Hi Readers cum Tax payers... :) Today we are going to discuss about our main income effector / reducer - Tax. We can't avoid it but we can reduce our income reducer. Right?
Every income tax payer of india whether veteran taxpayer or a first time payer, felt that they are paying too much tax and they want to save their income from tax as much as possible. So tax payers have to become smarter in paying taxes on their income. There are many things that we do unknowingly which can save our tax.
All we need to do is know the ways to save tax. Some of them might be know by us, But in this article you can find some more ways to know our regular expenses which make us eligible for tax benefits.
So let's check the options to save our income / reduce tax
Travel/Hotel Expenses in Business:
Interest Income on Saving Account:
You can save tax on both of your entities by investing in tax saving options like under section 80C. You will virtually pay no taxes on your secondary income if you invest 1,00,000 in tax saving instruments.
Inherited Amount through Will:
Expenses - which are eligible for tax benefits:
Repayment of home loan:
You will be glad to know that the burden of your home loan EMIs can reduce the burden of taxes. There are three ways to get income tax deduction on your home loan(s). The principal amount re-paid in the current financial year is included under section 80C, offering a deduction up to Rs. 1,50,000. The interest portion offers a deduction up to Rs. 2,00,000 separately under section 24 (Have to deduct rental income, if property is let-out one). In addition to this,
Benefit on interest on home loan for First Time Buyers (If loan availed b/w 01.04.2016 to 31.03.2017) – Rs. 50,000 under section 80EE.
Benefit on interest on home loan for First Time Buyers (If loan availed b/w 01.04.2019 to 31.03.2022) – Rs. 1,50,000 under section 80EEA.
If you are living in the home on which you took first home loan, you can get another loan for the second house. There is no limit on income tax deduction on the interest payment of second home loan.
Very few people are aware of this benefit of tax saving on second home loan.
***Read more about this***
Repayment of education loan:
Now a days, people often go for education loans when it comes to higher education, because of rising in costs of educational courses.
Interest paid on education loan is also non-taxable under Section 80E, there is no upper limit on the amount.
The interest on education loan for higher studies in india or abroad, is eligible for the deduction if taken for self, spouse or children.
Tuition Fees:
We often spend a considerable amount of our income to provide best education to our kids. Income Tax laws provide you opportunity to compensate the expenses you incur on their tuition fees by reducing your taxes. You can claim this deduction u/s 80C of Income Tax Act.
Note: Tuition fees for spouse is not eligible for tax exemption.
Medical insurance:
Medical expenses are part of everyone's life. These expenses can claim under section 80D. The limits of medical expenses Rs. 25,000 for medical insurance of self, spouse and dependent children (including preventive health check up limit of Rs.5000 ) for below 60 years and it is Rs.50000 for above 60 years.
In addition to this, you can avail deductions of Rs.50,000 for medical insurance of parents above 60 years (as per budget 2018).
Preventive Health Checkup:
You get tax reduction on preventive health checkups annually. Inside of aforementioned limit of Rs.25,000 (or Rs.30000 all things considered) under section 80D income tax, you can also claim expenses incurred for preventive health checkups up to Rs. 5000 for each budgetary year.
Note: The premiums paid for health insurance availed by your siblings are not qualified for tax benefits.
Deduction on rent paid (without HRA):
You are paying monthly rents but even HRA is not being paid by employer. Now, Don’ t worry if you don’ t get HRA in your salary as you can still get tax benefit as per the provisions of section 80GG of Income tax Act on your rent what you paid.
Pension funds:
Ideally, the day you start earning money should be the day you start planning your retirement.
One of the best ways to do this is to start investing in pension funds. Fortunately, you can also reduce your taxes when you contribute to certain pension funds. Provisions regarding tax benefits in this case are covered under section 80C.
Medical expenses of disabled dependent:
If you have a dependent person in your family who is suffering from a disability, then you can avail tax benefit under section 80DD. This deduction is offered to help you take care of your disabled family member who is dependent on you. It can help you save up to Rs.1,25,000 from your taxable income.
Medical expenses of disabled individual:
Similar to deduction under section 80DD, an individual suffering from disability himself gets tax benefit under section 80U. The maximum deduction limit under this section is Rs.1,25,000.
