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"Explore the ultimate guide on How to Save Tax and uncover smart strategies to maximize your savings legally and effectively.
Saving taxes is an essential part of securing your financial future.
As you aim to build a stable financial life, it's crucial to understand income tax and effective ways to save on taxes.
Fortunately, in India, there are various methods to reduce your tax burden, which means you get to keep more of your hard-earned money.
In this blog, we will delve into the basics of income tax, explore simple ways on how to save tax, and introduce you to government schemes that will guide you on how to save tax in India.
Understanding Income Tax
Before we delve into the various ways of how to save tax, it's important to understand the basics of income tax.
Income tax is a fundamental component of the taxation system implemented by the central government. It is applicable to both individuals and businesses during a financial year.
Income tax falls under the category of direct tax, meaning it is levied directly on the income earned.
The revenue generated from income tax is utilized for various purposes, including infrastructure development, healthcare, education, agricultural subsidies, and welfare schemes.
The calculation of income tax is determined based on the income slab rates relevant to the specific financial year, ensuring a systematic and equitable approach to taxation.
As individuals and entities earn income, they are obligated to pay taxes according to the prescribed rates, contributing to the overall financial framework of the nation.
Now that you know what income tax is, let's explore how to save income tax by discovering various financial strategies to reduce your tax burden.
How to Save Tax?
There are two primary ways through which you can save on taxes. Let's explore these methods in detail and discover how to save tax.
Utilizing Tax-Saving Instruments
The government of India encourages citizens to invest in tax-saving instruments listed under Section 80C of the Income Tax Act.
By doing so, not only can you potentially grow your money, but you can also reduce your tax burden significantly.
These tax-saving investments offer a win-win scenario, allowing you to secure your financial future while enjoying tax benefits on the invested amount.
Availing Tax Benefits through Deductions
You have the option to let your employer deduct tax from your salary on a monthly basis.
If the deducted amount exceeds your expenses eligible for non-taxable payments, you can claim a refund for the excess tax paid.
This process is facilitated through filing Income Tax Returns, wherein you inform the Tax department about your income, deductions, and investments to avail the appropriate tax benefits.
Top 5 Tax-Saving Strategies in India
Let's now delve into the top 5 strategies that will enable you to optimize your tax liability and keep more of your hard-earned money. Discover these effective methods to learn how to save income tax on salary:
Choose the Optimal Income Tax Regime
India's tax regime provides two options for taxpayers exploring how to save tax.
The new regime, revised after Budget 2023, offers full tax refunds for individuals earning up to 7 lakhs in FY 2023-24, along with a standard deduction of up to 50,000.
On the other hand, the old regime retains existing tax exemptions and deductions, but the non-taxable limit remains 2.5 lakhs.
By conducting a thorough evaluation of your income and the potential tax savings under each regime, you can make a well-informed decision on how to save tax.
Leverage Home Loan Tax Benefits
Availing a home loan not only helps you achieve the dream of owning a home but also comes with substantial tax benefits.
Sections 80C, 80EEA, and 24(b) offer deductions on principal and interest repayments, effectively reducing your taxable income.
Additionally, if you rent out the property, you can claim an exemption on the entire interest component from your annual income tax calculations.
Invest in Health Insurance for Tax Savings
With healthcare costs rising, having health insurance is a prudent financial decision.
The government incentivizes individuals to avail health insurance policies by offering tax deductions under section 80D.
Depending on the age of the insured and the number of family members covered, you can claim deductions on premium payments, reducing your tax liability significantly.
Maximize Tax Benefits through Life Insurance Plans
Life insurance serves as a tax-saving tool while safeguarding your family's financial future.
Policies issued on or after April 1, 2023, can claim tax exemption on the maturity amount of life insurance policies only if the total yearly premium is up to 5 lakhs or if the aggregate of premiums from multiple policies is up to 5 lakhs.
For policies issued before this date, deductions under section 80C can be claimed if the total premium payments do not exceed specified limits.
Tax Benefits on Rented Properties
House Rent Allowance (HRA) provides tax exemptions under Section 10(13A).
If your salary includes an HRA component, you can claim compensation against rent paid, subject to specific conditions. In case you don't receive HRA, you can still claim deductions on rental expenses under Section 80GG, based on specified criteria.
Effectively utilizing HRA and rental deductions can help you learn how to reduce income tax significantly.
By implementing these top 5 tax-saving strategies in India, you can efficiently manage your tax liability and learn how to save tax in new regime.
Key Government Schemes for Tax Savings
Apart from the above strategies, the Indian government offers various key schemes that allow individual taxpayers to maximize their tax savings under Section 80C. If you're wondering how can i save income tax, take a look at the following schemes:
- ELSS (Equity Linked Savings Scheme)
ELSS allows for tax exemption of up to 1.5 lakhs, offering an attractive avenue for tax-efficient investments. With a lock-in period of 3 years, ELSS investments in equity markets have the potential for higher returns while helping you save on taxes.
- National Savings Certificate (NSC)
Contributions made towards the Public Provident Fund (PPF) account, along with the interest earned and maturity amount, are all tax-exempted up to a maximum of 1.5 lakhs. The NSC comes with a lock-in period of 15 years, which can be further extended for an additional 5 years.
- National Pension Scheme (NPS)
NPS offers dual tax benefits. Firstly, you can avail deductions of up to 1.5 lakh under section 80C of the IT Act. Secondly, an additional deduction of up to 50,000 is allowed under Section 80CCD (1b). If your employer contributes 10% of your basic salary, that amount is not taxed. NPS comes with the flexibility to invest until retirement, ensuring meaningful financial planning for the long term.
- Bank Fixed Deposits
Investing in Bank Fixed Deposits provides a deduction of up to 1.5 lakh per year under Section 80C. With a lock-in period of 5 years, it offers stable returns and tax benefits.
- Senior Citizen Saving Scheme (SCSS)
Exclusively designed for individuals above 60 years, SCSS offers a deduction of up to 1.5 lakhs applicable for TDS. It comes with a lock-in period of 5 years, extendable for an additional 3 years, ensuring meaningful financial protection for seniors.
- Sukanya Samriddhi Yojana (SSY)
For parents looking to secure their daughter's future, SSY offers tax-exempted investments of up to 1.5 lakhs. The interest compounded annually and the maturity and withdrawal amounts are also tax exempted, providing a meaningful investment option for a period of 21 years.
- Unit Linked Insurance Plan (ULIP)
ULIPs offer tax deductions of up to 1,50,000 on policy premiums. Additionally, top-ups are also eligible for tax deductions under Sections 80C and 10D. With a lock-in period of 5 years, ULIPs present an effective avenue for tax-saving investments with insurance coverage.
With a clear understanding of how to save tax in India, you can harness the power of these key government schemes and figure out how much investment needed to save tax.
Understanding income tax and exploring various tax-saving strategies and government schemes can help you find hidden ways to save tax effectively.
By choosing the right income tax regime, taking advantage of tax benefits from home loans, health insurance policies, and life insurance plans, and utilizing key government schemes under Section 80C, you can optimize your tax liability and achieve meaningful tax savings.
Furthermore, utilizing a tax saving calculator can offer invaluable insights, helping you make well-informed financial decisions.