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In our latest blog post, we will share 15 practical strategies to help you reduce your income tax in 2023. Tax planning isn’t just about saving money; it’s also a way to increase your overall income. The Income Tax Act offers opportunities for deductions through various investments and expenses, so it’s important to explore these options. Instead of seeing income tax as a burden, consider it a chance to improve your financial portfolio with tax-saving investments.
Many people struggle with tax planning due to a lack of knowledge, highlighting the need to teach tax basics in schools for future financial responsibility. In India, taxes cover income, wealth, and property. Understanding these categories is essential for effective tax planning.
Tax revenue plays a crucial role in a country’s economic growth and ensures the smooth functioning of the nation.
Whether you’re a salaried employee, freelancer, business owner, or investor, meeting your tax obligations is essential. Explore legitimate ways to save on taxes, like tax-saving mutual funds, the National Pension System (NPS), insurance premiums, medical insurance, and home loans.
These strategies can help you in minimizing your tax liability,allowing you to keep more of your hard-earned money. Let’s delve into these tax-saving tips and make 2023 a year of financial empowerment.
Before we proceed with the article, let’s refresh your understanding of what Income Tax is.
Income tax is the money you pay to the government from your earnings. It’s used to run the government, provide services, and meet financial obligations. You must file an annual income tax return to determine how much you owe. This tax applies to both individuals and businesses and is collected by different levels of government, not just at the national level.
How to save tax?
The government encourages individuals to consider tax-saving investments mentioned under section 80C of the Income Tax Act. This helps them reduce the amount of taxes they have to pay. It’s a way to make sure you’re saving money and not giving too much to the government. Here are some examples of these tax-saving options.
1. PPF (Public Provident Fund)
The Public Provident Fund is a long-term government savings plan available at many banks and post offices in India. It has a 15-year tenure, and as of April to June 2023, it offers an annual interest rate of 7.1%, which is compounded annually.
Here’s how PPF works:
- i) Opening an Account: You can open a PPF account with as little as ₹100.
- ii) Investment Limit: The minimum investment you can make in a financial year is ₹500, and the maximum is ₹1.5 lakhs. If you invest more than ₹1.5 lakhs in a year, you won't earn interest on the excess amount.
- iii) Lock-In Period: Your money is locked in for 15-year period, but you can make partial withdrawals starting from the seventh year.
- iv) Tax Benefits: PPF is a safe option for saving on taxes. The interest you earn and the money you deposit are both tax-free at the time of withdrawal.
- v) Regular Deposits: You need to make at least one deposit each year for 15 years to keep the account active.
2. National Pension Scheme
The National Pension System (NPS) is a retirement savings plan overseen by the Indian government. It’s designed to help people save for retirement while providing tax benefits.
- i) What is NPS?
- NPS is a retirement savings fund introduced by the Indian government in 2004, initially for government employees, but in 2009, NPS was made available to everyone. It’s a way to ensure financial security in retirement and generate good investment returns.
- ii) How Does NPS Work?
- When you have an NPS account, you contribute money regularly during your working years. You need to invest at least ₹6,000 each year. When you retire, you have the option to withdraw 60% of the total amount saved. While the remaining 40% is used to buy an annuity, ensuring a consistent income after retirement.
- iii) Types of NPS Accounts
There are two types of NPS accounts:
- Tier I NPS Account: This is the primary NPS account, and you can’t withdraw money from it until you reach 60 years of age or retire.
- Tier II NPS Account: This is like a voluntary savings account. You have the flexibility to withdraw your money from it at any time.
- Investment Strategy: Your NPS investments are divided between equity and debt instruments. The exact allocation can be decided by you or chosen based on your age.
- Tax Benefits: Investing in NPS helps you save for retirement and provides tax benefits.
- In Case of Demise: If the account holder passes away before reaching 60 years, the entire savings go to the nominee or legal heir.
The total amount you accumulate in your NPS account depends on your contributions and the income generated by investing 40% of the maturity amount in annuities.
3. Premium Paid for Life Insurance policy
Life insurance can serve as a valuable tax-saving tool in India. When you choose a life insurance policy, you can enjoy several tax benefits.
Firstly,The premiums you contribute for the policy are eligible for annual tax deductions of upto ₹1.5L under Section 80C of the Income Tax Act, 1961.
Secondly, any payouts you receive under the policy are tax-free, subject to the conditions specified in Section 10(10D) of the same Act. Moreover, if your policy includes critical illness benefits, the premiums paid towards this coverage also qualify for tax exemption under Section 80D of the Income Tax Act, 1961.
These tax benefits not only provide financial security for you and your family but also help you reduce your tax liability, making life insurance an attractive investment choice for many individuals. However, it’s advisable to consult with a tax advisor or financial expert to make informed decisions based on your unique financial situation.
4. National Savings Certificate
The National Savings Certificate (NSC) is a secure investment option provided by our Government of India. Access to this scheme is available by simply visiting a local post office. The scheme comes with a mandatory 5-year lock-in period. As of April to June 2023, it offers an attractive interest rate of 7.7% per annum.
