The Income Tax Act, 1961 has many provisions that allow tax deductions for different types of investment instruments. As a famous saying goes, “Watch the pennies and the dollars will take care of themselves,” simply focusing on saving money and investing is not enough. Knowing how you can save your taxes can aid wealth creation in the long run.
How can you save income tax?
From the financial year 2020–21, every Indian taxpayer can choose between the old and new tax regimes. The new one offers lower tax rates; however, it forgoes most of the deductions and exemptions that are allowed under the old tax regime.
If you have a significant taxable income and you are looking to invest in tax savings schemes, here are some of the options you can choose from –
- Invest in tax saving schemes under Section 80C
You can avail a deduction of up to Rs. 1,50,000 by investing in the following tax-saving options under Section 80C:
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- Equity Linked Savings Scheme (ELSS), also called Tax-Saving Mutual Funds
- Five-year fixed deposits with banks and post office
- Contributions to Employee Provident Fund
- National Pension System (NPS): You can avail of an additional deduction of up to Rs. 50,000 under Section 80CCD(1B)
- Sukanya Samariddhi Account
- Invest in health insurance schemes under Section 80D
This section allows for tax deduction for money spent on one’s health or health insurance.
| Premium paid for | Maximum deduction allowed under Section 80D (Rs.) |
| Self | 25,000 |
| Spouse and dependent children | 25,000 |
| Parents <60 years | 25000 (Self) + 25000 (Parents) = 50,000 |
| Parents >60 years (Senior citizens) | 25000 (Self) + 50000 (Parents) = 75,000 |
| Self and parents > 60 years | 50,000 each for parents and self |
| Medical bills for parents not covered under the health insurance policy | 50,000 |
- Contribute towards charity under Section 80G
By donating to the specified charities under section 80G (via cheque or draft if exceeding Rs. 2,000), you can claim a deduction, thereby reducing your taxable income. Depending on the category you select, you can claim a 100% or 50% deduction (with or without restriction) of the amount donated.
- Apply for a home loan
| Repayment | Tax benefit |
| Principal amount | Deduction of up to Rs. 1.5 lakh under Section 80C |
| Tax Benefit on Interest on loan amount | |
| Self-occupied property | Deduction of up to Rs. 2 lakh under Section 24(b) |
| First-time homeowners | Deduction of up to Rs. 2,00,000 under Section 24(b) + Rs. 50,000 under Section 80EE = Rs. 250,000 |
| First-time affordable homeowners(value of property < Rs. 45 lakh) | Deduction of up to Rs. 2,00,000 under Section 24(b)+ Rs. 1,50,000 under Section 80 EEA = Rs. 3,50,000 |
The interest on the home loan under Section 24(b) for under-construction property can also be claimed as deduction only if the possession of the house takes place in five years.
If you are looking to save your income tax by investing in tax saving schemes, it is prudent to take investment decisions under expert guidance so that you can take financial decisions that are in line with your financial needs and appetite for risk.
