduced rate of 12.5%, but without indexation benefits.
Other Capital Assets
For sales made up to July 22, 2024: Gains from assets held for more than three years are taxed at 20%, with indexation benefits.
For sales made from July 23, 2024: The holding period is reduced to two years, with taxation at 12.5%, but without indexation benefits.
Additional Considerations:
Specified mutual funds with less than 35% exposure in Indian listed equity will be taxed as short-term capital gains, regardless of the holding period and would be taxed at slab rates.
Taxpayers selling real estate purchased before July 23, 2024, can choose between a 12.5% tax without indexation or a 20% tax with indexation.
The recent changes aim to simplify capital gains taxation while removing indexation benefits for certain assets.
Best Practices to Save Tax
Plan Early:
Begin tax planning at the start of the financial year to choose the best investment option without haste.
Keep Records:
Organise proofs of investments, insurance, and donations for smooth filing and audits.
Choose Wisely:
Pick tax-saving possibilities that match your financial goals and not just help you save tax.
Stay Updated:
Tax laws change yearly, so maximise exemptions and deductions by staying informed.
Use Multiple Sections:
Don't just rely on Section 80C. Explore options like 80D for health insurance and 80E for education loans, among others under old tax regime.
How to Save Tax Under Section 80C
Section 80C of the Income Tax Act provides multiple avenues for saving income tax while encouraging financial discipline and long-term savings under old tax regime. Saving tax doesn't have to be complicated. With the right planning and investments, you can keep more of your hard-earned money to yourself. To avail of deductions under Section 80C, these are the investment options:
Life Insurance Premiums
If you're paying premiums for life insurance policies for yourself, your spouse, or your children, you can claim a deduction under Section 80C (in case of the old tax regime).
Employee Provident Fund (EPF)
You're probably already contributing to EPF if you're a salaried employee. Your employer also contributes to this fund, but only your part qualifies for a tax deduction under Section 80C under old tax regime. The best part? The interest earned and the maturity amount are tax-free if you meet certain conditions.
Public Provident Fund (PPF)
PPF is a government-backed scheme for long-term savings. You can save up to Rs 1.5 lakh annually under old tax regime, and the interest earned is tax-free. It's a safe option, especially if you don't want to take risks with your money.
Equity-Linked Savings Schemes (ELSS)
ELSS are mutual funds that mainly invest in stocks. They have a three-year lock-in period and the potential for high returns, although they carry some risk due to market fluctuations. They also offer tax benefits under Section 80C incase of old tax regime.
How to Save Tax Beyond Section 80C
If you've already used up your 80C limit, there are other ways to save taxes under old tax regime. One option is the National Pension System (NPS), which helps you save for retirement while giving you multiple tax benefits. You can claim a deduction on the amount you contribute from your salary. Even your employer's contribution can help reduce your taxable income.
Another smart way to save is through medical insurance. Paying health insurance premiums qualifies for tax deductions. You can get a tax break on the premiums you pay for yourself, your family, and even your parents, with higher benefits if they're senior citizens. These options go beyond the usual 80C investments, giving you more ways to save under old tax regime.
Home Loan Interest (Sections 24(b) and 80EE)
If you're paying interest on a home loan, you can get a tax break of up to Rs 2 lakh per year. First-time homebuyers can get an extra Rs 50,000 if they meet specific conditions under Section 80EE of the Act under old tax regime.
Tax Benefits on Education Loan Interest
If you've taken a loan for higher education, the interest you pay is eligible for a tax deduction under Section 80E of the Income Tax Act under old tax regime. This deduction is available for up to eight years or until the interest is fully repaid, whichever comes first.
House Rent Allowance (HRA)
To claim HRA tax benefits, you should live in a rented home. You can pay rent for your parents and be eligible for HRA, but no such option is available for your spouse. The tax-free part of your HRA is the lowest of these three: the actual HRA you receive, the rent you pay minus 10% of your salary, or 50% of your salary if you live in a metro city (or 40% if you're in a non-metro area).
Tax-Saving Options for Senior Citizens
Senior citizens aged between 60-80 don't pay tax on income up to Rs 3 lakh, while those over 80 get an exemption up to Rs 5 lakh. Options such as a Tax rebate under section 87A, higher deductions on bank and post office interest, deductions in the senior citizens savings scheme, etc., are available for senior citizens.
