In India, paying income tax on salary income is mandatory for all individuals. However, the government has provided various ways to save income tax legally, which can be taken advantage of to minimize tax liability. This essay will explore the most effective ways to save income tax on salary income in India.
Invest in tax-saving instruments:
One of the most popular ways to save income tax is by investing in tax-saving instruments. The government has provided various instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Sukanya Samriddhi Yojana, Equity-Linked Saving Schemes (ELSS), and others that offer tax deductions up to a specific limit. For instance, investments up to Rs and 1.5 lahks in PPF, NSC, and ELSS are eligible for tax deduction under section 80C of the Income Tax Act. By investing in these tax-saving instruments, an individual can reduce their tax liability while earning a return on their investment.
Pay for health insurance:
Paying for health insurance is another way to save income tax. Under section 80D of the Income Tax Act, individuals can claim a tax deduction of up to Rs. 25,000 on the premium paid towards health insurance for themselves, their spouse, and dependent children. This limit increases to Rs. 50,000 for senior citizens. By paying for health insurance, individuals can protect themselves and their families from unforeseen medical expenses and avail of tax benefits.
Claim House Rent Allowance (HRA):
If an individual lives in a rented house and receives House Rent Allowance (HRA) from the employer, they can claim a deduction on the HRA. This deduction is calculated as the minimum of the following three: actual HRA received, 50% of basic salary, or rent paid minus 10% of basic salary. The remaining amount of HRA is then taxable. An individual can reduce their tax liability significantly by claiming the HRA deduction.
Take advantage of Leave Travel Allowance (LTA):
Leave Travel Allowance (LTA) is a tax exemption employers provide to their employees for travel expenses. Under section 10(5) of the Income Tax Act, an employee can claim a tax exemption for the expenses incurred on travel for themselves and their family within India. This exemption can be claimed twice in a block of four years, subject to certain conditions. By taking advantage of LTA, an individual can reduce their tax liability while enjoying a vacation with their family.
Claim tax deduction on education loan:
If an individual has taken an education loan for themselves, their spouse, or dependent children, they can claim a tax deduction under section 80E of the Income Tax Act. The deduction is available for a maximum of eight years or until the repayment of the loan, whichever is earlier. Individuals can reduce their tax liability and support their family’s education by claiming the tax deduction on an education loan.
Donations to charitable institutions:
Donating to charitable institutions is a noble act to save income tax. Under section 80G of the Income Tax Act, donations made to registered charitable institutions are eligible for a tax deduction of up to 50% or 100% of the donated amount, depending on the institution. By donating to charitable institutions, an individual can reduce their tax liability while also contributing to a good cause.
Opt for the new tax regime:
The new tax regime introduced in the Union Budget 2020 offers a lower tax rate for individuals willing to forgo certain exemptions and deductions. Under this regime, the tax rate for income between Rs. 5-7.5 lakh is 10%, between Rs. 7.5-10 lakh is 15%, between Rs. 10-12.5 lakh is 20%, between Rs. 12.5-15 lakh is 25%, and above Rs. 15 lakh is 30%. This new tax regime is optional, and individuals can continue with the old one, which offers more deductions and exemptions. Individuals can reduce their tax liability and simplify their tax filing process by opting for the new tax regime.
Invest in National Pension System (NPS):
The National Pension System (NPS) is a retirement savings scheme launched by the government that provides tax benefits to individuals. Under section 80CCD of the Income Tax Act, individuals can claim a tax deduction of up to 10% of their salary or Rs. 1.5 lakh, whichever is lower, on the contribution made towards NPS. By investing in NPS, an individual can save for retirement and avail of tax benefits.
Utilize tax-saving allowances:
Apart from HRA and LTA, there are other tax-saving allowances that an employee can utilize to reduce their tax liability. For instance, children’s education allowance, hostel expenditure allowance, transport allowance, and medical allowance are some of the allowances that can be used for tax-saving purposes.
Split income with family members:
If an individual’s family members, such as spouses or children, have a lower tax bracket, they can split their income with them to reduce their tax liability. For instance, if an individual’s spouse has insufficient income, they can invest in their name and claim tax deductions accordingly. However, ensuring that the investment is made from the spouse’s income and not gifted by the individual is essential.
Opt for a lower tax slab:
Individuals can opt for a lower tax slab by ensuring their income is spread over different heads and claiming deductions and exemptions accordingly. For instance, an individual can split their income between salary, rent, and capital gains to avail of the tax benefits available for each of them. However, it is essential to ensure that these are legitimate transactions and not done solely for tax avoidance.
Conclusion:
Salaried individuals in India need to take advantage of the various tax-saving options. With careful planning and a clear understanding of income tax laws, individuals can significantly reduce their tax liability and retain more of their hard-earned income.
In addition to the methods outlined above, it is also worth considering long-term investment options such as mutual funds, fixed deposits, and life insurance policies, which offer tax benefits and growth opportunities. These investments can help individuals to build a secure financial future while reducing their tax burden.
It is important to remember that tax saving should not be the sole focus of financial planning but rather an essential component of an overall strategy. While it is vital to reduce tax liability, it is also important to prioritize other financial goals, such as saving for retirement, building an emergency fund, and paying off debt.
In summary, by using the various tax-saving options available and planning their finances carefully, salaried individuals in India can reduce their tax burden, build a secure financial future, and achieve their long-term financial goals.
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