Ways to Save Income Tax In 2020-21

Paying taxes on one’s income is a legal and moral responsibility for every citizen. At the same time, some taxes might seem too steep and you may feel the need to reduce the tax burden. After all, you are being taxed from your income and would like to maximise your take-home salary/business income!

Fortunately, the Government of India provides legal ways to save the tax burden on taxpayers with a few suitable investment options. Here are 5 simple ways to save income tax in the year 2021:

#1 Take a life insurance policy.

The best way to secure your life and the financial future of your loved ones is to buy a life insurance plan. Life insurance can be in the form of Unit Linked Insurance Plan (ULIP), plans with maturity benefits, money back policies, term plans, etc. Another benefit of insuring your life is that you get tax savings under Sec 80C of the IT Act, 1961. The Budget 2021-2022 has not changed the tax terms for premiums and payouts under the IT Act. Thus, the premiums you pay towards life insurance are not taxed unless they exceed a total of Rs 1.5 lakh. Similarly, the sum assured you receive under policy maturity are tax exempt under Sec 10(10D). If you were planning to buy buy term insurance, the time do so is now.

#2 Invest in market-linked instruments.

Despite the topsy turvy trends of the stock market, it helps to stay invested in market linked instruments that are aligned with your financial goals. It is time to move away from traditional fixed savings schemes like bank FDs or RDs, whose income is taxed. This year, look up various tax saving instruments like National Pension Scheme (NPS), tax saving insurance like Unit Linked Insurance Plans, certain mutual funds, Equity Linked Saving Schemes (ELSS) etc. You are exempt from paying tax on ULIPs and ELSS whose premiums are lower than Rs 1.5 lakh and whose lock-in period is three years. You will find that market-linked instruments get tax rebates on capital gains, too.

#3 Buy a home with a home loan.

It is often a dream for most people to buy their own homes. Most people in the cities today live in rented accommodation while they save up money to buy their dream homes someday. However, it is better to take the plunge this year in terms of buying your home, especially if you wish to save up on steep (and non-refundable) rental spends and avail of tax rebates on home loans. Banks and NBFCs are also offering attractive home loans to revive the flagging real estate market, so you are bound to get a good deal on the loan. Do note that Budget 2021-2022 has kept the taxation system for home loans intact. Thus, you continue to get rebates under Sec 80C for principal amount borrowed for the home purchase, with deductions on interest paid under Sec 24.

#4 Start a retirement plan.

It’s never too soon to start planning for your retirement, especially in a year of several financial ups and downs. In fact, leaving retirement planning for later might result in lower reserves and lack of time to plan the exercise better. This is a good year to consider buying a suitable pension plan, which also offers premium deductions under Sec 80C. But do note that the payouts against annuity plans or received as lump sum amounts may be partially or fully taxed. Meanwhile, you can check out tax saving insurance plans like ULIPs that offer the dual benefit of life coverage with market exposure. This helps you save up funds for your retirement, while also getting deductions for premiums paid under Sec 80C.

#5 Take an education loan or invest in education.

Young parents must feel the pressure of rising school fees and planning the future course of education for their children. Though you can do little to offset the rising costs of education, you can certainly save money by investing in your child’s education. One option is to buy a child insurance plan, whose premiums are tax exempt under Sec 80C. Or if your child is about to enter the annals of higher education, you can take an education loan which is exempt for tax under Sec 80E.

Do note the new tax slabs!

On the subject of IT Laws, do note that the Government has introduced new taxation rates as per income:

Your investment advisor can help you choose the right instruments to save tax as per your income slab and future goals.