You must know what are tax-saving options available to you. Tax is important for the development and growth of the nation and community. Without taxes, the nation would collapse. But as your income starts to grow, you start feeling the brunt of taxes on your wallet. And it can be quite painful.
There are generally 2 types of taxes that we pay as citizens of India – direct taxes and indirect taxes. Indirect taxes are the ones that you pay every time you buy something – fuel, ration, electronics, anything you can imagine. These are taxes you cannot save unless you cut down on your expenses. The direct tax is attached to your annual income. And this is where the government has made certain amendments and regulations so you can legally save taxes. And we must take advantage of these tax-saving options because every rupee saved from taxes is a rupee added to your income.
Welcome to my blog series – ‘In Pursuit of Financial Freedom‘. This is the 9th post in the series and if you have not read the earlier 8, I highly recommend giving them a read.
Today, we will talk about the various options available for saving direct taxes. Before we jump into the options, we first need to understand the tax structure itself. And this is where things could get a little confusing.
Tax Structure in India –
Depending on your age, there are different tax slabs and income tax rates applicable. There are also two different regimes currently – the old tax regime and the new tax regime. To keep things simple in this post, let us assume that you are below the age of 60. Below is the tax chart for this demography –
| Tax Slab | Old Regime | New Regime |
|---|---|---|
| 0 ₹ – 2.5 lakh ₹ | NIL | NIL |
| 2.5 lakh ₹ – 5 lakh ₹ | 5% | 5% |
| 5 lakh ₹ – 7.5 lakh ₹ | ₹12500 + 20% of total income exceeding ₹5,00,000 | ₹12500 + 10% of total income exceeding ₹5,00,000 |
| 7.5 lakh ₹ – 10 lakh ₹ | ₹62500 + 20% of total income exceeding ₹7,50,000 | ₹37500 + 15% of total income exceeding ₹7,50,000 |
| 10 lakh ₹ – 12.5 lakh ₹ | ₹112500 + 30% of total income exceeding ₹10,00,000 | ₹75000 + 20% of total income exceeding ₹10,00,000 |
| 12.5 lakh ₹ – 15 lakh ₹ | ₹187500 + 30% of total income exceeding ₹12,50,000 | ₹125000 + 25% of total income exceeding ₹12,50,000 |
| 15 lakh+ ₹ | ₹262500 + 30% of total income exceeding ₹15,00,000 | ₹187500 + 30% of total income exceeding ₹15,00,000 |
Now, I am not here to tell you which regime is better for you and the complexities involved in the two tax regimes. That is a different blog in itself. But I can tell you this – while the new regime might have lower taxes, it also has very few tax-saving options available. So if you plan to invest your money in tax-saving instruments or have a home loan, then the old regime works better in most cases.
Having said that, since tax-saving deductions are only available in the old tax regime, it goes without saying that choose your regime wisely and the options I am explaining below apply to the old tax regime.
1. Section 80C
This is the most popular tax-saving section available. The maximum deduction you can claim in one financial year (April – March) is 1.5 lakh ₹. This section essentially encourages you to invest your money. It is a win-win situation where you can not only save taxes but earn high returns from that money. Below are the tax-saving options under this section –
- EPF (Employee’s Provident Fund) – If you are a salaried employee then you probably already have this. EPF usually offers a return of around 8.5%. The lock-in period for this is until you retire or leave your job permanently. You can also voluntarily increase your contributions to EPF. These can form a big retirement cover for you.
- PPF (Public Provident Fund) – This is also a government instrument that gives you generally a return of 7% while also saving your tax. The lock-in period for PPFs is 15 years that can you can choose to increase it to 5-year blocks later.
- ELSS (Equity Linked Saving Schemes) – These are essentially mutual funds that are linked to Equity but also offer savings of taxes. These offer the best returns of around 15-18% but are also riskier. They usually have a lock-in period of 3 years. The best part is you can directly buy them through your brokerage account like Zerodha and you can also invest in them in a SIP manner.
- Other options under this section include NPS (National Pension Scheme), repayment of principal of a home loan, children’s school fees, FDs (Fixed Deposits), ULIP (Unit Linked Insurance Plan), SSY (Sukanya Samrudhi Yojana), etc
Things to keep in mind – If you are a salaried person with a home loan, generally your EPF and principal repayment should cover the 1.5 lakh limit. But even still, the other options available under this section offer decent and stable returns. If your section 80C is covered, I would advise investing in regular mutual funds than ELSS, but if it is not, then ELSS offers the best returns in this category.
2. Section 80CCD (1b)
In addition to 1.5 lakh ₹ from section 80c mentioned above, you can also claim deductions of an additional 50k under this section by investing in NPS. So if you add the two sections 80C and 80CCD you can reduce your taxable income by 2 lakh rupees and save taxes.
3. Section 80D
This section encourages everyone to live a healthy and worry-free life. How? By giving deductions for medical insurance that you buy for yourself and your family. You can claim a deduction of up to 50,000 total in medical insurance premium payment (25000 for yourself and your spouse, 25000 for your dependent parents below 60 years). If your parents are senior citizens, you can claim up to 1,00,00 for insurance premium. If your senior citizen parents are not covered under any insurance then you can claim 50000 in medical expenditures for them in a year.
4. Other tax-saving options –
i. Section 24 –
Along with saving tax on the principal in a home loan, you can also claim tax benefits of up to 2 lakh interest paid per year. This is only applicable if the property is self-occupied.
ii. Section 80G –
Contributing to government-approved charities can also give you tax-saving benefits.
iii. Section 80E –
This section is for interest paid for an education loan. There is no limit on the interest amount for claiming this benefit. However, you can only claim it for a maximum of 8 years from the loan repayment start date.
iv. Apart from these tax-saving sections there are also others like section 80 CCD 2 (employer’s contribution to NPS), section 80 DD (medical expenses of differently-abled), section 80 U (individuals with a disability), section 80 EEA (a home loan for affordable housing), section TTA (interest on the balance in a savings account), section TTB (senior citizens), etc
Conclusion –
It is important that we understand the tax structure and also are aware of the tax-saving options for individuals. Chances are, if you are a salaried person, you are already optimized for tax savings because of EPF and the insurances you might have bought. My recommendation is, tax-saving should not be the sole objective when deciding on an investment instrument or strategy. If tax-saving comes out as a natural by-product, that is like the cherry on top. But do not go out of your way to save taxes on each section mentioned above unless it is fuelling your financial freedom journey.
