Witnessing too much tax deductions at source (TDS) from your salary may demoralise you. However, instead of getting demoralised, you need to explore ways to reduce your tax liabilities through tax-saving investment and availing deductions of expenditures on which tax benefits are available under the Old Income Tax Regime.
“There are two income tax regimes under the Income Tax Act. One can benefit from the concessional tax rates if opting for the new tax regime, but no deductions or exemptions are allowed. The old tax regime allows various exemptions and tax deductions to reduce your taxable income. You can invest money in some of the tax-saving instruments, make eligible expenses specified under Section 80C and reduce your taxable income up to Rs 1.5 lakh,” said Archit Gupta, Founder & CEO, Clear.
Under the New Income Tax Regime, however, none of the deductions are available.
Gupta lists some of the ways to reduce tax liabilities:
Deductions u/s 80C
You will have to choose either one of these tax-saving investments or invest in a combination to exhaust the Section 80C tax deduction and save taxes. Let’s take a look at the instruments that can help in lowering taxes.
- Public Provident Fund – PPF
- Employee’s contribution to Employee Provident Fund – EPF
- National Saving Certificate – NSC
- Equity-Linked Savings Scheme – ELSS
- Tax Saver Fixed Deposit
- Post Office Tax Deposit
- Life Insurance Premium
- Sukanya Samriddhi Yojana – SSY
- Senior Citizens Savings Scheme – SCSS
Investment in the National Pension Scheme (NPS) is also eligible for Section 80C deduction within a limit of Rs 1.5 lakh. However, an additional deduction of up to Rs 50,000 is allowed for the amount invested in NPS Tier 1 accounts under Section 80CCD(1B). The deduction is above Section 80C limit.
Moreover, employer’s can also contribute to the employee’s NPS account, and the employees are eligible for a deduction of up to 10 per cent of the basic salary plus dearness allowance (up to 14 per cent of basic pay and dearness allowance in the case of Central and state government employees) under Section 80CCD(2) of the Income Tax Act.
Health Insurance Premium, Expenses
Amounts spent for medical purposes are also eligible for tax relief. For example, premiums paid for health insurance for self, spouse, children and parents are allowed as a deduction under Section 80D. One can deduct the expenses up to Rs 25,000 for health insurance premiums paid for self, spouse or children. However, a separate deduction of up to Rs 25,000 is available for health insurance premiums paid for parents below the age of 60 years. If the health insurance premium is paid for senior citizens above 60 years of age, the deduction limit becomes Rs 50,000. You can only claim the deduction for the payments made in other than cash mode.
Individuals can also claim the deduction for the medical expenses incurred for senior citizens within the limit of Rs 50,000, provided any health insurance policy does not cover them.
HRA Exemptions on Rent Paid
Salaried employees staying in rented accommodation can significantly reduce their tax liability by claiming exemption of the house rent allowance received in their salary. The HRA is partially or fully exempt as per the conditions specified in the Income Tax Act. The employee must submit the proof of rent to the employer by the end of the financial year. The self-employed or the person not receiving HRA component in salary can claim a tax rebate under Section 80GG on rent paid on house property. The quantum of deduction can be 25 per cent of adjusted total income or actual rent over 10 per cent of adjusted total income or Rs 5,000, whichever is lower. A declaration in Form 10BA must be submitted for the same through the e-filing portal. However, the assessee, spouse, minor child or HUF must not own any house in the place of work.
Interest on Education Loan
Individuals or their parents can claim the deduction for interest paid on education loans for higher studies. They can claim a tax rebate up to eight years from when the education loan started.
Doing charity also helps one to reduce their tax outgo. However, One can claim the deduction only for the contributions made to prescribed funds. The deduction limit is 100 per cent or 50 per cent of the donation amount based on the fund’s category. As per the provisions of the Act, various specified donations are eligible for either 50 per cent or 100 per cent of deduction.
“It is important to note that you can claim the above deductions only if the payment is made before 31st March of the relevant financial year. Although there are many investment avenues for tax-saving, one should make a wise investment decision based on their investment goals. You must document all the investment and expense proof to claim such deductions while filing your income tax return,” said Gupta.