To get started, you’ll need a minimum of ₹100 to purchase an NSC certificate. These certificates are available in various denominations, including ₹10,000, ₹5,000, ₹1,000, ₹500, and ₹100.
It’s important to note that premature withdrawals are only permitted under specific circumstances. This includes cases where the certificate-holder has passed away or if the certificates have been surrendered.
One of the key advantages of the NSC scheme is its safety. It is backed by the Government of India, ensuring the safety of your invested capital. Additionally, it’s worth mentioning that only the interest earned in the final year is subject to taxation.
5. Equity Linked Savings Scheme
Equity Linked Savings Schemes (ELSS) are a special type of mutual fund in India. The scheme comes with a mandatory 3-year lock-in period. This means you can’t withdraw your money before this time is up. But here’s the perk: They’re the only mutual funds in India that qualify for a tax deduction under Section 80C of the Income Tax Act.
Now, let’s talk returns. ELSS mainly invests in the stock market, which can lead to significantly higher returns compared to other tax-saving schemes, especially over the long term. You have two options when investing: you can put in a lump sum amount or take the SIP (Systematic Investment Plan) route.
But there’s a catch.
Since ELSS plays in the stock market, there’s a moderate level of risk involved. However, this risk tends to even out over time, making it one of the more profitable tax-saving options.
Here’s a tax tidbit: if your gains from ELSS investments go over ₹1 lakh in a financial year, you’ll have to pay a 10% LTCG tax. Thus, it’s a crucial point to remember.
6. Home Loan’s Principal Amount
If you have a home loan, the portion of your Equated Monthly Installment (EMI) allocated for repaying the principal amount qualifies for tax deductions under Section 80C. It’s important to note that the interest you pay on the loan doesn’t qualify for this tax break.
7. Fixed Deposit For Five Years
You have an option to invest in tax-saving fixed deposits, which allow you to claim tax deductions of up to ₹1.5 lakhs. These deposits come with a five-year lock-in period, meaning you can’t withdraw your money before this time is up. You’re only allowed to make a one-time lump sum deposit, and early withdrawals are not permitted.
The minimum amount you need to invest depends on your bank, but you can’t exceed the ₹150,000 limit set by Section 80C. The interest rate you’ll receive is based on the prevailing 5-year FD rate.
Afterward, you have a choice of what to do with the interest earned. You can either reinvest it or opt for monthly or quarterly payouts. It’s important to know that TDS (Tax Deducted at Source) is applicable to the interest earned on your FD. However, you can avoid this by submitting Form 15G or Form 15H (if you’re a senior citizen) to the bank. In this manner, you can optimize the advantages of your investment.
8. Sukanya Samariddhi Account
The Sukanya Samriddhi scheme is a wonderful option for parents looking to secure a tax deduction while saving for their daughters’ future. This scheme offers an attractive interest rate of 8% per annum, compounded annually, as of June 2023. The interest earned is eligible for tax benefits.
With a lock-in period of 21 years, opening an account for your daughter early can lead to substantial savings by the time she reaches adulthood.
To begin, you’ll need to make an annual minimum deposit of ₹250 for 15 years. With a maximum yearly investment limit of ₹1.5 lakh, this plan provides an excellent opportunity to benefit from tax deductions under Section 80C of the Income Tax Act.
9. Children’s Tuition Fees
This income tax saving benefit is exclusively for individual parents or guardians and is limited to a maximum of two children per person. You can claim the tax deductions of up to ₹1.5 lakh for tuition fees paid towards your child’s education. It’s important to note that this deduction isn’t dependent on the child’s grade level. However, the educational program the child is enrolled in must be a full-time course in an Indian school, college, or university.
This benefit extends to parents who have adopted children, as well as unmarried individuals or divorced parents. In these cases too, you’re eligible to claim tax deductions of up to ₹1.5 lakhs for tuition fees paid for your child’s education.
So, whether you’re a parent by adoption, unmarried, or divorced, you can still take advantage of this scheme to ease the financial burden of your child’s education while gaining valuable tax benefits.
10. Senior Citizens’ Saving Scheme
The Senior Citizens’ Saving Scheme (SCSS) is a government-backed, long-term income tax-saving option with a tenure of 5 years, exclusively available to individuals above the age of 60. It offers an interest rate of 7.4% (taxable). Additionally, under this scheme, individuals can avail a tax deduction of up to ₹1.5 lakh, making it a beneficial and organized investment option for senior citizens.
Few Tax Saving Tips Other than Section 80C:
- i) Tax Deduction with Home Loan: Using section 80C of the Income Tax Act, you can reduce your taxable income when structuring your home loan. This allows for a benefit of up to ₹ 1.5L on the principal amount and ₹2 lakhs on the interest paid (section 24).
- ii) Interest on Savings Accounts: Interest earned on savings accounts up to ₹10,000 is generally tax-exempt. For senior citizens, the limit is raised to ₹50,000 as per the provisions of Section 80TTB.
