Saving Income Tax: 9 Income Tax Saving Tips That Also Help Your Financial Health

Here’s a look at 9 ways to save income tax and improve overall financial health.

1.Investment in tax saving instruments

To encourage savings of citizens, the government has provided for certain tax deductions on amounts invested in specified instruments under Section 80C of the Income Tax Act, 1961. Some of the specified investment instruments Popular for tax planning purposes are:
  • Employee Provident Fund (EPF)
  • Public provident fund (PPF)
  • Fixed deposits (term of 5 years or more)
  • Life insurance policies
  • ELSS Mutual Funds
  • National pension scheme (NPS) and other pension schemes

Investing wisely in these instruments can serve the dual purpose of simultaneously achieving financial goals and tax savings (up to an investment limit of Rs 1.5 lakh per fiscal year). However, tax savings will only be available if an individual opts for the old tax system. If one chooses the new tax system, which offers favorable tax rates, it will be necessary to forgo many of the tax deductions and exemptions available under the old tax system, such as the advantage of section 80C. For those who have opted for the new tax regime, investments in the above instruments will only help achieve their financial goals and not save taxes.

2.Selection of the appropriate elements in the salary structure offered by the employer

In the case of an employee, we can evaluate the salary structure offered by the employer and opt for salary components that maximize the tax benefits. For example, one can opt for Rent Allowance (HRA) in case they pay rent, phone / internet expense reimbursements, education allowances, food vouchers, etc. Accordingly, appropriate deductions / exemptions may be claimed when calculating taxable income (depending on the conditions specified).

3. Increase in the contribution to the pension fund

Employees may consider paying an additional contribution to the “Voluntary Provident Fund” in addition to the EPF, if the investment limit of Rs 1.5 lakh is not exhausted. This additional contribution will also be deductible from taxable income under certain conditions. In addition, the employer’s contribution to the NPS (subject to 10% of salary) will provide an additional deduction to the employee.

However, keep in mind that the employee’s own contribution to EPF and VPF must not exceed Rs 2.5 lakh in a financial year, otherwise income tax will be payable on the ‘accumulation of interest on excess contributions to the provident fund.

4. Tax advantages on a mortgage
If a home loan is taken out with a financial institution such as a bank or NBFC or a housing finance company to acquire / build a property, then the interest and principal paid on the loan taken out can be deducted from the income taxable, subject to specified conditions. limits provided for by tax provisions. However, the tax saving can only be claimed if the old tax regime is chosen. Keep in mind that the deduction on the principal repayment amount is subject to the aggregate limit of Rs 1.5 lakh under section 80C.

5. Protect yourself with health insurance
Income tax provisions provide for deductions from premiums paid for health insurance for self, spouse, dependent children and dependent parents. Therefore, one can purchase health insurance for oneself and family members to help manage medical expenses in the event of a medical emergency and at the same time enjoy tax benefits for the premiums paid for these policies ( Rs 25,000 for self, spouse and dependent children; Rs 50, 0000 for elderly parents, if applicable).

Likewise, if the elderly are not covered by any health insurance policies, they can also claim a deduction of up to Rs 50,000 for medical expenses incurred during the year.

6. Claim an appropriate deduction for medical expenses, tuition, etc.
It is important to note that in some cases, even if no additional investment is made, tax benefits can be obtained in connection with certain expenses incurred such as Rs 5,000 for preventive health checks. However, the deduction for health check-up costs is subject to the overall ceiling provided for in article 80D which includes the health insurance premiums mentioned above. In addition, parents can claim a tax deduction of up to Rs 1.5 lakh under section 80C (under the overall limit of Rs 1.5 lakh) for tuition fees paid for the education of their children.

7. Filing of income tax returns within the specified deadlines
The importance of filing income tax returns and other statutory forms (as applicable) within specified deadlines cannot be overstated. The same helps to establish a proper tax record for any investigation / verification by the tax authorities. In addition, the filed tax returns (ITRs) must also be submitted for various purposes, such as applying for immigration documents, home loans, loss carry-forward, some high value transactions, etc. Therefore, it is important to file your RTI in the aggregate. time limits to avoid interest / criminal implications.

8. New concessional tax regime
A new simplified optional personal income tax regime has been put in place by the government from the 2020-2021 fiscal year.

Subject to certain conditions, an individual or HUF will be able to pay taxes at reduced slab rates which apply without certain exemptions and deductions. Given the same thing, one can compare the tax payable under the current and new tax system and go for the system that is the most advantageous from a tax point of view.

9. Documentation requirements
Although no documents need to be uploaded during the electronic filing of the RTI, an adequate record should be kept of the documents for the investments made, such as PF account statements, passbooks, copies of insurance policies, pension plans, bank statements, etc. for hassle-free interaction with the relevant authorities.

(The author is Partner & India Mobility leader – People Advisory services, EY. This article was co-authored by Sreenivasulu Reddy, Director, EYs)

(The opinions expressed are personal.)

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