Every year, if you earn a certain amount of money, you have to report to the government how much you made by filing something called an Income Tax Return (ITR). This includes telling them about all the money you earned in a year and paying the tax you owe them. In India, the government has some rules that allow you to pay less tax if you follow certain steps mentioned in the Income Tax Act of 1961.
The main idea behind these tips is to encourage people to invest their money in a bigger or smarter way. There are different ways you can do this to pay less tax, and some of these methods include:
Consider investing in tax-saving instruments:
One effective way to save on taxes is by investing in specific instruments allowed by the Indian government under section 80C of the Income Tax Act. This section allows taxpayers to reduce their taxable income by the amount they invest in these instruments. The maximum deduction allowed is Rs 1.5 lakh on these investments.
One can consider investing in the Public Provident Fund (PPF), Employee Provident Fund (EPF), Equity Linked Savings Scheme (ELSS), National Pension System (NPS), Sukanya Samriddhi Yojana (SSY), Senior Citizen Savings Scheme (SCSS), Fixed Deposits (FDs) with a tenure of 5 years or more to save taxes.
Select a specific tax regime
Currently, Indian citizens have the option to choose between two tax regimes when filing their Income Tax Returns (ITR). The choice between these regimes is crucial for maximizing tax savings. The new tax regime offers a lower tax rate but doesn’t allow for tax deductions. If you wish to avail tax deductions under section 80C of the Income Tax Act, it’s better to opt for the old tax regime. However, if you don’t require these deductions, choosing the new tax regime can help reduce your income tax burden.
Consider Purchasing Health Insurance:
Purchasing health insurance policies for yourself and your family members is another way to save on taxes. As per section 80D of the Income Tax Act, taxpayers can claim a deduction of up to Rs 25,000 for paying health insurance premiums for themselves, their spouses, and dependent children. Additionally, senior citizens can claim a higher deduction of up to Rs 50,000 under the same section. Furthermore, if you pay health insurance premiums for your parents, you can save an additional amount of Rs 50,000.
Claim tax benefits on home loans:
If you acquire a home loan from a bank or non-banking financial institution, you can claim deductions from your taxable income concerning the interest and principal amounts of the loan. According to this law, you can avail maximum deductions of Rs 2 lakhs under section 24 for the home loan interest and Rs 1.5 lakhs under section 80C of the income tax for the home loan principal repayment.
Follow the timeline:
Filing your Income Tax Return (ITR) is mandatory before the specified date, typically by July 31st each year, or as directed by the income tax department. Failure to meet these deadlines incurs penalties. It’s crucial to file your ITR on time, as it serves various purposes such as facilitating housing loan applications, immigration processes, and high-value transactions, among others.
Often, people tend to invest in tax-saving schemes hurriedly towards the end of the fiscal year. However, this approach contradicts the primary aim of encouraging future investments. Hence, the ideal time to make tax-saving investments is at the beginning of each calendar or fiscal year. Consistent and regular investments in diverse tax-saving avenues help secure taxes and build wealth effectively. It’s essential to thoroughly understand all available tax-saving investment options and invest only in suitable instruments aligned with your financial goals.
Disclaimer: This blog has been written exclusively for educational purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.