Top 10 Ways to Save Income Tax In India
In India more than 1.5 crore people pay Tax on their income. Most of the people are shifting from the agriculture sector to services or manufacturing sectors to earn good amounts of money to fulfil their needs and dreams.
Most of the people are not aware about the ways of saving tax on their income. So, in this article we will discuss the ways by which an employee or an employer can save tax on their income. We will also discuss about how we can save tax as well as how we can earn interest on our investments.
1. Tax Saver Fixed Deposits
Fixed Deposits are of two types:
(a) Normal FD – In this you will earn a good return, but you will not get tax benefits.
(b) Tax saver Fixed Deposits – In tax saver Fixed Deposit you will get tax benefits on your investment.
Account in FDs can be opened by any individual resident of India. Fixed deposits have 5 years of lock-in periods. In India Investment amount under section 80C of the income tax act is exempt but interest received on fixed deposit amount is taxable income. Every bank offers a different interest rate on your tax saver fixed deposits.
SBI offers 5.40% Interest rate for general public and 6.20% for senior citizens.
DCB bank offers one of the highest interest rates on your investments in tax saver FDs. DCB bank provides 6.95% interest for the general public and 7.45% for senior citizens.
Tax saver Fixed deposits is one of the best ways to save tax on your investment. For e.g. If a Normal person Invested Rs.5,00,000 for a tenure of 5 years and is earning an interest rate of 5.50% yearly, then after 5 years an individual will receive total Rs.6,57,033 including interest amount of Rs.1,57,033. Minimum investment should be Rs.1000 and Interest received on investment is taxable income.
2. Public Provident Fund (PPF)
Public Provident Fund is one of the best ways to save Tax. Investment up to 1.5 lakh is tax free. Minimum amount of Public Provident fund should be Rs.500. Current Interest Rate of Public provident fund is 7.1%.
An Individual resident of India can open a PPF account but a Hindu Undivided Family (HUF) cannot open a PPF account. Interest earned on PPF is Tax free.
PPF is one of the best ways to earn a good amount of return and save tax. For e.g. If you are Investing Rs.100000 Yearly for a period of 15 years then your total investment will be Rs.15 lakhs and you will earn 7.1% compounded interest. Your total Interest earned in 15 years will be Rs.12,12,139 and at the closing year your maturity value will be Rs.27,12,139.
3. National Pension Scheme (NPS)
An Indian citizen between 18 to 65 years of age can join this scheme. Under the National pension scheme (NPS) a person will get an interest rate of 9 to 12%.NPS can be withdrawn at the age of 60 years and lock in period is between 30 to 35 years, however NPS can be withdrawn at any time.
NPS is regulated and administered by Pension Fund Regulatory and Development Authority (PFRDA).Suppose your current age is 25 and your retirement age is 60 and you are contributing Rs.500 every month under NPS and your interest rate will be 10% and your annuity period is 20 years.
So, if you will contribute 40% of pension in annuity amount and your interest rate on annuity payment is 5% then at the time of retirement you will get Rs.19,14,138.61 and pension per month will be 5052.92. So the principal amount which is invested by you will be Rs.2,10,000 and the amount reinvested in annuity will be Rs.7,65,655.44 and you will earn Rs.17,04,138.61 as an interest on investment.
So suppose your basic salary is Rs.6 lakh and your DA is 3 lakh so if you will invest in NPS then you can get Rs.1.5 lakh deduction under section 80C and Rs.50,000 under section 80CCD(1B) and you can also get deduction of your 10% salary plus on DA under section 80CCD(2) which will be Rs.90,000. So total deduction you can claim under NPS is Rs.2.9 lakh on a basic salary of Rs.6 lakh.
4. Health Insurance Policy (Section 80D)
Health Insurance policy is one of the safest ways to invest and save tax under section 80D of the income tax act. Annually You can get up to Rs.25,000 tax deduction on your premiums and Rs.5,000 on your medical check-up.