- iii) NRE Accounts for Non-Resident Indians: Indian citizens living abroad can open NRE accounts and receive tax-free interest on both accumulating and fixed deposits.
- iv) Life Insurance Policy: If you purchased a life insurance policy after April 1, 2012, and your premium amounts to less than 10% of the sum assured, any maturity amount or bonus you receive remains completely exempt from income tax under Section 10. However, for policies purchased before April 1, 2012, the maturity amount remains tax-free as long as the premium constitutes at least 20% of the sum assured.
- Additionally, for policies purchased after April 1, 2013, that cover individuals with a disability or specific diseases listed under Sections 80U or 80DDB, respectively, the amount received at maturity is also tax-free. This condition applies provided that the premium remains below 15% of the sum assured.
- v) Scholarship for Education: Scholarships granted to deserving students to cover educational costs are tax-exempt as per Section 10(16) of the Income Tax Act.
- vi) Wedding Gifts: Wedding gifts received from direct relatives are exempt from taxation. However, gifts from friends or unrelated individuals have a maximum limit of ₹50,000, exceeding which they are subject to applicable tax slabs.
- vii) Amount Received through Inheritance: Money received through inheritance, whether via a will or as a legal heir, is entirely tax-free as India does not have an inheritance tax.
- viii) Provisions under Section 80C: Section 80C allows for an investment of up to ₹1,50,000 to promote savings and reduce tax liability. This provision encourages investments in tax-saving instruments for the future.
- ix) National Pension Scheme (NPS): Contributions to the National Pension Scheme, typically under Section 80C, can enjoy tax benefits, with an option to invest an additional ₹50,000 tax-free.
- x) Loan for Education: According to Section 80E, individuals are eligible to claim a deduction specifically for the interest paid on a loan obtained for pursuing higher education. There is no upper limit on this deduction, which means you can potentially get a tax benefit on the entire amount of interest paid. However, it's important to note that this deduction applies only to the interest component and not the principal amount of the loan. This provision is designed to encourage the individuals to pursue higher education by providing a tax incentive for the interest payments on educational loans.
- xi) Health Insurance Premium: For taxation purposes, an individual is eligible to deduct up to ₹25,000 for their own insurance premium, as well as the insurance premiums of their spouse and dependent children. In addition to this, if an individual's parents are below 60 years of age, they can claim a separate additional deduction for their parents' insurance premium, up to ₹25,000. However, if the parents are above 60 years of age, this additional deduction can be extended up to ₹50,000. This provision is in place to provide tax benefits and encourage individuals to secure insurance coverage not only for themselves but also for their immediate family members, including parents.
- xii) Expenses for Treating Specific Diseases: Section 80DDB provides deductions for medical expenses related to specific diseases or ailments, subject to certain conditions and capped at a specific amount.
- xiii) Charity Donations: Donations to designated relief funds and charity organizations qualify for deductions under Section 80G, although not all donations may be eligible.
- xiv) Donations to Political Parties: When you donate to a political party or electoral trust, you can deduct up to 100% of the donation from your taxable income using Section 80GGC. However, this deduction cannot exceed your total taxable income. This falls under Chapter VIA of the Income Tax Act, which means the total deductions from all available sources in this chapter cannot exceed your taxable income. In simple terms, you can't reduce your taxable income to zero with this deduction.
- For example, if you earned ₹50,000 and donated ₹10,000 to a political party, you can deduct the full ₹10,000. This means you'll only be taxed on ₹40,000.
- It's important to note that this deduction only applies to donations, not to tax deducted from your salary (TDS). So, while political donations can lower your tax, TDS on your paycheck doesn't qualify for extra deductions. If your employer deducts ₹80,000 (10% of ₹8,00,000) as TDS from your ₹8,00,000 salary, you can't claim an additional deduction on this amount. The TDS is already considered in your tax liability. Therefore, even if you make a political donation, you can only claim a deduction for the ₹50,000 donated, not for the TDS amount. This ensures that tax benefits for political donations are applied fairly based on your income.
- xv) Tax Savings for Business Owners: Entrepreneurs often need to travel for business, especially if they have branches in different cities. If you want to save on taxes, consider booking your travel and accommodation through the company's funds rather than using your personal account. This is considered a legitimate business expense and can be deductible from the company's taxable income. Keeping good records, like saving receipts and canceled checks, is important. These documents show that the expenses were for business purposes. They not only help you get reimbursed by your company but also make it easier for your company to file its taxes accurately.
- So, by using the company's money for business trips and keeping proper records, you can save on taxes and make things smoother for both you and your company.
Conclusion: Choosing a tax-saving instrument should consider risk, lock-in period, liquidity, and returns. Staying updated on the latest tax-saving provisions is crucial for maximizing savings in India. The government offers various tax benefits for residents and non-residents, so knowing your rights can lead to significant tax savings. While taxes are inevitable, investing in instruments like mutual funds, stocks, and bonds can help save on taxes. However, saving taxes requires time and effort.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
