How to Save Tax Using Income Tax Deductions?
The first step towards understanding how to save income tax is to know about various deductions allowed under Income Tax Act for tax benefit investments. They can help you lower the taxable income as per the tax-saving options you choose.
There are several tax-saving investments or incurred eligible expenses that can help you claim deductions that can help you save income tax to some extent. Furthermore, different there are multiple sections of the Income Tax Act dedicated to providing with a variety of tax-saving options.
Let’s discuss various deductions related to tax-saving investments and other eligible contributions and how to save income tax this way:
1. Section 80C: Save Tax with Life Insurance & Other Eligible Investments/Expenses
Section 80C is a significant part of the Income Tax Act, which is why you should know about the different tax saving options it encompasses and understand how to save income tax maximally.
Under Section 80C of the Income Tax Act, 1961, you can claim deductions on your tax benefit investments and contributions in various financial products. Many tax professionals primarily consider 80C deductions while explaining how to save income tax.
You can avail a deduction of up to Rs.1.5 Lakh under section 80C. Also, learn about investing in tax saving options like ELSS and Public Provident Fund (PPF), to gain better insights on how to save income tax. Life insurance premium amount, ELSS investments, tax saver fixed deposit, PPF investments, PF contribution (Employee contribution only), home loan principal repayment amount, and much more are covered under Section 80C of the Income Tax Act, 1961. The total deduction which can be claimed from all the above-stated deductions is Rs.1.5 lakh. As a part of tax planning, it is crucial to consider different tax-saving aspects of various tax benefit investments.
2. Section 80CCD: Save Tax By Investing in Retirement Plans
While learning about how to save income tax, you may have heard about the National Pension System (NPS). NPS is one of the tax-saving options you can choose to reduce your net taxable income. Section 80CCD covers the deductions you can avail of with your NPS investments. To get the hang on how to save income tax with NPS, you must first know about Section 80CCD in detail.
Two of the subsections of Section 80CCD of the Income Tax Act elaborate on how to save income tax with retirement plans like NPS and Atal Pension Yojana (APY):
Section 80CCD (1)
It covers the tax benefits of investing in retirement plans like NPS and APY, which makes you eligible for deductions. You can invest in NPS and avail of tax benefits as per your intent on how to save income tax.
The maximum deductions for salaried individuals and self-employed individuals under this subsection are 10% of their salary and 20% of their total gross income, respectively. You should know this while planning on how to save income tax.
Section 80CCD (1b)
This sub-section covers the tax benefit of NPS that allows an additional deduction of Rs.50,000 over and above the limit of Rs.1.5 Lakh in 80C. If you earn a handsome salary, you must include the tax saving options covered under this section in your plan of how to reduce your income tax payout.
3. Section 80D: Save Income Tax with Health Insurance
Under this section, you can avail of deductions of up to Rs.1. Lakh annually for the premium paid towards health insurance or critical illness rider in life insurance. So purchasing a health insurance policy not only reduces chances of out-of-pocket medical expenses but also helps you save income tax.
The subdivisions for the tax deduction limit are as follows:
Deduction of Rs. 25,000 on medical insurance premium for self, spouse and kids
Deduction of Rs. 50,000 if you are a senior citizen
Deduction of Rs. 25,000 on the premium paid on behalf of your parents
Deduction of Rs. 50,000 if your parents are senior citizens
Deductions under Section 80D Max Life Insurance
It is essential to know these subdivisions to dig deeper into how to save income tax.
4. Section 80E: Tax Benefit of Education Loan Interest Payment
As a part of planning how to save income tax, the education loan you have borrowed can help you avail of tax deductions. Unlike other tax-saving options, the interest you repay for the education loan qualifies for a deduction under Section 80E of the Income Tax Act.
To understand more about how to save income tax under this section, you must first check the total amount paid as the loan interest in a financial year. There is no upper limit to deductions claimed under this section, unlike other tax benefit investment avenues. This is a differentiating factor you must know about while thinking about how to save income tax.
5. Section 80EE: Save More Tax with Affordable Housing Home Loans
You must consider the home loan you have borrowed while planning your taxes. It is because Section 80EE allows a tax deduction of up to Rs.50000 on the interest you pay for home loans. This tax benefit is over and above the limit of Section 80C and Section 24 home loan tax benefits.
Include this section in your tax planning, if you are a first-time homebuyer. Furthermore, the loan amount should not exceed Rs.35 lakh. Knowing about such intricate details is crucial while thinking about how to save income tax.
6. Section 80G: Tax Saving Benefits of Making Donations
Donations are considered one of the tax-saving options for Indian taxpayers. Therefore, your charitable acts must be included in your tax-saving strategies. You can claim deductions on donations made to non-profit societies under Section 80G.
You must also know the following facts to plan your tax savings under Section 80G:
- Donations must be made to societies registered under Section 12A to qualify for deductions.
- Cash donations of above Rs.2000 are not considered valid for deductions.
7. Section 80GG: Save Tax By Declaring Rent Paid
While planning on how to save income tax being a salaried individual, you can claim a deduction on the House Rent Allowance (HRA) of your salary. However, you can claim a deduction under section 80GG if you live in a rented place and your salary does not include the HRA component. This way, the rent paid becomes one of the tax-saving options you can utilize.
Under the section, you must not own a home. Also, you can claim the least out of the following in a year as tax savings under Section 80GG:
Rs.5000 per month
25% of your annual salary
Total rent paid minus 10% of the total income
8. Section 80TTA: Get Tax-Free Interest from Savings Bank Accounts
Your savings bank accounts give you a fixed rate of interest on your deposits. It becomes a part of your income and Section 80TTA allows a deduction on such interest income.
To better understand how to save income tax under Section 80TTA, you must know that you can avail of deductions on:
Interest income from a savings account in a bank/post-office
Interest earned up to the limit of Rs.10,000
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Q. You can avail a deduction of up to Rs……. under section 80C.
A. 1.5 Lakh
B. 11.5 Lakh
C. 1.1 Lakh
D. 15 Lakh
Ans. A. 1.5 Lakh
Q. What is the Full form of NPS
A. National Public System
B National Pension System
C. National Post System
D. None of the above
Ans. B National Pension System
Q. APY Stands for…
A. Atul Pension Yojana
B . Atal Pen Yojana
C. Atal Pension Yojana
D. None of the above
Ans. C. Atal Pension Yojana
Q. HRA Stands For
A. House Rent Allowance
B. Home Rent Allowance
C. House Receipt Allowance
D. None of the above
Ans. A. House Rent Allowance
Q. Which Section allows a deduction on such interest income from a savings account in a bank/post-office
A. 80GG
B. 80TTA
C. 80EE
D. 80C
Ans. B. 80TTA