If your employer is paying your health insurance premium then you will not get any tax deduction benefit. You should take an insurance policy on your own for your family or parents to get tax deduction under Health Insurance Policy.
You can get tax deduction benefits on your premium only if you are paying for self, spouse, dependent children or parents.
5. Home Loan
Interest paid on home loan repayment is deducted under income tax. If the house property is self occupied then on home loan interest you can get deduction up to Rs.2 lakh and if the house property is not self occupied then deduction on the entire loan interest will be applicable.
For purchase and construction of a property the deduction on the interest will be limited to Rs.30,000 on your gross income.
6. Senior Citizen Saving Schemes (SCSS)
Senior citizen saving scheme is one of the best investments for your retirement and you can save tax on your investment under this scheme.
Under the Senior citizen saving scheme interest rate is 7.40% and interest is compounded quarterly. You can get a deduction up to Rs.1.5 lakh on your investment under this scheme.
However, interest received under this scheme is fully taxable. In SCSS you can deposit more than Rs.15 lakh. Suppose your investment amount is Rs.500000 for a period 5 years then you will receive Rs.1,85,000(Quarterly interest Rs.9,250*20 quarter=Rs.1,85,000) as interest.
So if you invest Rs5,00,000 then you will receive Rs.6,85,000 after five years and you can also get tax deduction on your investment. So, under SCSS you can save a good amount of tax on your annual gross income.
7. Life Insurance
Life insurance is one of the best investments to secure the future of your family. Investing in life insurance will also help you in saving tax. You can get a tax deduction up to Rs.1,50,000 on your premium paid by you for your child or spouse’s for life insurance and it comes under section 80C of the Income Tax Act.
In life insurance your family will get paid out and tax charge will be the lowest as possible. Life insurance isn’t a great way to save tax but it is a multi purpose option. So you can secure the future of your family along with saving some tax under life insurance policy.
Charity is one of the most popular ways to save tax. Donating in any charitable organisation or relief funds can be claimed as deduction under section 80G of income tax act.
However, some specific donations are not applicable under section 80G of income tax act. Payment through cheque, draft or cash can only be claimed. In cash payment you cannot claim deduction if your donation amount exceeds Rs.10,000.
You will be allowed a 50% deduction on your charity or donation and if you are donating under the Prime Minister’s relief fund, Chief Minister’s relief fund or any National Defence setup by the central government then you can claim 100%deduction on your donation without qualifying any limit.
9. Donations to Political Parties
An individual or organisation can claim tax deduction on the amount donated by them to any political party in India. Tax deduction can be claimed under section 80GGB for making any donation to any political party but if the party is registered under Section 29A.
There is no limit for an individual to contribute but an organisation cannot contribute more than 7.5% of their annual profit. Tax deduction benefits will not be allowed under section 80GGB. You should have documents to claim Tax deduction for your donation.
So Donating to any political party is one of the most popular methods under the corporate sector. You can get tax benefits on your annual gross income by donating to any Political Party.
10. Employee Provident Fund
Investing in Employee provident fund is one of the best methods to save tax and earn interest on your investment. Employee provident fund is tax free for employers and for employee tax deduction can be claimed under section 80C. Under EPS you will get a specific rate on your deposit. Current EPF interest rate is 8.65%.
Employers and employees should contribute 12% of an employee’s basic salary and DA on a monthly basis. Minimum 5 years required to get your maturity amount tax free.
For e.g if your salary is Rs.50,000 and your age is 25 years and you are contributing into your EPF account then at the time of retirement your total contribution will be Rs.23,76,000 and your employer’s contribution will also be same and your maturity amount will be 2,04,67,205 including interest of Rs.1,57,15,205. You can also get tax deduction up to Rs1.5 lakh annually on your investment in EPF.
Interest earned and annuity amount under EPF will be tax free, so it’s a good investment plan for any employee to contribute a portion of their salary in EPF account.
So these are the few ways by which you can save tax and can also earn income on your investments. In India you have a lot of option to save tax on your taxable income by investing money in different schemes.