The importance of financial literacy cannot be underestimated in today’s world. A strong understanding of money management, risk prevention, investments, and taxes may be crucial to thrive and prosper financially. However, gender discrimination may lead to women being at the lower end of the financial literacy spectrum. For instance, in a 2019 survey by the National Centre for Financial Education, only 21% of women respondents achieved the minimum financial literacy score.
If women are to progress further, then there may be an increasing need for awareness regarding financial topics amongst women. One topic that may get overlooked, is income tax.
Women may be able to save a considerable amount of taxes by knowing the various income tax benefits available, provided they meet the terms and conditions required. These benefits may be in the form of tax deductions, exemptions, and allowances on salary.
Let’s look at these benefits in detail.
Income Tax Benefits available for Taxpayers
There are no separate tax benefits available to Women taxpayers. While some of the tax benefits are only applicable if you are a salaried professional, there are other tax benefits that you may claim even if you do not earn a regular salary. These benefits are common amongst all taxpayers, men or women. Most of the Benefits are available only upon selecting Old Tax Regime. Tax deductions depends up Tax Regime opted. Below benefits/exemptions are available on opting of Old Tax Regime.
Here’s a look at both types:
• Standard Deductions
Regardless of the income category you are under, all taxpayers are permitted a standard deduction of Rs. 50,000 to reduce their tax outgo. So, whether their annual income is Rs. 3 lakhs or Rs. 10 lakhs, taxpayers can claim this deduction to reduce their tax liability to a considerable extent.
Let’s take a tabular example of a young professional named Smriti’s salary, to understand this better.
Details (in Rs)
Smriti’s salary (2021)
(-) Standard Deduction
Thus, Smriti would have to pay taxes on only Rs 9.5 lakhs.
• Allowances on Salary
Salaried individuals can claim the following exemptions on their salary:
• House Rent Allowance (HRA)
The HRA is a component of your salary that you may use to reduce your taxable income. Note that the HRA exemption might only be applicable if you are residing in rented accommodation. You may provide receipts of your rent payment to your employer to claim this exemption. In case you are unable to do so, you can still claim the exemption when filing the ITR (Income Tax Return).
• Leave travel allowance (LTA)
If a salaried individual incurs travel expenses during a leave from their professional workdays, then they may claim an exemption against those expenses to reduce their total tax outgo. The LTA may only be claimed twice in a block of four years and only against the actual transit taking place, and not against all the travel expenditure (shopping, sightseeing, entertainment, etc.).
Other allowances may also apply depending on your salary structure. You may reach out to your employer for more details.
Note: These allowances are subject to several terms and conditions. Only if the specified terms and conditions are met, you will be able to claim exemptions under old tax regime.
• Deductions under Section 80C2
Section 80C of the Income Tax Act of 1961 provides tax-saving options which are subject to provisions stated therein. Some options you may want to consider are:
• Life Insurance Policy
The premiums that you pay for your life insurance policy may be used to claim a deduction of up to Rs 1.5 lakhs.
While saving tax is indeed a worthy benefit of buying life insurance, there are many other advantages that you could gain in the process. Most importantly, you may enjoy peace of mind because your loved ones have a financial backup in case of an unfortunate event.
• Annuity Policy
An important aspect of financial independence that women must not overlook is retirement planning. What’s more, planning retirement with the right products may help increase the tax benefits.
An annuity policy is a type of pension plan in which the policyholder parks money for a particular period (usually starting a few years before their retirement); then, as the plan matures and the individual retires, they may receive payouts at the frequency of their choice. Apart from this benefit, the annual premiums paid for an annuity, too, are eligible for a maximum deduction of Rs 1.5 lakhs under Section 80C and 80CCC of the Income Tax Act, 1961 as per the terms and conditions stated therein.
• Tax Benefits Under Section 80D 3
Section 80D of the Income Tax Act of 1961 allows one to claim tax deductions against the premiums they pay for health-related insurance policies subject tp provisions stated therein.
If you have bought a critical illness benefit as an add-on with your life insurance policy, then you may claim an additional deduction of up to Rs 25,000 under Section 80D. If the person being insured under the rider is over 60 years of age, then the deduction limit can increase to Rs 50,000.
Important note: Many of the life insurance tax benefits mentioned here may be available only for taxpayers who have taken the old tax regime. Taxpayers under the new tax regime may not be eligible for these tax benefits. Please check with your financial advisors for more details.
Tips to Optimise Income Tax Benefits for Tax payer
While women may take advantage of the above tax benefits to increase their tax savings, the below tips can help push their financial independence even further.
• Select the Appropriate Tax Regime4
Currently, there are two tax regimes a taxpayer can choose from. The new tax regime, introduced in Budget 2020 provides lower tax rates for different slabs. The old tax regime may also be chosen in lieu of the new tax regime. Though the tax rates are higher under the old tax regime, it allows for several tax deductions which are not eligible under the new regime.
Hence, women need to review their priorities - low tax rates or tax deductions - and choose the suitable tax regime for themselves to make appropriate use of income tax benefits.
• Invest Regularly
Investing in a plan that can provide good yields over the long term can be a wise choice for women looking to generate wealth. Women may want to consider a market-linked insurance product such as a ULIP (Unit-Linked Insurance Plan) to receive the dual benefits of life insurance and investment opportunity under one product. Additionally, tax benefits are also available on ULIP, under the aforementioned Section 80C of the Income Tax Act 1961 subject to the terms and conditions concerning it2.
By choosing the right asset class that suits their goals, women may build market linked wealth in the long term and gain a higher level of financial independence.
• Use an Income Tax Calculator
To get an idea of your approximate tax liability, you may use an income tax calculator. You may have to input details regarding your income, the deductions you are eligible for, and so on, to get a tax estimate.
Though there are several resources and tools available online, it is preferred to reach out to a tax expert and/or a financial consultant for a deeper understanding of the several tax benefits.
1. https://ncfe.org.in/images/pdfs/reports/NSFE_20-25_ENG.pdf (please refer to page 10)