Q. Dear Dollar Didi, I have been working for the last 7 years but this is the first time I will file my tax returns. Could you please tell me how much tax I can save on my income?
First of all, a small rap on your knuckles for not knowing about tax exemptions until now and then a tiny pat on your back for taking the initiative to learn. We all know that it’s never too late to ask questions.
Let me dive right into it. Filing of taxes is always stress-inducing affair. I mean, there was a time that my skin used to break out each time I would sit down to file my taxes. But then I discovered these fantastic tax-saving options that actually have me beaming from ear to ear, and I look forward to filing returns every year.
Yes, it’s very much legal to save some of your hard-earned money. The first thing you should know is that the first 2.5 lakh of your income is totally tax-free. We are praying that the tax exemption limit is increased this year when the government announces the new budget. But as of now, that’s your money to take home. After that up to 1.5 lakh can be saved through following deductions under section 80C:
1. Life Insurance Policy
While we all know that life insurance provides coverage against the unexpected death of the policyholder, the sum assured, premiums paid and interest amount related to a LIC plan are all exempt from tax deductions.
2. Public Provident Fund (PPF)
This is a savings scheme offered by the government of India. The interest earned and the maturity proceeds are both exempted from tax.
3. NSC (National Saving Certificate)
Any Indian resident can purchase this from a post office. The principal amount invested in an NSC is exempt from the tax deduction. The annual interest earned from NSC (for the first four years) is deemed to be reinvested, so it is free from tax. But the interest earned in the 5th year is not reinvested and hence taxable according to the investor’s slab rate.
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4. Sukanya Samriddhi Account Scheme
This can be opened by parents of a girl child below the age of ten years in any post office or authorised branches of commercial banks. The principal amount, the interest earned and maturity amount are all, and hence, it is considered an EEE (Exempt, Exempt, Exempt) investment.
5. ULIP (Unit Linked Insurance Plan) Investment
This one is a double benefit. One, because it gives you insurance with investment. And two, because the premium paid is exempt from tax under section 80c and returns on maturity are exempt from income tax under Section 10(10D) of the Income-tax Act.
6. ELSS (Equity-Linked Savings Scheme)/Notified Mutual Fund
A type of diversified equity mutual funds with a lock-in period of 3 years, returns from which are tax exempt.
7. Fixed Deposits
A five years fixed deposit with a scheduled bank or a five years Post Office Fixed Deposit will also help you in saving tax.
Let me also add that apart from Section 80C of the Income Tax Act, there are other options where tax deductions are available over and above the said 80C deduction of Rs.1.50 lakh.
Under section 80CCD(1b), you can save up to Rs.50,000/-by investing in National Pension Scheme (NPS). This is launched by the Government of India, so you get a market-based return but in a safe and regulated manner. It’s an excellent tool for retirement planning.
Then there are tax deductions under Chapter VI-A of the Income Tax Act which are as follows:
Mediclaim insurance premium under Section 80D is suitable for self, spouse and children– up to Rs. 25,000 and for parents (if not senior citizens) up to Rs. 25,000 and parents (if senior citizen) up to Rs. 50,000.
There are tax deductions on medical treatment for handicapped dependent as well. If the disability is more than 40% but less than 80% then a fixed deduction of Rs 75,000 and If the disability is more than or equal to 80% fixed deduction of Rs. 1,25,000.
For someone who has more than 40% but less than 80% physical disability, a fixed amount of Rs. 75,000 is allowed and if the disability is more than or equal to 80% then set amount of deduction is Rs.1,25,000
In the Rajiv Gandhi Equity Saving Scheme under section 80CCG, the maximum Investment permissible is Rs. 50,000, and the investor would get a 50% deduction of the amount invested from the taxable income for that year. The only catch is that the employee’s annual Gross salary should be <= 12 lakh.
There are benefits of staying in a rented house too as you can claim tax deductions under the House Rent Allowance.
Under section 80E, if you have taken a loan for higher education, this is also exempt from tax.
Any interest on a loan to buy a house is also tax-free.
Goodwill goes a long way in saving some tax. So, all donations to charity are also exempt from tax.
In short, if you avail the above deductions, then you can save tax on your regular income of around Rs.2.5 – 3 lakh.
Now don’t come back crying to me that you did not know about these tax saving tools. Imagine all the things you could do with the money you save on tax.