Two individuals with the same salary structure can have different take-home salaries based on how well they optimise their tax outgo. In this article, we’ll look at 5 simple options that will help you optimise your tax outgo.
If your salary is your only source of income, then it is vital that you do all in your capacity to reduce your tax outgo. This is even more important for individuals who come under the highest tax bracket of 30%.
The total tax an individual pays to the government is calculated by taking several things into consideration. These include: total income, income sources, tax deductions and exemptions availed.
Then there is your salary structure. Most companies structure salaries in the most beneficial way for their employees. But you must play your part too by making timely reimbursement claims and investing in avenues that offer tax deductions.
Additional Reading: Top 5 Best Tax-Saving Investment Plans For 2018-19
Two individuals with the same salary structure can have different take-home salaries based on how well they optimise their tax outgo. We’ll share some useful tips in this article that can help you reduce your tax burden.
But first, what is a tax deduction?
Tax deduction tools help in reducing your taxable income. It decreases your overall tax liability and helps you save more. The amount of deduction, however, depends on the type of tax deduction you claim. A number of day-to-day expenditures, too, qualify for deductions. You can also get deductions for certain expenses like medical expenses and certain investments like retirement plans and National Savings Plan (NPS).
In this article, we’ll look at five simple options that will help you optimise your tax outgo.
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Deduction under Section 80C, 80CCC and 80CCD
You can claim a maximum deduction of up to Rs. 1.5 lakhs by investing in instruments that fall under the umbrella of these three sections. Keep in mind the cap of Rs. 1.5 lakhs applies to all the three sections in total and not to individual sections.
Some of the popular investment options under these sections are:
- Payment made towards Life Insurance policies (for self, spouse or children)
- Payment made towards a superannuation/provident fund
- Tuition fees paid to educate a maximum of two children
- Payments made towards construction or purchase of a residential property
- Payments issued towards a Fixed Deposit with a minimum tenure of 5 years
This section provides for a number of additional deductions like investment in equity-oriented Mutual Funds, senior citizen saving schemes, etc.
Click here to know more about these sections.
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Deduction under Section 80D, 80DD and 80DDB
The money spent on Health Insurance premium can be claimed for deduction under this section. The deduction available under this section is over and above the deduction of the Rs. 1.5 lakhs available under the previous sections mentioned above.
Here are the rules for Section 80D:
- Rs. 25,000 (max) per year on Health Insurance premium for self and family.
- The maximum deduction of Rs. 30,000 per year if you or your parents are senior citizens.
- A deduction of Rs. 5,000 can be claimed every year on expenses related to health check-ups. This limit includes the check-up expenses of all members of a family, including spouse, kids, and parents.
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Section 80DD
This section provides provisions for tax deductions to individuals who have dependents with disabilities. A deduction of Rs. 75,000 is offered in case the dependent has a disability of 40% or over, but less than 80%. In case the disability is above 80%, the amount available for deduction is Rs. 1.25 lakhs.
These deductions can be claimed in case of the following expenditures:
- On payments made towards the treatment of dependants with a disability
- Premium paid to purchase an insurance policy for such dependant.
The dependent, in this case, can be either a spouse, sibling, parents or children.
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Section 80DDB
This section provides deductions on the expenses incurred by an individual/family towards medical treatment of certain diseases. The permitted deduction is limited to Rs. 40,000, which can be increased to Rs. 60,000 if the treatment is for a senior citizen.
Additional Reading: Tax Deductions Demystified
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A Home Loan Can Help You Save Tax
Home Loans are eligible for tax benefits under three sections of the Income Tax Act – 80C, 80E and 24(b). Your Home Loan consists of two components: principal and interest. You may be eligible to claim tax benefits for these components provided you meet certain criteria. You must be the owner, co-owner or co-borrower of a Home Loan to claim tax deductions.
The principal amount under Section 80 C – An Individual or a HUF (Hindu undivided family) can claim tax benefits on the principal repayment of a loan.
