The government offers several tax saving options that help the common man meet his financial goals and save tax in the process. The most commonly used options are those under Section 80C of the Income Tax Act, 1961. One of the major benefits of investing through these sections is that you can claim up to Rs 1 lakh deduction under Section 80C against your total taxable income (Section 24). You can avail these sections as part of your overall investment portfolio or in isolation based on your risk appetite and goals.
Top 9 Tax Saving Options
1. Child Education Allowance
If your child is studying in an educational institution and less than 18 years of age, he or she may be eligible for Child Education Allowance (CEA). This allowance is taxable in the hands of the recipient. The amount of CEA will depend on whether your child is studying in India or abroad. For more information, click here. For Indian students, take a look at Scholarship tax breaks.
2. HRA/ House Rent Allowance
One of a few tax saving options, HRA is a cash reimbursement that employees can claim as an expense deduction. For self-employed individuals and business owners, a house rent allowance (HRA) is a way to lower your tax burden. To qualify for HRA, you must meet three conditions: 1) receive rental income; 2) live in or operate your business from home; and 3) spend at least 280 hours there each year (25% of your time). This deduction can help offset mortgage interest payments, repair costs, homeowner’s insurance, property taxes and more. Some employers will even cover all or part of their employee’s HRA—so ask your boss if you qualify for one!
3. Health Insurance Cover for Self & Family
One of the most basic tax saving options is to buy health insurance cover for self and family from a company that offers tax deductions. However, such schemes are only available to people in certain age bands: individuals aged below 30 years can avail tax benefits if they have medical insurance. To get tax deduction on premiums paid on health insurance premium, you need to ensure that your employer has enrolled you under Employees’ Health Insurance Scheme (EHIS). If your income falls within an exempt-exempt-taxable category then you would not be eligible for any tax benefit on health insurance premium. This is because EHIS will reimburse only deductible and exempted amounts as per Income Tax Act or rules made thereunder and remaining amount will be taxable in hands of employee.
4. PPF Scheme
PPF (Public Provident Fund) is one of the safest and most tax-efficient savings options. It’s a long-term investment option that offers tax benefits. To start a PPF account, you need to have an active bank account and have a PAN (Permanent Account Number). The minimum contribution for opening a PPF account is Rs 500 and your maximum contribution in a financial year should not exceed Rs 1.5 lakhs. As per Section 80C of Income Tax Act, interest on PPF is tax-free as long as it’s locked for at least 15 years, which means that any sum received from your PPF can be reinvested without being taxed again.
5. Public Provident Fund (PPF)
The Public Provident Fund (PPF) offers tax-free returns and is one of the most popular and attractive tax saving instruments in India. A PPF account can be opened with minimum amount of Rs 500 and an upper limit set at Rs 1.5 lakhs. This can be further extended up to 15 years, depending on how much you contribute each year. The returns on PPFs are better than most other instruments, given that it provides both principal security as well as growth over a period of time. As of April 2015, interest rates have been reduced to 8% from 8.8%. Additionally, all deposits made into a PPF account are eligible for deduction under Section 80C of Income Tax Act for any financial year in which income falls within specified limits.
6. Senior Citizen Savings Scheme
This scheme is especially meant for senior citizens. They can open a tax-saving fixed deposit (FD) in any bank and earn interest income tax-free up to Rs 50,000 annually. Senior citizens who earn pension are eligible for additional deduction of Rs 50,000 on interest earned on deposits made under Section 80TTA (deduction u/s 80TTA). The interest accrued during that year would be taxed at 20% after you file your return in March. In case you decide to close your FD before maturity, there is a penalty of 3% of interest payable on premature closure. This penalty is deductible from your taxable income.
7. 80C Limit Exemption – The Meaning & Strategy
The 80C limit exemption is an umbrella term for a host of tax-saving avenues that you can use to save tax. The most popular amongst these is an ELSS or equity-linked savings scheme, which we’ll cover later in this post. But first, let’s understand what 80C means, and why it exists. In theory, when you earn money from your employer or self-employment, you pay income tax on it and that’s that. However, if your taxable income falls below a certain threshold (Rs 2.50 lakhs if you’re single; Rs 5 lakhs if married), then you don’t have to pay any taxes at all!
8. Medical Insurance Premiums as a Deduction From Income
Premiums paid for medical insurance are tax-deductible. This is beneficial especially if your employer does not cover medical insurance. All medical expenses, including premiums paid for medical and dental insurance, long-term care coverage and amounts paid for prescription drugs, are deductible from income subject to a limit of 10% of adjusted gross income (AGI). You can also claim 100% of out-of-pocket expenses incurred for preventive care up to a certain amount. For 2017, you can deduct premium payments made towards health savings accounts (HSAs) as well as payments made towards Archer Medical Savings Accounts (MSAs) and health flexible spending accounts (FSAs). If you have been receiving employer contributions towards these accounts then your employer should have deducted these contributions from your taxable wages too.
9. Section 80C Limit Exemption – How to Use?
One of India’s most attractive investment avenues for tax saving is to put money in tax-saving mutual funds. Investing up to Rs 1.5 lakh in an ELSS fund every year can help you earn a handsome tax exemption. The returns from these equity-oriented products could be significantly higher than other traditional debt or hybrid funds, since they are exempt from paying capital gains tax under Section 10(38) of Income Tax Act, 1961. However, when it comes to claiming a deduction on your income tax return (ITR), you need to carefully decide how much you should put into which investment avenue.
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