Tax Saving & Financial Planning

Tax Planning for Salaried Employees in India

1. Well Known Tax Saving Options under section 80C

Maximum Benefit: Rs. 1.5 Lakhs

Everyone knows that Section 80C offers a maximum deduction of up to Rs. 1,50,000. A few of the options are as follows:

• Public Provident Fund

• National Pension Scheme (NPS)

• Life Insurance Premium

• National Savings Certificate

• ELSS Mutual Funds (Equity Linked Savings Scheme)

• Principal Amount Repaid on Home Loan

• 5 year fixed deposits with banks and post office

• Sukanya Samariddhi Account

• Tuition fees paid for children’s education, up to a maximum of 2 children

• ELSS mutual funds are one of the best tax saving options under 80C, due to lesser lock-in period and the high potential return on investment. Before start making an investment, you must know the difference between SIP vs lump sum mutual fund investment for better understanding.

2. Tax Savings on Additional Contribution to NPS

Income Tax Section: 80CCD (1B)

Max Tax-free Amount: Rs. 50,000

Your additional contribution towards NPS can fetch exemptions over and above the regular deduction of Rs. 150,000. Up to Rs. 50,000 can be saved by making an additional contribution to NPS.

3. Tax Saving from Home Loan

Get Deductions u/s: 80C, 24 & 80EE

Use your home loan efficiently to save more tax. There are three ways to get an income tax deduction on your home loan(s).

(a) The principal amount repaid in the current financial year is included under section 80C, offering a deduction up to Rs. 1,50,000.

(b) The interest portion offers a deduction up to Rs. 2,00,000 separately under section 24.

(c) Benefit on interest on home loan for First Time Buyers - Rs. 50,000 under section 80EE

(d) If you are living in the home on which you took a first home loan, you can get another loan for the second house. There is no limit on income tax deduction on the interest payment of the second home loan. Very few people are aware of this benefit of tax saving on a second home loan. This is one of the effective Ways to reduce Income Tax in India .

4. Tax Saving on Education Loan

Max Tax Savings: No upper limit

Under Section 80E - Interest paid on education loan is also non-taxable. There is no upper limit on the amount.

The education loan for higher studies is applicable for the deduction if taken for self, spouse or children.

5. Medical Insurance

Tax Savings u/s Section 80D - Deduction for the premium paid for medical insurance

Deduction of Rs. 25,000

Additional deduction of Rs. 25,000 for medical insurance of parents less than 60 years of age. Rs. 50,000 in case the parents are more than 60 years old.

In a rare scenario, if the age of the taxpayer and his parents are 60 years or above then the maximum deduction you can have is Rs. 100,000. For example, if the age of Ram is 61 years and that of his father is 92 years. Then Ram can claim a deduction of Rs. 1 Lakh.

6. Medical Treatment of Disabled (handicapped) Dependant Relative

Applicable Section: 80DD

You get a fixed deduction of Rs. 75,000 in case of 40-80% disability. In case of severe disability (more than 80%), you can claim a deduction of Rs. 125,000.

The expenses should be:

(a) Incurred on medical treatment, training, and rehabilitation of handicapped dependent relative.

(b) Towards payment or deposit to specified scheme for maintenance of dependent relative.

(c) You will require a certificate of disability from medical authority to back deductions.

7. Medical Expenses of Disabled Individual

Deduction u/s: 80U

Any individual who suffers from a physical disability or mental retardation can claim a fixed deduction of Rs. 75,000. In case of severe disability, deduction of Rs. 125,000 can be claimed. Here also you will require a certificate of disability from medical authority to back deductions.

8. Medical Treatment of Specified Disease for Self or Dependent Relative

Applicable Section: 80DDB

Deduction of Rs. 40,000 can be claimed in respect of any expenses incurred towards specified medical disease. In case, if you are incurring expense on behalf of, dependent senior citizen, then deduction up to Rs. 1 Lakh can be claimed.

You will require a certificate of disability from a specialist working in a government hospital to back deductions.

Specified Disease:

(a) Neurological diseases like dementia, aphasia, parkinson’s, and others

(b) Malignant Cancers

(c) AIDS

(d) Chronic Renal Failure

(e) Haematological disorders like haemophilia and thalassemia.

9. Donations

Tax Savings Under Section 80G

Donations to specified funds or charitable institutions. You need to retain the stamped receipts of the donations and make sure the charitable organization is registered.

10. Donations to Political Parties

Exemption U/S: 80GGC

Max Exempted Amount: No upper limit

Your donations to political parties qualify for 100% deduction. There is no upper limit and all the donation amount can be claimed as a deduction.

11. Inherited Amount Through Will

There is no inheritance tax in India. So anything you get from your parents or uncles through WILL is not taxable in your hands. It becomes your legitimate non-taxable income.

12. Agriculture Income

Agriculture Income exempted u/s: 10(1)

Any income derived from Agriculture land is tax-free in India. The agriculture income can be:

Any rent or revenue derived from land

Income from agriculture products

Income from a farm building.

13. Amount Received as Gifts on Marriage

Tax-Free Income Under Section: 56(2)

Did you know that the gifts received (through cash/cheque/gifts) on marriage are totally tax-free?

You can receive gifts from your relatives, friends, and family on the occasion of your marriage and you don’t have to pay any taxes.

14. Dividends Received on Shares or Equity Mutual Funds

Stocks and Mutual Funds (Equity focused) distribute dividends to all the shareholders. The dividends are tax-free in the hands of the receiver.

Like in the previous example, where you bought stocks worth Rs. 100,000, let’s assume you receive dividends of Rs. 2000 after 10 months. Even though one year is not completed since the time you bought stocks, you still don’t have to pay any tax on such dividends received.

15. Profit from Selling Shares or Equity Mutual Funds

Only after 1-year holding (Long Term Capital Gains)

Maximum Tax-free Gains: Rs. 1 Lakhs

If you invest in stocks or mutual funds then you can make your profits 100% non-taxable up to Rs. 1,00,000.

For example, if you have invested Rs. 100,000 in TCS stock and in 11 months your investment becomes Rs. 1,20,000 then you have to pay tax on 20,000 profit. However, if you hold it for another month, then you are not liable to pay any tax on the profits.

Same is applicable to equity mutual funds.

16. Educational Scholarship

Save Income Tax Under IT Section: 10(16)

Max exemption: No upper limit, full scholarship amount is tax-free

Any amount received as a scholarship for education is not taxable. It does not matter if the scholarship is granted by the government or from a private trust.

17. Interest Income on Saving Account

(Tax Saving Under Section: 80TTA/80TTB)

Max Tax Saving Limit - Rs. 10,000

You might not be aware that interest income on savings accounts is not taxable up to Rs. 10,000.

Suppose, in the last financial year you earned Rs. 15,000 as interest from all your savings accounts (you need to add up interest received on all your bank saving accounts), then you need to pay tax only on Rs. 5,000.

The exemption is higher (Rs. 50,000) in case of senior citizens (80TTB).

You can also consider the interest earned on savings accounts held in a post office or a co-operative society engaged in the business of banking for claiming the exemption. This can help in effective planning when evaluating Tax Rates for Companies - Which Option to Choose