- Date : 02/06/2021
- Read: 5 mins
Is income tax taking away the joy of a salary hike? Here are some tax saving options you can use to save money.
Getting a raise is a dream for all working individuals. The hours of toiling, nights spent preparing presentations, and getting up early to be at your home desk on time can all take a toll on you. A salary hike can make all this seem worthwhile. Every time you get a raise, you move a step closer to your dreams and goals. Of course, a rise in your income can also raise the amount of income tax you pay. However, there are some tax saving schemes that can help to reduce your taxable output. Let’s see what they are:
- Life insurance policy: Life insurance plans can offer many tax benefits. To start with, the premiums paid towards a life insurance plan qualify for a tax exemption up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. Not only this, the benefit paid to you at maturity is also entirely tax exempt under Section 10 (10D) of the same Act. So, buying life insurance can not only secure your loved ones and their future but also help you save money in the present.
- Public Provident Fund (PPF): PPF can be a great choice for retirement savings. It currently offers an interest rate of 7.1%. Moreover, you can claim a tax exemption of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961 on investments made in the PPF in a financial year. The interest earned is also tax exempt and your withdrawals on maturity are tax-free as well.
Related: Best ways to save tax in 2021
- Equity Linked Savings Scheme (ELSS): ELSS is a type of mutual fund that also offers tax benefits. You can claim deductions under Section 80C up to Rs 1.5 lakh invested in an ELSS fund in a financial year. An ELSS fund can offer a return of up to 15%-18% and has a lock-in period of just 3 years, making it an ideal addition to your investment portfolio.
- Home loan: Buying a home can offer you security, stability, and financial freedom. It also makes for an excellent income tax saving tool. You can claim a tax exemption of up to Rs 1.5 lakh per annum for the principal amount of a home loan under Section 80C of the IT Act. You can claim an additional Rs 2 lakh per year on the interest paid towards the home loan under Section 24 of the same Act.
- National Pension Scheme (NPS): Similar to a PPF, an NPS is a retirement savings tool that is also a good tax saving instrument. You can claim up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. You can also claim an additional deduction of up to up to Rs. 50,000 for self-contribution under Section 80CCD (1B).
- Increase health cover: A health cover not only protects you from medical costs but also helps save tax. You can claim a tax deduction of up to Rs. 25,000 for health insurance for yourself, your spouse, or your child. You can also claim an additional Rs. 25,000 for a health plan for your parents if they are under the age of 60. For parents over 60, the additional amount can go up to Rs. 50,000, making it a total of Rs. 75,000. If you and your parents are both over 60, then you can claim Rs. 50,000 + Rs. 50,000 = Rs. 1,00,000. Considering increasing your health cover to maximise your tax savings.
- Donations: Donations are another good tax saving tool. For instance, if you sponsor a child's education through donations, you can claim a tax deduction under Section 80G up to 50% of the donation. Section 80G includes other types of donations too that let you claim deductions up to 50% to 100% of the donated amount.
- Senior Citizens Savings Scheme (SCSS): This is a government-sponsored savings scheme specifically created for senior citizens above the age of 60. For working women over 60, this can also be one of the best tax saving options. You can save up to Rs 1.5 lakh under Section 80C of the IT Act by investing in this scheme.
Apart from the income tax saving investments mentioned above, it also helps to choose the right tax regime. As of 2021, there are two tax regimes in the country – old and new. The new tax regime announced in the 2020 Budget has more tax slabs and lower tax rates but no tax deductions and exemptions. The old tax regime, on the other hand, has higher tax rates but also offers the option to claim tax deductions and exemptions.
As a citizen of India, you have the right to choose either of these tax regimes. So make sure you understand your tax liability and pick one that results in lower tax outflows.
Related: 8 Myths about tax filing debunked
Simple things, such as investing your money in tax saving schemes, opting for long-term capital gains over short-term capital gains, and mindfully picking the right tax regime can help you save on tax and increase your earnings. If it seems too complex, you could take help from a professional financial advisor and invest accordingly.
Also read Top 6 Most common mistakes to avoid when filing IT returns to ensure there are no errors when it comes to your taxes.