Scrambling to submit investment proofs at work for tax benefits? Here are some areas you can explore to reduce your tax outgo.
It’s that time of the year when you’re probably scrambling to submit investment proofs at work for tax benefits. If you haven’t made any tax-saving investments then be ready to see a dip in your salary over the next few months.
Some common declarations made by most people are house rent, insurance, interest earned on Savings Account etc. But, if you take a closer look, you’ll find many more options that can help you save a good amount of tax money.
Before you begin, you first need to understand how much tax you need to save. This is done by checking your tax slab and calculating the maximum deductions available to you under it. Once you understand this, you’ll be able to lay out a plan or strategy that’ll help you reduce your tax burden.
Here are some areas you can explore to reduce your tax outgo.
Savings Account Interest
The interest earned on money in your Savings Account falls under the umbrella of ‘Income from Other Sources’. Thus, this interest earned must be filed for Income Tax returns. Since TDS is not applicable on the interest earned from your Savings Account, all interest exceeding Rs. 10, 000 is taxed according to your income tax slab rate.
So if you earn Rs. 16,000 in interest from all your Savings Accounts together, then only Rs. 6,000 will be taxed. The deduction is available only on Rs. 10,000.
Additional Reading: Pros And Cons Of Multiple Savings Accounts
NRE Savings Account
NRE accounts are exempted from tax. Not only is the income exempt from tax, but so is the interest earned on these accounts. Hence, taxes like income tax, wealth tax, gift tax, etc., are not applicable in India.
As per the provisions of Section 80G of the Income Tax Act, any individual, company or organisation can donate money and claim deductions while submitting their I-T returns. Donations made under Section 80G may fall under the 100% or 50% exemption groups. Hence, it is important to do your research before making the payment.
In-cash donations can be offered to charitable organisations in the form of cheques, drafts or cash as per the provisions of the I-T Act, 1961. However, donations for exemption under Section 80G has its cap for cash deposit at Rs 10,000 and anything above it needs to be paid by cheque or demand draft.
A significant point to note here is that for salaried personnel, no deductions on donations made under Section 80G will be reflected in Form 16. To claim the tax benefit you will have to furnish details of donations made while filing the tax return and claim a refund from the I-T department.
Additional Reading: How To Score Maximum Tax Deductions On Charitable Donations
Deduction On Employees’ Provident Fund Contributions (EPF)
An employee can get tax benefits for contributing to provident fund accounts under section 80C of the Indian Income Tax Act, 1961. This benefit can be availed for a contribution up to Rs. 1 lakh to a PF account.
If you contribute to an EPF account for 5 years, you will escape tax deduction on the amount you have contributed. But, if the duration of your EPF contribution is less than 5 years and you withdraw your PF contribution before it completes 5 years, income tax will be deducted at source (TDS).
Additional Reading: When and how can you withdraw from your EPF?
Taxation of ancestral property that has been inherited is not applicable, but income earned from such property is taxable.
All agricultural income is exempt from taxation and not included under total income. The Central Government cannot impose or levy a tax on agricultural income as stated by the exemption clause under Section 10 (1) of the Income Tax Act.
However, state governments can charge agricultural tax. Agricultural income within Rs. 5,000 in a financial year is not accounted for tax purposes. Anything above this amount is taxed as per the applicable rates. As per the finance act, the total tax liability for a person would include the agricultural income added to the non-agricultural income.
Under section 80D of the Income Tax Act, you can claim deductions up to Rs. 25,000 for paying the premiums of a medical or Health Insurance policy for yourself, your spouse or children who are dependent on you.
For the financial year 2017 – 2018, senior citizens can claim deductions of up to Rs 30,000 (under section 80D) for medical insurance. You can also claim additional deductions if you have paid the medical insurance premiums for your parents, even if they are under the age of 60. However, the total deductions that you can claim under this section cannot exceed Rs 30,000.
Education & Home Loan
If you have taken an Education Loan for higher education in India, you can claim tax deductions under section 80E of the Income Tax Act for interest paid for the loan. You will be eligible for deductions under this section if the loan was taken for yourself, your spouse or your dependent child. However, this benefit does not apply to loans taken for education in a foreign country and if the lender is not gazetted by the Government of India.
Anyone availing a Home Loan benefits in two ways. The amount paid towards the principal repayment qualifies for a tax deduction under Section 80C of the Income Tax Act. Another benefit comes in the form of a deduction for the amount paid as interest on the Home Loan. The maximum amount you can claim as interest deduction from your income for a self-occupied property is Rs. 2 lakhs.
If you buy more than one property, only one house can be counted as a self-occupied property. All other houses are deemed to be rented out (even if they are not rented out). In case the loan is jointly availed between you and your spouse, the deduction of Rs. 2 lakhs can be claimed by both of you.
In case of properties that are deemed to be let out or are actually let out, the entire amount paid as interest was eligible to be considered for deduction under Section 24B of the Income Tax Act. The rent received gets added to your income.
Additional Reading: How To Make Your Salary Tax Efficient
Although gift tax at one point was abolished, currently, you need to pay tax if the value of the gifts received exceeds Rs. 50,000 in a financial year. This applies to all kinds of gifts – cash, shares, jewellery, property, and other moveable or immovable assets.
However, these apply to only gifts received from non-relatives. There are also different rules if the gift was received for your wedding. Any amount of money that you might receive in the form of cash or cheque on the occasion of your marriage is fully exempt from tax. This comes with certain conditions though. Remember that the ‘occasion of marriage’ will include the day of the wedding and a day or two before and after.
