Save Income Tax in India – Legal Secrets

How to Save Income Tax in India – Legal Secrets

Hi everyone, if you are looking for ways of saving on taxes in India then this article is for you. Paying taxes is one of the most responsibilities for all residents of a country and it’s very important for the development and functioning of the country. But no one can deny this, paying taxes is a huge pain, especially for salaried individuals. Even the government knows this and hence the system provided us with a host of entirely legitimate ways of saving taxes. When you are in your 30s and 40s, where you can actually use the invested money and the returns you got by investing in some tax-saving investment options.

The most common way is to use up the Rs 1.5 lakh limit under section 80C, i.e 1.5 lahks will be deducted from taxable income. Isn’t it great, that you are doing investment on one side and on another side, you can save Rs 1.5 lakh from taxing? Moreover, if you are lucky, after deducting this Rs 1.5 lakh from your taxable income if your taxable income is less than Rs 5 lakh no tax is to be paid on the remaining amount too.

How to save tax under section 80C? What are the options available?

Following are the list of option Income-tax Act 1961 provides – Tax-Saver FDs, PPF (Public Provident Fund), ELSS Funds, NSC (National Saving Certificate), Life Insurance Premiums, NPS (National Pension System), Home Loan Repayment, Payment of Tuition Fees, EPF, Senior Citizens Saving Scheme and Sukanya Samriddhi Yojana.

Save Income Tax in India – Legal Secrets

Let’s understand each one of them:

1. Tax-saver Fixed Deposits (FDs):

These FDs are different from our normal FDs, usually, in normal FDs, we don’t have any lock-in and even if some banks offer lock-in, it will be maxed for 1 year. Tax-saver FDs have a lock-in of 5 years, offering a fixed rate of interest (get updated yourself with the current rate of interest FDs give). But remember the returns/interest on these FDs is taxable. With this investment option, you can save Rs 1.5 lakh from Taxation.

2. PPF (Public Provident Fund):

The government of India offers a tax-free saving scheme known as Public Provident Fund. It is a long-term investment scheme with a lock-in period of 15 years. This fund can be avail from most banks and post offices in India. The rate of interest changes every quarter, but the good thing is interest on PPF is tax-free. Not just PPF, any provident fund like EPF can also be available for a tax deduction.

3. ELSS Funds:

This option is best for people who are interested in investment options like Mutual Fund and with less locking period. ELSS stands for “Equity Linked Saving Scheme”. As the name suggests, this is an equity fund with a major portion invested in equity or equity-related instruments.

The scheme helps you save tax by exemption up to Rs 1.5 lakh from taxable income. Most importantly with a lock-in period of 3 years, which is the least lock-in period among all other options. Remember, the returns are taxable under Long Term Capital Gains Tax (LTCG) though.

4. NSC (National Saving Certificate):

An initiative by the government of India, the National Saving certificate is a fixed-income investment and saving bond scheme, attracting people to invest while saving on income tax under section 80C.

One can get any number of NSCs, but keep in mind, that only 1.5 lakhs of investment annually can earn the owner the tax savings benefits under the Income Tax Act, of 1961. The best part about this scheme is the interest earned on the certificates annually, for the 1st 4 years is added back to the initial amount invested (i.e deemed to be reinvested). Due to this, the interest is also eligible for a tax break, subject to the overall annual limit of 1.5 lakh.

Things you need to keep in mind is, on the maturity of this scheme i.e 5th year, the interest earned is not re-invested and hence taxable as per your applicable slab rate.

5. Life Insurance Premiums:

As we all know Life Insurance is very impotent for us and our families, to secure our future and to be sure of comfort leaving our family, in case of emergency. In spite of knowing all this, many of us do not have life insurance. Apart from all other advantages, Life Insurance (more specifically, Life Insurance Premium) helps you save on tax.

Premiums for different types of insurance policies including ULIPs, term Insurance, and endowment policies are tax-deductible up to Rs 1.5 lakh.

6. NPS (National Pension System):

The National Pension System works as a voluntary defined contribution pension system in India. This means the contributions are invested in a mix of assets. The retirement collection is dependent on the return of those assets.

The National Pension System is an EEE instrument in India, that provides several tax benefits. The contribution made to NPS is deductible up to Rs 1.5 lakh. Apart from this the entire collection at maturity escapes tax and the entire pension withdrawal amount is tax-free.

7. Home Loan Repayment:

Here you need to be a little focused, don’t get confused between Repayment of the Principal Amount deduction and Interest Payable on the Home Loan deduction. Repayment means you are paying a lump sum amount of your principal amount on a Home Loan. I say Lump Sum because only Rs 1.5 lakh per annum is tax-deductible.

8. Payment of Tuition Fees:

This one is very simple to understand. The fees paid for your children’s education or even your own (if you are studying while earning) are exempted from your total taxable income.  These tuition fees can help you save up to Rs 1.5 lakh from taxation.

9. EPF (Employee Provident Fund):

Many of us are already aware of this scheme. Under the EPF scheme, an employee has to pay a certain amount toward the scheme and an equal amount of contribution is paid by the employer. Exciting isn’t it?

How do you get to benefit from this? The employee gets a lump sum amount including self and employer contribution with interest on both, on retirement. Talking about tax, the amount from employees paid under this scheme counts towards the Rs 1.5 lakh limit under section 80C.

10. Senior Citizens Saving Scheme:

Another tax-saving scheme is government controlled for senior citizens. The main objective of this scheme is to ensure senior citizens of India have a regular flow of income. The scheme has a tenure of 5 years, in which returns are on a quarterly basis and payments are released annually to the savings account of the account holder.

How can you save tax here? The contribution to SCSS is relief from taxation. Remember the return from this scheme is taxable though.

11. Sukanaya Samriddhi Yojana:

This is another scheme backed by the Government of India, in addition to tax exemption benefits it also provides a healthy environment for a girl child.

This scheme helps parents to build funds for the future education and marriage expenses of their female child.

This scheme has a tenure of 21 years, with deductions of up 1.5 lahks allowed from taxation annually. Not only that, but the interest on investment is also exempted from tax and the best thing is you don’t have to pay any tax on maturity or withdrawal.

At present, I prefer ELSS and I am invested some amount in a bunch of ELSS funds. To help you out you can check out the top good Equity Linked Saving Scheme or ELSS funds – tax saving funds.

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