Interest payment under Section 24(b) – This section allows for a tax deduction on interest payable on a loan is taken to buy or construct a house.
Deduction for Joint Home Loan
If a Home Loan is availed by two or more people then each person is eligible to claim a deduction on the interest paid of up to Rs. 2 lakhs. Tax can be deducted from the principal amount paid as well as for an amount not exceeding Rs. 1.5 lakhs each. However, all the applicants should also be co-owners of the property in order to claim this deduction. Therefore, a joint loan can give you greater tax benefits.
A quick look at tax deductions available on Home Loan |
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| Deduction | Section | Max Limit | |
| Principal | 80c | Rs. 1.5 Lakhs | Property should not be sold before 5 years of purchase. |
| Interest | 24b | Rs. 2 Lakhs | Loan must be availed for purchase or construction and the property must be constructed within 5 years of availing the loan. |
| Interest | 80e | Rs. 50,000 | Loan amount should not exceed Rs. 35 lakhs and the property value should not exceed Rs. 50 lakhs. |
| Stamp duty | 80c | Rs. 1.5 Lakhs | This benefit can be availed only on the year that the stamp duty expenses are paid. |
Did you know you can claim a deduction on a second Home Loan too? In this case, however, one property will be regarded as a self-occupied property, while the other will be considered a let-out property.
Click to know more about the taxation structure for multiple properties.
Additional Reading: 5 Hidden Home Loan Tax Incentives
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Save Capital Gains tax
When you sell capital assets like stocks, bonds or real estate, you are liable to pay taxes to the government. However, this tax is not applicable to the total amount you acquire from the sale, but only on the profit that arises out of the sale. The profit is calculated as the difference at which the property was originally bought for and the current price at which it is sold. Capital gains are calculated by factoring in indexation.
There are two types of capital gains: Short-term capital gains and Long-term capital gains. Click here to read more about each type.
Additional Reading: Here Are Some Unusual Ways Salaried Individuals Can Save Income Tax
Here is a comprehensive list of the tax exemptions that you can get on your capital gains:
- You can get tax exemption on profits earned from long-term capital gains if you spend the entire profit amount to buy or construct a new house. You have to buy the new house within two years from the date of sale of your previous property or construct a new one within three years from the date of sale.
- In case you are unable to find a suitable property to buy or suitable land to construct the new house on within two or three years from the date of sale of your previous property, you need to open a Capital Gains Account Scheme in any public sector bank. The money deposited in this account has to be used only for buying or constructing a new house, or else it is taxable
- You can claim tax benefits up to Rs. 50 lakhs if you buy bonds issued by the National Highway Authority of India or Rural Electrification Corporation
- You can avail tax exemption if you invest your profits to set up a small or medium-scale industry. You need to buy the manufacturing tools for the industrial unit within six months from the date of sale of your asset
- If you sell agricultural land which is not within the city limits, the profit earned out of the sale is not taxable
Click here to understand how the tax on capital gains is calculated.
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Tax Deduction on Education Loan (80E)
An Education Loan can be availed by students aspiring to study in India or abroad. But, to be eligible for tax benefits on an Education Loan, the loan should be availed from a scheduled bank or a notified financial institution. You can avail an Education Loan for self, spouse or children. The legal guardian of any student can also avail this loan. This way, parents or spouses can also claim a deduction for payment of interest.
However, only the interest amount paid towards the repayment of the loan is eligible for a deduction and not the principal amount. Also, there is no upper limit fixed for interest repayment. Tax benefits can be availed for a maximum of eight years, or on the loan repayment term, whichever is applicable. For example, if the entire loan is repaid in 6 years, then the tax benefit is also limited to that term.
There are many more ways to lower your tax liability. Even donations qualify for tax deduction. If you haven’t made any tax-saving investments, you can look at tax-saver Mutual Funds. They offer inflation-beating returns along with tax benefits. Not sure where to make your first Mutual Fund investment?
Well, right here at BankBazaar.com.