Treatment of specified diseases:
For certain specific diseases, Income Tax Department offers tax benefits to the individual u/s 80DDB on the basis of expenses incurred by him for the treatment of such diseases or ailment. Treatment of diseases like cancer and AIDS is very expensive and this section offers much needed financial relief to the person suffering from such ailment and his family members.
Exemption limit for individual less than 60 years is Rs.40,000, For senior citizen (above 60 years) is Rs.80,000 and For very senior citizen (above 85 years) is Rs.1,00,000.
Donations:
There is another reason to rejoice when you make donations. You not only boost your karma & achieve inner peace but also earn right to claim another tax exemption which is covered under section 80GGA. There is an upper limit on cash donations. Such donations are capped at Rs.2,000.
Donations to the National Defense Fund, Prime Minister’s National Relief Fund, The National Foundation for Communal Harmony, National/State Blood Transfusion Council, etc. qualify for 100% tax deduction on donated amount.
Donations made towards trusts like Prime Minister’s Drought Relief Fund, National Children’s Fund, Indira Gandhi Memorial Fund, etc. qualify for 50% tax deduction on donated amount.
Any donation made for scientific research or rural development is eligible for deduction under section 80GGA of the Income Tax Act.
Travel/Hotel Expenses in Business:
Business owners have to travel to grow their business. They can file travel and hotel expenses as business expenses to save tax. They never pay for travel from their salary but from company account. Smart people always show expenses before taxation.
Look what a salaried person do – Assume he has taxable income of 10,00,000 (after all deductions) and paying his taxes as per slab. Then he spends 2,00,000 on travel vacation on leftover income.
And what a business person do – He shows his travel as a business expense and takes the rest of profits as salary. He will pay tax on 8,00,000 only.
Smart no!
Food Expenses in Business:
Similarly, business owners need to meet so many people like customers, vendors, and potential hires. Often he spends money on paying bills of food. They save tax by showing all food expenses as the business expense.
Distributed Profit to Partners in Partnership Firms:
There is no tax in the hand on partners if their partnership firm is making profits and partners decide to distribute profits among themselves. Partners get tax benefit because their partnership firm has already paid taxes on the profits.
Leave Travel Allowance for salaried:
Employees can utilize Leave Travel Allowance for the expenses on domestic vacations. This policy covers the expense of travel tickets for yourself and your family. You will not be taxed on the travel expenses of your spouse, two children and parents if they are part of your journey. Brother or Sister are covered only if they are solely dependent on you.
You can avail this facility twice in the block of four years. If you were unable to claim the benefits in four year block then you can carry over one vacation in next block, provided you avail in the first year of the block itself.
Expenses Related to Internet or Phone:
Employees often get mobile phones and internet devices from their employer to do their jobs effectively. Expenses incurred in using these devices are either pre-paid by the employers or can be reimbursed by the employees. Tax benefits can be claimed on these expenses.
Incomes - How much you can avoid tax on income:
Interest Income on Saving Account:
You might not be aware that interest income on saving accounts is not taxable up to 10,000 Rupees under section 80TTA. If you earned 15,000 as interest from all your savings accounts (sum up interest from all your bank saving accounts), then you have to pay tax only on 5000 rupees. For senior citizens, Maximum exemption limit was increased from Rs.10000/- to Rs.50000/- under section 80TTB in budget 2018.
Interest Income on NRE Account:
Indian Government is very friendly to NRIs. Someone with NRE account doesn’t have to pay tax on interest income on saving or fixed deposits.
Some smart Indians residing abroad, take a loan from the foreign country at 3-4% and invest their income in India through NRE account and earn tax-free income at 8-9%. Point to note that their income from NRE account is tax-free in India, but it may be taxed in their residing country (as per country law).
Maturity or Claim amount by Life Insurance:
As per amendments introduced in the Finance Act, 2003, any proceeds received on account of maturity/surrender of an insurance policy were exempt from tax only if the premium paid did not exceed 20% of the sum assured. As an example, if the annual premium is Rs.10,000, to qualify for the exemption, the minimum sum assured under the policy was required to be Rs. 50,000.
If the sum assured was less than the said value, the entire maturity proceeds would be taxable.