Premium Payment On Life Insurance & Maturity
Premiums paid towards a Life Insurance Policy can be deducted from your income when considering income tax, under Section 80C of the Income Tax Act.
For Individuals: An individual can claim a deduction on Life Insurance premiums paid towards policies that have been taken for self, spouse or own child – who may be dependent, independent, married or unmarried. You cannot claim deductions on premiums paid towards Life Insurance policies taken for parents, siblings or in-laws.
For HUF: Hindu Undivided Families (HUF) can claim deductions for Life Insurance premiums paid towards any member of the HUF.
Section 10(10D) allows you to claim tax exemption on the amount you receive as Life Insurance payout – including the sum assured and bonus – at the time of maturity, surrender or death of the person whose life was insured. However, there are certain conditions on this exemption.
Tax On Capital Gains
A capital gain is a profit that you gain after selling or transferring your asset/investment (like property, shares, jewellery, Mutual Funds, etc). It is the difference between the actual purchase price of the asset and the price at which it was sold.
You can get a tax exemption on the profits earned from your capital gains if:
- You have spent the entire profit to buy another house. You can buy a 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.
- You use the profit to buy bonds issued by the National Highways Authority of India or Rural Electrification Corporation. You can claim tax benefits up to Rs. 50 lakhs.
- If you sell agricultural land which is not within the city limits, then a tax is not levied on your capital gains.
- If you use your profits to set up a small scale or medium scale industry. However, you need to buy the manufacturing tools for the industrial unit within six months from the date of sale of your asset.
- In case you are not able to find a suitable property to buy within two or three years from the date of selling your capital asset, you can deposit this amount in a separate account of any nationalised bank under the capital gains accounts scheme.
- If you have long-term capital losses, these can be used to offset long-term capital gains.
- Use this guide on capital gains to help you evaluate your capital gains taxes and understand what tax exemptions you are entitled to.
Tax On Dividends
Dividends paid on equity shares are tax-free up to a limit of Rs. 10 lakhs, and so are the dividends paid on equity Mutual Funds.
Leave Travel Allowance (LTA)
Leave Travel Allowance is one of the best tax-saving tools that an employee can avail. LTA basically covers the expenses incurred by the employee for his own and family member’s travel. Spouse, parents, siblings and children are considered to be family members as far as the provisions relating to LTA are concerned. If an employee books air tickets for the travel then his/her ticket cost should be equal to or lower than the limit allotted for LTA.
LTA is only for domestic travels and does not cover international trips. LTA can be claimed by both the husband and wife in case both of them are working and the employer offers Leave Travel Concession. However, both of them cannot claim LTA for the same trip. Similarly, LTA cannot be claimed for the travel of only family members if the claimant is not travelling along.
Additional Reading: Confused About How To Claim LTA? Here’s Everything You Need To Know
Income From Gratuity
Gratuity is paid by an employer when an employee leaves the job after serving the same organisation for a minimum period of 5 years.
Gratuity received by an individual will be viewed as a part of his/her salary component, making it a taxable entity as per existing laws. But the government offers tax exemptions on the gratuity received, subject to certain conditions. In case of gratuity received by a nominee/heir on the demise of an employee, the amount received is liable to be taxed, falling under the ‘Income from other sources’ heading.
According to existing laws, the gratuity received by government employees on their superannuation/retirement/termination is exempt from tax. This extends to employees of both State and Central Government employees, employees from the defence sector and those working in any local authority.
Tax exemptions on gratuity for private sector employees depend on whether they fall under the ambit of the Payment of Gratuity Act of 1972.
Additional Reading: Up For Gratuity? Here’s How To Check If You’re Getting The Right Amount
Coupons or meal vouchers constitute another component that can help you save on your tax, and many companies are providing this component to their employees in a bid to help them save tax.
House Rent Allowance (HRA)
House Rent Allowance, this allowance is provided to employees who live in a rented accommodation. HRA is exempt to certain amounts only. The least of the following is exempt: Either 50% of the basic salary, or excess of rent which has been paid amounting to over 10% of basic salary, or the actual HRA you have received.
Medical bills are a popular exemption option. Medical expenses incurred by an individual, for self and family, during a given financial year qualify for this exemption. Bills of salaried employees, reimbursed by employers, are not taxable. You do not have to pay tax on up to Rs. 15,000 in a financial year if you submit medical bills for the same amount to the employer.
Additional Reading: Super Top-up Health Insurance – What’s That?
This is a taxable component, but on retirement, this is tax exempt to a certain amount. Tax exemption is available as per section 10(10AA) of the IT Act for both government employees and other employees. Government employees are fully exempt from tax, for leave encashment. Other employees get the least of the following as exemption, actual leave encashment received, or 10 months average salary, or Rs. 3 lakhs, which is the amount specified by the government.
Voluntary Provident Fund (VPF)
Employee’s contribution to the VPF account is eligible for deduction when accounting for tax, to the tune of Rs. 1 lakh. The income generated through interest is not taxable, provided the money derived isn’t in excess of the base interest rate of 9.50%. The accumulated amount, if withdrawn before the account completes 5 years, is subject to taxation.
As you can see, there is no dearth of options if you want to reduce your tax burden. It’s best to start looking at these options at the beginning of the year rather than towards the end.
We can help you with investment options that will not only grow your wealth but also help you save tax. How about starting with Mutual Funds?