Let’s face it – when it comes to income tax, the struggle is real!
As salaried professionals, we often find ourselves thinking, "How can I reduce my tax outgo?" After all, a big chunk of our hard-earned salary goes into paying taxes, and that can feel frustrating.
But don’t worry; there are ways to save on income tax that you might not even be aware of.
The good news is, you don’t have to be a tax expert to take advantage of these tips.
So, let’s break down some practical strategies to help you save on your income tax while staying within the boundaries of the law. Sounds good?
Understanding Your Salary Structure
Before we jump into the nitty-gritty of tax-saving tips, it’s important to understand your salary structure. It usually consists of basic salary, allowances (like HRA, conveyance, and special allowances), perquisites, and deductions.
Knowing how your salary is structured will help you make the most of the exemptions and deductions available under the Income Tax Act.
Pro Tip: Always go through your salary slip to understand the components that can be exempted or claimed as deductions.
1. Make the Most of Section 80C Deductions
One of the most common and effective ways to save income tax is through Section 80C deductions. Under this section, you can claim deductions up to ₹1.5 lakh on investments or expenses in specified financial instruments.
What qualifies for Section 80C?
- Employee Provident Fund (EPF): Your EPF contributions can help you get tax deductions.
- Public Provident Fund (PPF): Investing in PPF is not only a good way to save for the future but also helps in reducing your tax liability.
- Life Insurance Premiums: Premiums paid for life insurance policies (including policies for your spouse and children) can be claimed under this section.
- Tax-saving Fixed Deposits (FDs): These FDs have a lock-in period of five years and offer tax benefits.
- Equity-Linked Savings Schemes (ELSS): These mutual funds come with a three-year lock-in period and are tax-saving as well as wealth-creation instruments.
Pro Tip: Diversify your investments across different instruments to maximize returns while saving tax.
2. House Rent Allowance (HRA) – Use It to Your Advantage
If you’re living in a rented house, you can claim House Rent Allowance (HRA) as a deduction from your salary. HRA exemptions are a great way to reduce your taxable income.
How is HRA calculated?
The amount of HRA exemption you can claim is the minimum of the following three:
- Actual HRA received from your employer.
- 50% of your basic salary if you live in a metro city (40% for non-metro cities).
- Actual rent paid minus 10% of your basic salary.
If you don't receive HRA but still pay rent, you can claim a deduction under Section 80GG (with certain conditions).
Pro Tip: Make sure to keep rent receipts or the rental agreement handy, as they may be required as proof.
3. Leave Travel Allowance (LTA)
Another component of your salary that can help save tax is the Leave Travel Allowance (LTA). This exemption is available for expenses incurred on travel within India. You can claim LTA for two journeys in a block of four years.
Pro Tip: Keep your travel bills and tickets as proof for claiming the exemption. Remember, LTA only covers travel expenses and not food or accommodation.
4. Standard Deduction
The government provides a Standard Deduction of ₹50,000 for salaried individuals. It’s a flat deduction and doesn’t require any proof of expenses. This deduction replaced the previous tax benefits on medical and conveyance allowances, making it a straightforward way to reduce your taxable income.
5. Opt for the New Regime or Old Regime – Choose Wisely
With the introduction of the new tax regime, individuals now have the option to choose between the new and old regimes. The new tax regime offers lower tax rates but doesn’t allow most of the deductions and exemptions available in the old regime.
Which one should you choose?
- If you have fewer exemptions and deductions, the new tax regime might work better.
- If you claim significant exemptions like HRA, LTA, and deductions under Sections 80C, 80D, etc., you might benefit from the old tax regime.
Pro Tip: Use an income tax calculator to compare your tax liability under both regimes before making a choice.
6. Medical Insurance Under Section 80D
Buying medical insurance for yourself and your family not only provides health security but also offers tax benefits under Section 80D. The deductions are as follows:
- Up to ₹25,000 for insurance of self, spouse, and children.
- An additional ₹25,000 for insurance of parents (₹50,000 if they are senior citizens).
Pro Tip: Take comprehensive health insurance for your family to ensure protection and tax savings.
7. Save Tax Through Home Loan Benefits
If you have a home loan, you’re eligible to claim deductions on both the principal and interest components:
- The principal amount can be claimed under Section 80C (up to ₹1.5 lakh).
- The interest component can be claimed under Section 24 (up to ₹2 lakh).
Pro Tip: If you have jointly taken the loan, both borrowers can claim tax benefits, effectively doubling the tax-saving limit.
8. Donations to Charitable Institutions (Section 80G)
If you have a generous heart, why not get a tax benefit for it? Donations made to specified charitable institutions can be claimed as deductions under Section 80G. The percentage of deduction can vary depending on the institution, so make sure to check the eligible limit.
Pro Tip: Ensure that you get a receipt from the charitable organization, as it is required to claim the deduction.
9. Education Loan for Higher Studies
If you or your children have taken an education loan, you can claim a deduction for the interest paid under Section 80E. There is no upper limit on the amount of interest deduction, and it can be claimed for a maximum period of 8 years.
10. Tax-Free Allowances to Consider
Some allowances are exempt from tax, either fully or partially:
- Children’s Education Allowance: Up to ₹100 per month per child (for up to two children) is exempt.
- Hostel Expenditure Allowance: Up to ₹300 per month per child (for up to two children) is exempt.
- Transport Allowance: For differently-abled employees, up to ₹3,200 per month is exempt.
Pro Tip: Discuss with your employer about optimizing your salary structure to include more tax-free allowances.
11. Tax Benefits for NPS Contributions (Section 80CCD)
Contributing to the National Pension System (NPS) offers tax benefits. Under Section 80CCD(1B), you can claim an additional ₹50,000 deduction over and above the ₹1.5 lakh limit under Section 80C. Plus, contributions made by your employer can also be exempt up to a certain limit.
Pro Tip: If your employer offers NPS as a part of the salary package, make the most of it to save more.
Additional Tax-Saving Tips
- Food Coupons and Meal Cards
- Use meal cards like Sodexo to reduce taxable income, as they are partially exempt from tax.
- Salary Restructuring
- Consider restructuring your salary to include more tax-saving components like allowances and reimbursements.
- Voluntary Provident Fund (VPF)
- Make additional contributions to VPF to enjoy tax benefits beyond the EPF limit.
- Tax on ESOPs (Employee Stock Option Plans)
- Understand how ESOPs are taxed and manage them effectively to minimize tax outgo.
- Interest Income Exemptions (Section 80TTA/80TTB)
- Claim deductions for interest income earned on savings accounts (up to ₹10,000) and fixed deposits (higher limit for senior citizens).
- Reimbursement Claims (Phone, Internet, etc.)
- Get reimbursements for mobile and internet bills to reduce your taxable salary.
- Gratuity Exemption
- Gratuity received on retirement is exempt from tax up to a certain limit; plan accordingly to optimize tax savings.
- Encashment of Earned Leaves
- Leave encashment is tax-exempt under specific conditions for government and private-sector employees.
Are You Ready to Save More & More?
These tax-saving tips can go a long way in helping you reduce your tax burden. Make sure you’re not leaving money on the table by ignoring these deductions and exemptions.
The key is to plan your finances well and take advantage of the tax-saving options available. After all, who doesn’t want a little more money in their pocket?
At Suvit, we understand the struggle of managing taxes and finances, which is why we’re passionate about sharing tips like these. Our goal is to simplify the financial lives of individuals and businesses, making tax-saving easy and hassle-free.
Try Suvit for free for a week!
Happy saving!