Key takeaways
- Tax planning can help you maximise the tax-saving options allowed under the Income Tax Act and reduce your tax liability.
- Popular options for tax saving include term life insurance plans, savings plans, ULIPs, PPF, ELSS, etc under old tax regime.
- There are two tax regimes - old and new. Choosing the right tax regime can help in minimising your tax liability.
- Capital gains form a part of your total taxable income. Find out how much capital gains are taxable.
- Maximise the tax-saving benefits offered by Section 80C of the Income Tax Act under old tax regime.
- Under the old tax regime, you can claim tax benefits beyond Section 80C by leveraging exemptions available on home loans, health insurance premiums, education loans, and more.
- Senior citizens can also enjoy additional tax benefits on their income
- To save tax effectively, start early and choose the right tax-saving options for your financial goals.
Conclusion
If you are wondering how to save tax, the answer is simple - plan it!
Effective tax planning involves strategic investments and maximising deductions under the Income Tax Act. Understanding the different sections and benefits allows you to minimise tax liabilities legally. Whether you're a salaried employee, business, freelancer, or senior citizen, knowing how to save tax efficiently can significantly enhance your financial well-being. Also, when choosing the tax regime, compare your tax liability under both regimes. The regime that offers the lowest tax liability would be the right choice. So, start early and use the available avenues to reduce tax and save more.
Happy saving!
FAQs
What are the common tax-saving investments under Section 80C?
Life insurance premiums, PPF, EPF, NSC, and ELSS are common tax-saving investments and qualify for deductions up to ₹1.5 lakh under Section 80C under old tax regime.
How can I save tax on health insurance premiums?
Under Section 80D, you can claim up to ₹25,000 in health insurance premiums for yourself and your family if you are below 60 years of age under old tax regime.
Are there any tax benefits on a second home loan?
Yes, tax benefits are available on a second home loan. If the first home is self-occupied and the second is vacant, both are considered self-occupied, allowing a deduction on interest paid (up to ₹2 lakh). If the second home is rented out, you must declare rental income but can claim deductions, including a 30% standard deduction, municipal taxes, and unlimited interest on the home loan.
How do you save tax via education loans?
Section 80E allows a deduction on the interest paid on education loans for higher studies. This deduction is available for a maximum of eight years or until the interest is fully repaid, whichever is earlier under old tax regime.
Can I get tax deductions for donations to charity?
Yes, under Section 80G, donations to specified charitable institutions are eligible for deductions ranging from 50% to 100% of the donated amount, depending on the organisation under old tax regime.
What is the maximum amount I can save on income tax?
The maximum amount depends on how much you save, the tax regime you choose, your income level, and the applicable income tax sections that you use to claim tax exemptions and deductions.
Can I invest in both ELSS and PPF?
Yes, you can invest in both ELSS and PPF basis your financial goals and tax planning strategies.
Which tax regime can be chosen for a ₹10 lakh income?
Under the new tax regime, income up to ₹12 lakhs is tax-free through the rebates available1. So, if you have an income of ₹10 lakhs, you can enjoy zero tax liability under the new tax regime.
Can I claim both HRA and home loan deductions together?
Yes, you can claim both HRA and home loan deductions together, provided any of the following conditions are met2 -
- You pay rent for a home located in another city, different from the city where the loan-funded house is located
- Both houses are in the same city, but you live in a rented apartment for work or your children’s schooling
- The loan is taken for an under-construction house, and you live in a rented apartment
- You let out the house on which the loan has been taken, and you live in a rented apartment
Is it possible to switch between the old and new tax regimes every year?
Yes, you can switch between the old and new tax regimes every year, provided you have non-business income3.
Which tax-saving option offers the highest returns?
The returns under different tax-saving options are different. While fixed-income instruments can offer safe returns, market-linked avenues can help you earn more, but there’s volatility risk. So, you should choose a tax-saving option based on your risk appetite and not only the returns it can generate.
Sources:
- https://economictimes.indiatimes.com/wealth/income-tax-slabs?from=mdr
- https://cleartax.in/s/claim-hra-deduction-home-loan-interest
- https://www.incometax.gov.in/iec/foportal/help/new-tax-vs-old-tax-regime-faqs#:~:text=An%20individual%20with%20non%20business,(1)%20of%20I%20T%20Act.
