“In this world, nothing is certain but death and taxes,” said Benjamin Franklin.
The above saying portrays essential emotions when one experiences unwanted money extortion, and Tax is just the term used for such a payment.
Well, like every time, let us begin from the fundamentals.
What is Tax?
Putting it informally, Tax is mandatory extortion of finances by the federal authorities to finance government bodies.
Taxes form the primary source of revenue for the government, which it further utilizes to enhance the developments in the public sector and the services provided to the general public.
How many kinds of Taxes are Prevalent in India?
Taxation mechanisms in India are complex. But broadly, Tax can be classified under two major headings:
- Direct Tax: The burden to pay the Tax cannot be shifted.
- Indirect Tax: The burden to pay the Tax can be shifted. Generally, the end consumer of the product is liable to pay.
Direct Tax constitutes 50% of the government’s total revenue. It further embodies Income Tax, Capital Gains Tax, and Corporate Tax. Income Tax Act, 1961, governs the levy of Income Tax.
In this article, we will learn how to save your Direct Tax, highlighting Income Tax.
Discussing the boundaries of Income Tax
While Income Tax is levied on your Annual Income, it is categorized as follows:
- Income from Salary
- Income from House Property
- Income from Professional And Business
- Income from Capital Gains
- Income from Other Sources
Every kind of income or gain you receive is classified under the above sets. For example, Dividend income is treated under Income from Other Sources, and Income from Rent is discussed under Income From House Property.
The complications of the tax system can not be summed up within one article. And thus, here, we shall confine the scope to saving your income tax by availing certain deductions.
But before we begin, there is a thought that we need to address:
By availing of deductions, one avoids taxes, which should be treated as an offense.
I would like to begin my discussion with this famous saying, “The difference between tax evasion and tax avoidance is the thickness of a prison wall”.
Well, tax avoidance is a systematic approach to reduce your income tax payments by claiming legitimate deductions as stated under the law.
The best way to save taxes is to initiate investments in the government sector from the beginning of the financial year. We shall discover all such deductions below:
ELSS Mutual Fund
ELSS stands for Equity-Linked Saving Scheme. In this, the finances are allocated in equity funds. Under section 80C of the Income Tax Act, 1961, one can claim deduction up to a maximum amount of Rs. 1.5 Lakh.
Investment can be made through any procedure, whether Systematic Investment Plan (SIP) or Lump Sum Payment. ELSS offers significant tax benefits to investors.
National Savings Certificate
NSC is an investment plan which enables you to open a fixed income tax-saving plan with any post office. It is a plan offered by the government.
It qualifies under section 80C of ITA, and allows a maximum deduction of Rs. 1.5 Lakh. NSC provides the holder with an interest of about 6.8% p.a. Further, there are two plans for NSCs; a five-year plan and a ten-year plan.
National Pension Scheme
It is also an investment plan initiated by the government which tends to offer security to the aged and retired strata of the society. People can opt for NPS and keep investing right after becoming an adult.
The amount allowed is a maximum of Rs. 1.5 Lakh. However, one can also avail extra Rs. 50000 under section 80CCD (1B). This adds up to Rs. 2 Lakh.
Under Section 80D, the deduction is allowed for the premium paid for medical insurance.
|Entity||Self, Spouse, Children||Parents|
|1. Medical Insurance Premium||Yes||Yes|
|2. Preventive Health Check Up||Yes||Yes|
|3. Central Government Health Scheme||Yes||No|
|In case of 1+2+3||Maximum Limit Rs. 25000||Maximum Limit Rs. 25000|
|Additional Deduction||Additional Rs. 25000 if anyone is above the age of 60 years.||Additional Rs. 25000 if anyone is above the age of 60 years.|
Deductions for Housing Loan
You can claim deductions for housing loans twice. Once under section 24(b) of Income from House Property and then under section 80EE. However, you need to fulfill certain conditions:
- The loan must have been acquired from a bank or a financial institution for the acquisition of residential property.
