There are various ways to save income tax through investing, insuring and spending. But not all investments, insurance policies or spends are eligible for tax deductions. Only those qualified under the Income Tax Act will help you save tax. Each tax-saving instrument is different from the other. There are also multiple sections of the Income Tax Act under which you can earn deductions. Let’s look at some of these sections first, and also get into the qualified instruments under each section. This primer should be very useful for first-time taxpayers as only a few months are left before FY2019-20 comes to an end.
Section 80C is the most popular section for reducing tax liability. It allows tax deduction benefits up to Rs. 1.5 lakh in a year. So, if you fall in the 30% tax bracket, you can save taxes up to Rs. 45,000 through instruments qualified under this section. You can invest in instruments like the Employees Provident Fund, Public Provident Fund, Equity Linked Saving Schemes, Unit-Linked Insurance Plans, five-year fixed deposits, National Savings Certificates, Sukanya Samriddhi Yojana, life insurance policies, National Pension Scheme, or any other qualified instrument.
Each instrument is different from the other. PPF, for example, has a lock-in of 15 years, and it is suitable for long-term low-risk investments. ELSS has a lock-in of three years and is ideal for long-term, high-risk investments. ULIP has a lock-in of 5 years, and the investor can get the benefit of exposure to equity and bond markets. Depending on your investment requirement, risk appetite, returns expectation, liquidity needs, and other aspects, you can select the appropriate tax-saving investment tool. Other notable ways to earn deductions are through tuition fees paid for your children (up to two children) and for repayment of home loan principal.
Section 80D allows tax deduction benefits up to Rs. 25,000 (Rs 50,000 for senior citizens) for health insurance premium paid for self or dependent family members, including spouse and children. You can avail an additional deduction of Rs. 25,000 for health insurance premium paid for your non-senior citizen parents and up to Rs. 50,000 for senior citizen parents. If your senior citizen parents do not have any health insurance cover, you can also claim a deduction against healthcare expenses settled by you under Section 80D.
Section 80CCD (1B)
Investment in the National Pension Scheme allows you tax deductions up to Rs. 50,000 under Section 80CCD(1B). The deduction benefit under this section is over and the above tax deduction benefit allowed under Section 80C. NPS has low liquidity, and it requires a long-term commitment. It suits taxpayers looking to create a retirement fund and are ready to wait till investment maturity at the age of 60.
Under Section 80TTA, you can claim a deduction up to Rs. 10,000 against interest received on your savings account. Section 80TTB allows senior citizens to claim tax deduction benefits up to Rs. 50,000 against interest received on savings accounts and deposits in banks and post offices.
If you don’t get the benefit of house rent allowance in your salary or are a non-salaried person, you can get a deduction under Section 80GG. Individuals living in a rented home can avail of this benefit. The deduction allowed under this section is the lower of rent paid above 10% of total income, 25% of total income after deduction under Section 80C to 80U, and Rs. 5,000 pm.
Other sections which provide deductions
Apart from the sections discussed above, you can also claim tax deduction benefit under Section 80E for the entire interest paid in a financial year against your education loan; under Section 24 for payment of home loan interest; under Section 80G for donations to qualified funds or institutions subject to an applicable threshold limit.
Depending on who you are, what your age is, and what you do for a living, you may be eligible for more benefits under the Income Tax Act. Do look up the relevant sections online to maximise your tax deductions for your own benefit. When in doubt, consult a tax advisor.