Five ways you can save tax

Tax planning is an essential aspect of financial management. Proper tax-saving strategies can help individuals reduce their tax liability and maximize their savings. In this article, we will explore five effective ways to save tax while ensuring compliance with the tax laws.

1. Invest in Tax-Saving Instruments

One of the most effective ways to save tax is by investing in government-approved tax-saving instruments. Some of the popular options include:

a) Equity-Linked Savings Scheme (ELSS)

  • ELSS funds offer tax benefits under Section 80C of the Income Tax Act.
  • Investments in ELSS are subject to a lock-in period of three years.
  • Potential for high returns compared to other tax-saving investments.

b) Public Provident Fund (PPF)

  • PPF investments are eligible for tax deduction under Section 80C.
  • The interest earned and maturity amount are tax-free.
  • Lock-in period of 15 years with partial withdrawals allowed after six years.

c) National Pension System (NPS)

  • Contributions to NPS are eligible for tax deductions under Sections 80CCD(1) and 80CCD(1B).
  • Additional deduction of Rs. 50,000 available under 80CCD(1B) over and above Section 80C limit.
  • Provides financial security post-retirement.

2. Claim Deductions Under Section 80C

Section 80C of the Income Tax Act allows taxpayers to claim deductions up to Rs. 1.5 lakh per financial year. Some eligible expenses and investments include:

  • Life Insurance Premiums
  • Employee Provident Fund (EPF) contributions
  • Sukanya Samriddhi Yojana (SSY) deposits
  • Home Loan Principal Repayment
  • Tuition Fees for Children

3. Avail Tax Benefits on Home Loans

Owning a home comes with tax benefits that can significantly reduce taxable income.

a) Deduction on Home Loan Principal (Section 80C)

  • The principal amount repaid on a home loan qualifies for a deduction under Section 80C.

b) Deduction on Home Loan Interest (Section 24(b))

  • Home loan interest payments can be claimed as a deduction up to Rs. 2 lakh per annum for a self-occupied house.
  • If the property is rented out, there is no upper limit for interest deduction.

c) Additional Deduction Under Section 80EEA

  • First-time homebuyers can avail an additional deduction of Rs. 1.5 lakh on home loan interest under Section 80EEA.

4. Utilize Health Insurance Benefits (Section 80D)

Medical expenses can be financially draining, but health insurance provides relief in two ways—medical coverage and tax benefits.

  • Premiums paid for health insurance policies qualify for deduction under Section 80D.
  • Maximum deduction limits:
    • Rs. 25,000 for self, spouse, and children
    • Additional Rs. 50,000 for senior citizen parents
  • Preventive health check-ups up to Rs. 5,000 can also be claimed under this section.

5. Opt for the New Tax Regime If Beneficial

The government introduced a new tax regime in Budget 2020, offering lower tax rates but removing most deductions and exemptions.

a) Old vs. New Tax Regime

  • Under the old regime, taxpayers can claim multiple deductions.
  • The new regime offers lower tax rates but eliminates deductions like 80C, 80D, HRA, and LTA.

b) Who Should Opt for the New Tax Regime?

  • Individuals with fewer investments in tax-saving instruments may find the new regime beneficial.
  • Those with higher deductions may save more under the old regime.

Effective tax planning requires awareness of various deductions and exemptions available under the Income Tax Act. By investing in tax-saving instruments, claiming deductions under Section 80C, utilizing home loan benefits, availing health insurance deductions, and selecting the most suitable tax regime, taxpayers can significantly reduce their tax burden.

Always consult a financial advisor or tax expert before making tax-saving decisions to ensure compliance and maximize benefits.

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