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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Whether you are a salaried employee or a self-employed individual, an increase in income is always a reason to celebrate. And a pay hike at work or a month of good business comes with many perks. You can increase your investment budget, pay off your debts, or even spend the extra funds on something you’ve always wanted to indulge in.
But with an increased income also comes the possibility of an increase in your tax liabilities. If your pay hike or rising business profits push your income into the next tax bracket, the rate of tax applicable to you will also rise correspondingly. Fortunately, the Income Tax Act, 1961 gives you many different ways to save tax.
Here are 5 such ways to reduce your tax burden.
1. Invest in an Equity Linked Savings Scheme (ELSS)
An Equity Linked Savings Scheme (ELSS) is an investment option that gives you the dual advantage of market-linked returns as well as tax savings. It is an equity-oriented mutual fund scheme that qualifies for tax deduction under section 80C of the Income Tax Act, 1961. So, the amount you invest in ELSS is eligible for deduction up to Rs. 1.5 lakhs from your total taxable income.
In addition to this, after lock-in period of 3 years, the long-term capital gains (LTCG*) on ELSS up to Rs.1 Lakh is exempt from tax. If you have a high appetite for investment risk and want to also save tax, ELSS may be the ideal investment choice for you.
2. Invest your income in different tax-saving schemes
ELSS is not the only tax-saving scheme qualified under section 80C of the Income Tax Act, 1961. There are a number of other investment options too that you can choose from if you want to invest and simultaneously enjoy tax benefits. Here is a list of some such tax-saving schemes under section 80C.
Each of these investments come with different lock-in periods and offer varying levels of returns. However, you can claim a total deduction of Rs. 1.5 lakhs under section 80C. This deduction reduces your total taxable income and thereby brings down your tax liability too.
3. Use your home loan to save tax
Interestingly, it is not only investments that can help you save tax. Certain expenses can also be claimed as deductions from your taxable income. Your housing loan is one such expense. Typically, your housing loan EMI has two key components.
Both these components offer tax benefits. More specifically, there are three sections of the Income Tax Act, 1961 that become relevant here.
Tax benefits under section 80C
Under this section, you can claim a deduction of up to Rs. 1.5 lakh on your home loan principal repayment. This includes both stamp duty and registration charges, but these expenses can only be claimed once, in the year during which they are incurred.
Tax benefits under section 24
The self-occupied housing loan interest component can be claimed as a deduction of up to Rs. 2 lakhs as per section 24. This is only applicable in case the loan is taken for the purchase or construction of a house property, and the construction is completed within 5 years from the end of the financial year during which you availed the loan.
Tax benefits under section 80EE
If you are a first-time home buyer, you can claim an additional deduction of Rs. 50,000 for the interest component of your home loan, thanks to section 80EE. To be eligible for this benefit, you need to meet the following conditions.
4. Claim deductions on your life insurance premiums
The premiums you pay for your life insurance cover can help you save tax too. If you have a life cover that requires you to pay your premiums each month, every quarter, or on a semi-annual or annual basis, you can claim the premiums you pay each financial year as a deduction under section 80C of the Income Tax Act, 1961. The limit under this section is Rs. 1.5 lakhs, and it includes any other tax-saving investments that qualify for deductions under this section.
For example, say you have a couple of life insurance plans that together cost Rs. 1.6 lakhs each year. And you have no other 80C investments. In this case, you can claim Rs. 1.5 lakhs as a deduction from your taxable income.
Alternatively, suppose you have a life insurance plan that costs Rs. 1 lakh annually, and you have invested another Rs. 1 lakh in PPF. In this case, you have a total eligible amount of Rs. 2 lakhs under section 80C. However, in this case maximum, deduction will be limited to Rs. 1.5 lakhs only.
5. Save tax with your children’s tuition fees
Parents can claim deductions on the tuition fees paid to any university, college, school or other educational institution situated within India for their children’s education. This benefit is also granted by section 80C of the Income Tax Act. Here are some important details about this tax benefit.
Summing up
Tax planning is an art that you can easily master if you know what works for you. And there are several investments and expenses that can help you reduce the tax burden. The strategies seen above are only five of the many ways in which you can save tax this year. Remember to keep yourself up-to-date about the new rules and exemptions that the income tax department notifies from time to time, so you can make the most of the tax-saving provisions available to you.
*LTCG: Any capital tax which stems from the ownership of more than 12 months.
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