The Income Tax Act allows a salaried individual to claim certain deductions in order to save on taxes. However, to avail the benefits of such deductions, the individual must ensure proper tax planning during the year.
Such deductions are allowed on the Gross Total Income (GTI), and income tax is levied on the balance income, as per the tax slabs in force.
It is obvious that everyone would want to save their incomes from being subjected to extremely high taxes. Tax planning is not very difficult if you follow certain guidelines. There are many ways to save tax, and they are all legal. Let us discuss few of them here.
5 legal ways of Tax Planning to save on taxes
1. Save Tax U/s 80C, Section 80CCC, Section 80CCD of the Income Tax Act
To encourage the habit of saving, and to direct the savings of taxpayers into lawful channels, the Central Government permits certain investment- linked deductions, provided the amount is invested in instruments as specified in Section 80C, Section 80CCC & Section 80CCD of the Income Tax Act.
The maximum collective deduction allowed under Section 80C, Section 80CCC & Section 80CCD is Rs. 1,50,000.
The most common investment instruments covered under Section 80C, Section 80CCC & Section 80CCD are:
Note that an individual can claim an additional deduction of Rs. 50,000 U/s 80CCD by investing in the National Pension Scheme (NPS).
2. Reduce Income tax via Home Loan
If an individual has taken a Home Loan, then he/she is entitled to claim the deduction for repayment of the principal amount (Deduction of the Principal amount under section 80C), as well as the interest of the home loan (Deduction of the Interest amount under section 24). The maximum deduction allowed under section 80C is Rs. 1,50,000and under section 24 is Rs. 2,00,000.
3. Save Income Tax U/s 80D of the Income Tax Act
Medical/health insurance works as a shield and protects a person and his family from any financial crisis during a medical emergency. It’s the insurance company which bears the cost of treatment, and ensures that the policyholderscan avail the best medical assistance. Based on the nature and type of medical insurance policy, in addition to hospitalization charges, the policy may also cover ambulance charges, domiciliary expense, pre and post hospitalization expenses, etc.
The Income Tax Act permits an individual to save tax through deductions if the taxpayer has paid a premium for insuring his/her own health or the health of his/her family members (parents, children or spouse).
4. Tax Saving with House Rent paid
If the individual is staying in a rented house and is receiving House Rent Allowance (HRA) from his employer, he/ she can claim deduction U/s 10(13A) of the Income Tax Act. The least of the following will be considered as deduction from the individual’s salary:
However, if the individual is a non-salaried person and does not receive HRA, or does not own a residential property, he/ she can still get the deduction of house rent paid during the year from his/ her taxable income U/s 80GG of the Income Tax Act.
The least of the following will be considered as deduction from the individual’s Gross Taxable Income:
5. Tax Saving through Education Loan under section 80E of the Income Tax Act
Under section 80E of the Income Tax Act, an individual can claim tax deduction on an education loan (for higher studies),if the loan is for himself/ herself, his/ her children, spouse or even for a student of whom he/she is the legal guardian.
However, only repayment of Interest on the Education Loan is allowed as deduction. That means no deduction on the repayment of the principal amount of loan is allowed. However, the good thing is that there is no maximum limit to claim deduction U/s 80E of the Act for the interest repayment of education loan. The deduction U/s 80E for the education loan is available to an Individual assessee and not to a Hindu Undivided Family (HUF).