How to Save Income Tax?
The government offers many investment opportunities, deductions and exemptions through various sections under the Income Tax Act to help you lower your tax burden. These exemptions and deductions vary according to the tax regime you opt for. Depending on your income and needs, you can choose from the old tax regime or the new tax regime.
How Can I Save Income Tax in the Old Tax Regime1?
The old tax regime provides a standard deduction of ₹ 50,0001 from taxable salary, which is automatically deducted from the taxable salary. Here are some tax-saving exemptions and opportunities available under the old regime.
1. Section 80C - Tax Saving Schemes1
You can claim a total deduction of upto ₹ 1,50,000 under section 80C (incase of the old tax regime) by investing in various eligible schemes such as;
- Life Insurance - Premium paid for life insurance is eligible for deduction if it is less than 10%3 of the sum assured for policies issued after 1st April 2012. For policies issued before, the premium payment should be less than 20% of the sum assured for 80C benefit4.
- Public Provident Fund - PPF returns are tax-free.
- Equity Linked Savings Scheme - ELSS provides market-linked returns with tax benefits.
- Tax Saving Fixed Deposits
- National Savings Certificate
- Employee Provident Fund - EPF contributions are also eligible for tax deduction.
2. Section 80CCD (1B) - National Pension Scheme1
This section offers an additional deduction of upto ₹ 50,000 above section 80C (under old tax regime) deduction for investment in the National Pension Scheme (NPS), which offers retirement savings.
3. Section 24 and 80EE - Home Loan Interest1
Section 24 allows a deduction of upto ₹ 2 lakhs on the home loan interest you pay for a self-occupied property. In case the loan amount is less than ₹ 35 lakhs for a property valued at not more than ₹ 50 lakhs, an additional deduction of ₹ 50,000 can be claimed under section 80EE.
4. Section 80E - Education Loan1
The interest paid for an education loan taken for higher studies is also eligible for deduction under section 80E. This deduction can be claimed for upto 8 years from the year you start repayment.
5. Section 10(14) - House Rent Allowance1
Salaried individuals who receive a House Rent Allowance (HRA) can claim a deduction under section 10(14). The deduction is the lowest of these 3: Actual HRA / 50% of salary for metro cities and 40% of salary for non-metro cities / 10% of the basic salary deducted from the rent paid.
6. Section 10(10D) - Maturity Benefit of Life Insurance Policy4
A life insurance policy's maturity or death benefit is fully tax-exempt under section 10(10D), if the premium is not more than 10% of the sum assured for policies issued after 1st April 2012 and not more than 20% of the sum assured for policies issued before 1st April 2012.
However, for policies issued after 1 April 20234, any traditional policies with an aggregate annual premium of more than Rs 5 lakh will be taxable, and any unit-linked insurance plans issued on or after 1 February 2021, will be taxable if the aggregate annual premium exceeds Rs 2.5 lakhs6.
7. Section 80TTA - Interest Income1
Interest earned from a savings account or a post office account is exempt from tax up to a limit of ₹10,000. For senior citizens, the exemption for interest income from savings accounts, recurring deposits, or fixed deposits is up to a limit of ₹50,000.
8. Section 80G - Charitable Donations1
Donations made to specific charitable institutions or relief funds are tax-exempt for up to 50% or 100% of the donation amount depending on the Institution and subject to other terms under this section .
How to Save Tax in New Tax Regime2?
The new tax regime offers limited deductions for taxpayers. It is a good choice for taxpayers with minimum investments. There is no tax for annual income up ₹ 7.5 lakhs2, and tax rates are lower than the old regime. A standard deduction of ₹ 75,0003 is available under the new regime. For those wondering how can I save tax, here are the deductions allowed under the new regime;
1. Section 80CCD(2)3
Under this section, the employer’s contribution to NPS is eligible for a deduction upto 14% of the salary.
2. Section 80CCH(2)3
This section allows the entire contribution of the applicant and the Central Government to the Agniveer corpus for a tax deduction. The act also specifies that an exemption will apply if the applicant or nominees receive income under the Agnipath Scheme. Also, this deduction is now also available in the old and new tax regimes.
3. Reimbursements and Allowances from Employer2
An employee can claim expenses made for work as reimbursements for fuel, internet or phone by providing bills and proof. Allowances for travel, conveyance for office work and transport allowance for specially-abled employees are also eligible for tax deduction.
4. Section 243
This section allows a deduction for home loan interest paid for a let-out property only and not for self-occupied property.
5. Section 103
This section allows multiple deductions as explained below.
- Section 10(10C) allows Voluntary Retirement Scheme benefits for deduction upto ₹ 5 lakhs.
- Leave encashment at the time of retirement of non-government employees is tax-exempt upto a limit of ₹ 25 lakhs7 under section 10(10AA). This is irrespective of the tax regime.
- Gratuity is fully exempt for government employees under section 10(10).
6. Section 57(iia)3
In case of the employee’s death, the family pension given by the employer to the employee’s family is eligible for a tax deduction of upto ₹ 25,000.
Conclusion
Saving income tax requires planning and knowledge of tax-saving instruments. Both old and new regimes provide tax benefits to taxpayers. Evaluate both regimes according to your income and needs. Opt for the one that gives you maximum tax benefit. Additionally, start planning at the beginning of the financial year so that you have ample time to make informed decisions.
FAQs
1. How can we save tax on salary?3
Depending on the tax regime you opt for, you can save tax by claiming tax deductions and exemptions offered in each regime. You can use allowances like HRA, LTA, standard deduction and deductions under sections 80C, 80CCD, 80E (under old tax regime) etc.
2. How can I save tax beyond section 80C?3
Other than section 80C, you can save tax on home loan interest you pay, education loan interest, HRA, interest income, and donations.
3. What is LTA in Salary?5
LTA is Leave Travel Allowance, a component of salary that covers travel expenses when you go on a holiday. LTA can be used to claim a deduction on travel expenses incurred within India as per the applicable conditions.
References:
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