Tax Saving is always a natural phenomenon with taxpayers. Taxpayers try to find out the best of procedures and make their investments in such a way that their tax liabilities are reduced. These procedures and operations which taxpayers carry out are known as tax planning.
Tax saving and tax planning are co-related with each other. When the operations and procedures related to taxation are carried out wisely then tax saving is possible. Usually, towards the end of the financial year many taxpayers are in a hurry to complete the process of taxation and at the same time save taxes. As a result of this hurry, they might end up committing some major mistake while paying taxes as they invest in certain products without analyzing the merits and demerits. Due to this, it might happen that they do not use the deductions and exemptions that are available up to the maximum extent and suffer a loss.
There are certain guidelines and instructions which can be followed so as to ensure that you save taxes and do not commit any blunders in your investments. These guidelines will help in reducing your tax liability and utilizing it in other profitable investments.
Tax Saving Guide
There are certain guidelines or basic steps which need to be followed for tax saving.
Maximum use of deductions under Section 80C
Section 80C is the most popular tax-saving option available to the individuals and Hindu Undivided Families. This section consists of various investments and expenses on which tax deductions can be claimed to a limit of Rs.1.5 lakhs.
Some of the common investment avenues which are available U/S 80C are
- Public Provident Fund which has a return of 7% to 8% and a locked-in period of 15 years.
- National Savings Certificate which has a return rate of 7% to 8% and a locked-in period of 5 years.
- National Pension System which has a return rate of 12% to 14% and its locked-in period is available till retirement.
- 5-Year Bank Fixed Deposit has a locked-in period of 5 years and a return rate of 6%-7%.
- ELSS Funds have high return rates of around 15% to 18% and a locked-in period of 3 years.
The investments made into these avenues under Section 80C qualify to be claimed as deductions for tax saving.
Maximum utilization of Section 80D
Insurance premium paid by individuals can be claimed as deductions under Section 80D of the Income Tax Act, 1961. According to the budget for FY 2019-20, you can easily claim a tax-deduction of INR 25000 for the health insurance premium paid for yourself, spouse and children and if you are a senior citizen then the deduction limit permissible is up to INR 50,000. In addition to this, if you are purchasing a health insurance plan for your senior citizen parents and paying the premium; then you would be allowed to claim a tax-deduction of INR50, 000 more. So, under Section 80D if you are buying a health insurance premium for yourself and your parents who are senior citizens then you can easily save tax up to INR 1 lakhs of your taxable income.
Utilization of loans to claim deductions
If you have an education or a home loan, you can use these loans as a tax- saving option. If you have a loan for your home, then the interest component and not the principal amount are permissible for tax exemption under Section 24. If you are a homeowner for the first time then you can avail an additional tax deduction of up to INR50, 000 under Section 80EE.
In addition to home loans, study loans are also a tax-saving measure. If you have taken a study loan for higher education, then the interest on the loan is tax-free under Section 80E. This is permissible in case of the study loan taken for yourself, your spouse or kids or for a student whose legal guardian is you. There is no limit on the amount of total interest on which you can claim tax deduction.
Tax Savings by donations
Donations are another means of tax saving and help you in reducing your tax liability. Under Section 80G of the Income Tax Act, 1961 the money which is donated to charitable organizations can be claimed as deductions.
If you have made your donations towards charitable organizations like Prime Minister’s Drought Relief Fund, Indira Gandhi Memorial Trust then you can claim a tax deduction of 50% on the donation money. However, if your donations have been made towards National Defense Fund, Prime Minister’s National Relief Fund, etc. then you can claim a tax deduction of 100% on the donation amount.
Tax saving on Savings Account Interest
Under Section 80TTA of the Income Tax Act, 1961 the interest earned by an individual on Savings Account and Post Office Savings Account is allowed for tax deductions up to a limit of INR10,000. Moreover, this limit gets raised to INR 50,000 if the account holder is a senior citizen.
Enhanced Standard Deduction limits
The standard deduction limit has been enhanced to INR 50,000 as per the Interim Budget 2019. However, this deduction can only be availed by salaried people.
Tax Rebate claims
According to the Union Budget 2019, those individuals who are having a net taxable income of up to INR 5 lakhs can claim tax rebate. This means if your taxable income is INR 5 lakhs or below INR 5 lakhs you do not have to pay any Income Tax. So, suppose you have an income of INR 7 lakhs then you can use the various tax-saving measures like deductions u/s 80C, NPS investments, etc. and bring down your taxable income to either INR 5 lakhs or below INR 5 lakhs and avoid paying Income tax.
So, by following these guidelines on tax-saving an individual can very easily plan his taxes in such a way that the liable taxes are minimum but the benefits obtained are optimum.
Equity Linked Saving Scheme (ELSS)
Under Section 80C of the Income Tax Act,1961 there are quite a large number of investment options which can be used for tax saving. Investments into PPF, NPS, NSC, etc. can be very good options for tax saving and would reduce your taxable income remarkably.
However, amongst all the suggested investment options for tax saving under Section 80C; ELSS is one of the best options.
What is ELSS?
ELSS or Equity Linked Saving Scheme is mutual fund investment schemes which will help you in saving Income tax. ELSS is also known as the tax-saving funds as they help you in availing a tax deduction under Section 80C.
Features of ELSS Mutual Funds
- ELSS Mutual Funds have a compulsory locked-in period of 3 years and it is the shortest locked-in period amongst all other tax-saving measures.
- They generate returns at the rate of 10%-12% which is the highest amongst all tax-saving investment measures.
- They do not have any entry or exit load.
- An ELSS investor can enjoy dual benefits i.e. capital appreciation from the investments in equity and tax saving.
- An investor can receive regular income if he will opt for dividend pay-out or can go with capital appreciation.
How can you invest in ELSS?
Investment into ELSS can be done in the same way as that of investment into a Mutual fund is done. It can be done easily by an Online Investment Services Account. An investor can either invest by a lump sum amount or by a Systematic Investment Plan i.e. SIP.
Why ELSS is considered as the best tax saving option?
Amongst all the investment options such as PPF, NSC, NPS, etc. which can act as tax saving instruments, ELSS are considered to be the best one. ELSS or Equity Linked Saving Scheme has the lowest locked-in period of 3 years and provides a high return of 10%-12% which is the highest among the other tax-saving measures. In ELSS, there is a flexibility of investing in SIP and start the investment with a minimum amount of INR 500 only.
Hence, tax saving is the most common motive with all the taxpayers and the Government has designed the budgetary framework in such a way so that the people can use the various options and save taxes. It is just that the tax planning needs to be done in a wise manner so as to reduce the tax liabilities.