In case the policy is issued after 01.04.2012, then the limits of 20% premium paid reduced to 10%.
Educational Scholarship:
Any amount received as a scholarship for education is not taxable. It does not matter if the scholarship is granted by government or private trust.
Profit from Selling Shares or Equity Mutual Funds:
If you invest in stocks or mutual funds then you can make your profits 100% non-taxable. Do not sell your equity before holding for one year, whether shares or mutual funds (equity).
For example, you invested 100,000 in some stock and in 11 months it becomes worth 1,20,000. If you sell all of them then you have to pay tax on 20,000 profit. If you hold it for another month, then you are not liable to pay any tax on the profits up-to 1,00,000 and thereafter 10% on profit (whatever tax slab you are in).
Same is applicable to equity mutual funds.
Dividends received from Shares or Equity Mutual Funds:
Until 31.03.2020, as mentioned below - Stocks and Mutual Funds (Equity focused) distribute dividends to shareholders. All of the dividends are tax-free in the hands of the receiver.
Like in the previous example, where you bought stocks worth 100,000, let’s assume you receive dividends of 2000 after 10 months. Even one year is not completed since you bought stocks, you don’t have to pay any tax on Dividends.
After 01.04.2020 - Dividend is taxable income.
Amount received as Gifts on marriage:
In india, the gifts received (cash/cheque/gifts) on marriage are totally tax-free.
You can receive gifts from your relatives, friends and family on the occasion of your marriage and you don’t have to pay any taxes.
Agriculture Income:
Any income derived from Agriculture land is tax-free in India.
1. Any rent derived from land
2. Income from agriculture products
3. Income from farm building
HUF account for secondary income:
You can take benefit of tax saving under HUF account if you have any additional income to your salary. You can pay tax on your salary under your name and deposit secondary income into HUF account.
Hindu Undivided Family (HUF) status is available to Hindu, Sikh and Jain families in India. You have to get separate PAN and bank account number. Income Tax Department considers HUF as a separate entity for taxation purpose.
Under section 80C, income tax exemption for individual is Rs.2,50,000 and income tax exemption for HUF is Rs.1,00,000.
Under section 80C, income tax exemption for individual is Rs.2,50,000 and income tax exemption for HUF is Rs.1,00,000.
You can save tax on both of your entities by investing in tax saving options like under section 80C. You will virtually pay no taxes on your secondary income if you invest 1,00,000 in tax saving instruments.
Inherited Amount through Will:
There is no inheritance tax in India. So anything you get from your parents or uncles through WILL is not taxable in your hands. It becomes your non-taxable income.
House Rent Allowance:
You can claim HRA to save tax on your house rent. This is applicable only if you are not owning any house near to your office. You must be living in rented space and should receive rent receipts from the house owner. You have to submit PAN card copy of your landlord if you are paying more than 100,000 annual rent.
1. The actual HRA received from your employer
2. The actual rent paid by you for the house, minus 10 per cent of your salary (including your allowances)
3. 50 per cent of your basic salary (for a metro) or 40 per cent of your basic salary (for non-metro).
Income from Gratuity:
Gratuity received on retirement or on becoming incapacitated or on termination or any gratuity received by his widow, children or dependents on his death is exempt subject to certain conditions.
The maximum limit of exemption is Rs. 3,50,000.
Meal Coupons:
You can ask your employer to issue you meal coupons (like Sodexo) those are not taxable up to 2600 per month.
Medical Bills:
For salaried persons, medical bills are reimbursed by most of companies. But keep the receipts of your medical expenses which can be used to save tax at year end. You must know that up to 15,000 amount is non-taxable on medical expenses for yourself and your dependents.
Daily Travel Allowance:
You can avail tax benefits on conveyance up to 1600 rupees (Revised) per month from your company. You can save tax on 19,200 per annum on conveyance allowance. You don’t have to submit any bills or proof to avail this tax benefit.
Some companies have the policy of daily travel allowance if an employee is commuting by car or bike. You have to submit original fuel bills to get the tax benefit. Limit of non-taxable amount varies with your vehicle type and capacity, you have to check with your employer for more details.