- The purchase price of the house should be up to Rs. 50 Lakh
- Loan ought to be sanctioned between 1/4/2016 to 31/3/2017
- The loan must amount up to Rs. 35 Lakh
- The maximum deduction that can be claimed u/s 24(b) is Rs. 2,00,000, and u/s 80EE is Rs. 50,000. Hence, the total deduction that can be claimed is Rs. 2,50,000.
Note: The above conditions are applicable for FY 21-22 and are subject to change with a change in FY.
Deductions for Donations Made
Certain donations open doors to deductions under ITA,1961. Section 80GGA allows 100% exemption for any contribution made to a scientific research institute or a rural development project.
The donation amount is allowed if only the payment has been made in modes other than cash. Section 80GGB and 80GGC allow assesses to claim exemptions for donations made to political parties and electoral trusts.
Medical Treatment and Maintenance of a Handicapped Dependent Relative or Handicapped Assessee
When we talk about relatives, in terms of taxation, it means your close family, which consists of parents, spouse, children, and dependent siblings. A flat deduction of:
- Rs. 75,000 is allowed in case of a normal disability
- Rs. 1,25,000 is permitted in case of a severe disability.
They are flat deductions that implies you can claim them immaterial of the expense incurred.
Deduction for Education Load
As an individual residing in India, the deduction can be claimed for interest payment on a loan sanctioned for the higher education of self, spouse, or children.
An individual assessee is eligible to avail of the benefit from this section. The amount of deduction is equivalent to interest paid to the lender, and there is no specific limit.
The deduction can be claimed even if the loan has been obtained for education in foreign countries.
Section 80TTA and 80TTB
Deductions under Chapter VI-A also envelopes exemptions on interest earned from Savings Account. The eligible assessees are an Individual and a Hindu Undivided Family.
It is vital to consider that the account must be maintained with a Banking company, cooperative bank, or any Post Office.
A maximum deduction of Rs. 10,000 is allowed. However, in the case of senior citizens, the amount reaches up to as high as Rs. 50,000.
Deductions with Respect to Medical Treatment of Specified Diseases
Income tax deductions can also be availed by an Individual or an Undivided Hindu Family in case of treatment of specified conditions.
The maximum amount of deduction that can be claimed is Rs. 40,000 in case of a citizen under the age of 40 and Rs. 1,00,000 in case of a senior citizen.
To encourage investments, specific tax-saving schemes have been unfolded for residents to invest. By investing in these plans, an individual becomes eligible to claim income tax deduction under section 80C.
Remember, the maximum amount of deduction available u/s 80C is Rs. 1.5 Lakh.
Following is the list of investments:
- Life Insurance Premium:
- Premium Paid
- 10% of Policy Value if the policy has been issued after 1/4/2012
- 20% of Policy Value if the policy has been issued before 1/4/2012
(Whichever is lower is considered as the amount of deduction)
- Deposits in notified bonds of NABARD.
- Investment in specific units of Mutual Funds or Unit Trust of India (UTI)
- Deposits held under Senior Citizen Saving Scheme.
- Fixed deposit maintained with a scheduled bank or post office, given the tenure of such deposit must be at least five years.
- Tuition Fees paid for the education of children. A maximum of two children are allowed.
- Employee’s Contribution to Statutory Provident Fund, Recognized Provident Fund, or Approved Superannuation Fund.
The above-illustrated points are subject to notifications. Therefore, an assessee needs to read the required circulars. Amendments in provisions in the law of taxation are frequent. Consequently, it is advised to follow the updated notifications to avail maximum benefit.
As complicated as the taxation system is, it can be dealt with in a planned and organized manner. A calculative approach shall help you save your taxes to a great extent.
Government-initiated investments assist in paving the way to a remarkable procedure of saving taxes. Therefore, in the broad picture, investment is the key to channelize your finances from expense to asset.