The last quarter of the financial year is here and you may want to know how to reduce your tax liability. The Income Tax Act, 1961 offers several tax deductions; however, proper planning is necessary.
When you plan properly, these deductions are reduced from your gross total income. The income tax is then levied on the balance as per your slab.
Here are nine tax-saving tips.
1. Ways to save tax through section 80C, 80CCC, and 80CCD.
2. Tax saving tips under section 80D, 80DD, and 80DDB.
3. Tax benefits for principle repaid on home loans.
4. Tax deductions on education loans
5. Tax deduction under section 80CCG
6. Tax exemption on long-term capital gains
7. Donations under section 80G
8. Capital gains through sale of equities
9. Rent under section 80GG
Let us discuss the above mentioned tips in detail:
Section 80C, 80CCC, and 80CCD
To encourage savings through investments, the government offers tax benefits under different sections of the Income Tax Act. The maximum deduction under all these sections is limited to INR 1.5 lakh per annum. An additional INR 50,000 invested in the National Pension System (NPS) is eligible for tax benefits as per section 80CCD. Some of the investments under section 80C include Public Provident Fund (PPF), life insurance, Equity-Linked Saving Schemes (ELSS), National Savings Certificate (NSC), and pension plans.
Section 80D, 80DD, and 80DDB
If you pay a premium to avail of health insurance for self, your spouse, or children, the same may be claimed as a deduction under section 80D. Section 80DD also offers benefits on treatment expenses for handicapped dependents. Additionally, treatment of specified diseases is eligible for tax benefits under section 80DDB.
In addition to the investments under section 80C, principal repaid on your home loan is eligible for tax benefits. Furthermore, section 24 allows interest deduction on the loan for up to INR 2 lakh per annum.
Section 80E allows tax deductions on education loans availed for self, spouse, or children. However, only the interest is eligible for deductions and not the principal repaid on the education loan.
The Rajiv Gandhi Equity Saving Scheme (RGESS) provides additional deductions under section 80CCG. If your annual income is less than INR 12 lakh, your investments in certain mutual funds and equities are eligible. However, this is one of the complicated tax-saving investment options and only available if you are a first-time mutual fund investor.
Long-term capital gains
If you earn capital gains through the sale of an asset, you may claim tax exemption if the sale proceeds are invested in specified instruments. You must hold the asset for at least three years to be eligible for this exemption.
Donations under section 80G
Another tax-saving tip under section 80G is for donations made to charities or philanthropic societies. Furthermore, if you contribute to the National Relief Fund, this amount may be claimed as an exemption under section 80G. The Ministry specifies eligible organizations and it is recommended you check these before making a tax deduction claim. In certain instances, the entire donated amount is eligible for the benefits while in some cases only 50% of the amount is eligible.
Capital gains through sale of equities
To enhance investments in equities and mutual funds, the government offers certain tax benefits. When you hold your investments for at least one year before selling, the long-term capital gains are tax-free. However, if you sell before one year, you have to pay taxes at the rate of 15%.
Rent under section 80GG
If your employer has not paid you House Rent Allowance (HRA), you may claim benefit under section 80GG. However, neither you nor your spouse or children must own a property at your work location. Furthermore, you must file Form 10BA to claim this deduction.
Tax planning is important and helps you to save money when done correctly. However, it is vital to start early to avoid last minute rush.
Here are five benefits of starting tax planning early.
1. It provides you with sufficient time to channelize your money to maximize your gains
2. You are able to plan your investments well and follow a disciplined savings approach especially if you opt for a Systematic Investment Plan (SIP)
3. When you start early, you are able to build wealth as your tax-saving investment options have longer time to earn income through the power of compounding
4. If you wait until the end, you may make inaccurate investment decisions because you do not have sufficient time to analyze the different options
5. When you delay your planning, you may miss the opportunity to avail of tax benefits and hence face difficulty in reducing your liability.
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