If there is any downside to earning more money, it is having to pay more tax.
Tax season is the least favourite time of the year for every earning person; irrespective of whether the person is an investor, a businessman or a salaried employee.
As the tax season approaches, everyone frantically searches for expenses or investments that will help them to retain as much as possible of their hard earned money.
However, many times investments are made in haste without proper research, and people end up having to pay the tax they wanted to reduce as some investment returns come under the income tax slab.
Thus, tax planning is something that needs to be well-though-out in advance to effectively reduce to amount of tax to be paid.
Listed below are some of the best ways to save tax in the upcoming year (which are absolutely legal, never fear)-
Expenses that Save Tax
This is probably the only time you do not hesitate to spend. Here are some expenses that help reduce tax –
Educational expenses –
- Tuition fees come under Section 80C of the Income Tax Act and are considered one of the best ways to save tax.
- Section 80C allows tax deductions up toRs 1.5 lakhs.
- The amount of tuition fees is deducted from the gross income, thus reducing the tax liability.
- Any registered school, college or university qualifies for this tax benefit and can be either private or sponsored by government.
- The course undertaken by the child must be full time. The tax benefit applies for upto two children.
- Development fees, donation fees or late application fees do not come under tax deduction.
- The parent paying the fees gets the tax deduction advantage.
House Rent Expenses –
- Salaried individuals typically have a House Rent Allowance(HRA) component in their salary structure.
- This allowance is applicable for deduction of tax for individuals who live in rented houses and is one of the best ways to save tax.
- Submitting rent agreement or rent receipts is mandatory to avail this benefit.
- If rent paid is more than Rs 1 lakh per year, pan card of the landlord also becomes necessary.
- Individuals who live in their parents’ houses but pay rent to them can also claim this benefit. However, documental proof of these transactions is mandatory.
Education Loan Repayment –
- Almost everyone opts for education loan for higher studies.
- Interest paid on the education loan can be deducted from income tax under Section 80E.
- Either child or parent repaying the loan is eligible for the tax benefit.
- Loan should be taken from a recognised financial institution and not from family or friends.
- Loan should be taken for full time graduate or post-graduate courses.
Home Loan Repayment –
- As both interest and principal on home loans is applicable for tax deduction, this is considered one of the best ways to save tax.
- Interest deduction comes under section 24 and principal deduction comes under section 80C.
- People buying home for the first time can save even more money on tax.
Charity Begins at Home –
- Charity not only adds weight to the balance of good and bad deeds, but also helps to reduce tax.
- Donations made for charity are exempted from tax under section 80G.
- However, all donations are not applicable for 100% deduction.
- Donations must be in form of cash or cheque.
Travel and Food Expenses –
- Owning a business involves a lot of travelling and having lunch or dinner with clients.
- Business owners can file the travel and food bills as business expenses and avail tax benefits.
Best Ways to Save Tax through Insurance
Life Insurance –
- Life insurance can also reduce tax amount in addition to providing a safety net for a person’s family in case of his or her demise.
- The premium payments required for life insurance policies are eligible for tax deductions under section 80C.
Medical Insurance –
- With the rapidly increasing cost of health care, medical insurance has become a necessity.
- Fortunately, tax deductions upto Rs 15,000 or Rs 20,000 can be availed on the premium payments.
Investments to Save Tax
Investments can reduce tax in addition to aiding financial growth of individuals and offer some of the best ways to save tax. Some popular taxes saving investments are–
Equity Linked Saving Schemes(ELSS) –
- These are diversified equity mutual funds.
- Amount invested in them qualifies for deduction from tax under section 80C.
- The lock-in period for this scheme is 3 years.
Public Provident Fund(PPF) and Employee Provident Fund (EPF)-
- PPF and EPF have been considered the best ways to save tax for many years.
- Tax deductions can be applied on contributions.
- The resulting interest income and maturity amount is exempted from tax.
Pension Schemes –
- Many people invest in pension funds from young age to ensure sufficient funds in retirement.
- Certain pension schemes allow individuals to reduce tax through the contribution amount to them.