Standard Deduction:
This is proposed in latest budget'2018 by hon' FM. A standard deduction of Rs.50000 in lieu of medical bills reimbursement and daily travel allowance (above stated). It will come into effect from the FY 2018-19.
Standard Deduction:
This is proposed in latest budget'2018 by hon' FM. A standard deduction of Rs.50000 in lieu of medical bills reimbursement and daily travel allowance (above stated). It will come into effect from the FY 2018-19.
Section 87A:
As per section 87A, if a resident individual's taxable income is up-to Rs.3,50,000 then he will get the benefit of Rs. 2500 or the amount of tax whichever is lower.
Company Leased Car:
Check with your employer if they have car lease policy. In that case, you will not be allowed to take advantage of Daily Travel Allowance, and you can drive company leased car to save tax on car EMI & fuel.
Telephone/Internet Expenses:
Your employer may not be reimbursing your telephone or internet expenses but may have any policy to make these expenses tax free. You can either get telephone expenses reimbursed or claim tax benefits.
Money under VRS:
If a government or public sector employee takes voluntarily retirement then the amount received is non-taxable with the upper limit of 5 Lacs.
Money Received from Provident Funds (after 5 years):
You will save tax on investments in Provident Account in the year of investment. The good news is that you don’t have to pay taxes on interest received from EPF/PF investments (note that Interest received on Fixed Deposit is taxable).
You have to keep your Provident Fund active for at least five years before you start withdrawing money (however not recommended unless an emergency)
Setting off capital gain:
You have to invest your sale proceedings amount in capital gains, When you sell a property. if you make capital gains on your investments, you attract taxes. However, if you make a loss then Income Tax Department allows you to carry forward your capital loss up to 8 years. Note that you can set off short-term capital gain only with short-term capital loss and long-term capital gain only with long-term capital loss.
Regular Savings under 80C:
Employee Provident Fund:
If your employer has opened an EPF account for you, then you are already investing in a very lucrative investment option. The contribution that you make to your EPF or PF account can be claimed as deduction under section 80C. The interest income & maturity amount that you get as a result is also exempt from tax.
Voluntary Provident Fund:
12% of your basic salary goes as a mandatory investment in your EPF. However, you can choose to invest more (up to 100%) of your basic salary + DA through voluntary contributions. In case you choose to invest more, your EPF becomes your VPF. VPF earns you tax-free interest of 8.4%. Therefore, you can increase your contributions in VPF to get the most out of your deductions under section 80C.
Public Provident Fund:
Other than PF, you can also invest in PPF. It is a good option if you looking for long-term (15 years, you extend 5 years more) investment opportunity. Just like PF, you can get tax deduction on your contributions while resulting interest income & maturity amount stays exempt from tax.
Sukanya Samriddhi Scheme:
This scheme is only available to parents or guardians of a girl child. it is arguably one of the best tax saving investment options available today. Its tax benefits are also covered under section 80C. It offers higher rate of return on investment when compared to remain all government schemes PPF.
*** Read more about this ***
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National Pension System:
This scheme is available at all Nationalized Banks and Post Office. It is considered a highly secure option having almost zero risk and you will get pension after 60 years. Your contribution to this scheme makes you eligible for section 80C deduction.
“An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act.”
5 year post office or Bank time deposit account:
Five year fixed deposits can be opened with any branch of Indian Post Office or Any bank. These deposit accounts work like any other fixed deposit account except that they have a lock-in period of five years and offer good returns and tax deduction.
National Savings Certificate:
Indian postal department provides National Savings Certificates (NSC) scheme to invest your funds and get exemption under section 80C (through post offices).
Senior Citizen Savings Scheme 2004:
An individual of the age of 60 years or more (Age 55 years, who are retired on superannuation or VRS) can invest in this scheme and which also come under section 80C exemption.
Let me know, how much smart you are in your tax saving and share your thoughts and queries in comments below
Senior Citizen Savings Scheme 2004:
An individual of the age of 60 years or more (Age 55 years, who are retired on superannuation or VRS) can invest in this scheme and which also come under section 80C exemption.
Let me know, how much smart you are in your tax saving and share your thoughts and queries in comments below
Hello, welcome to my blog, Smart Investor. I'm Satyanarayana, a banker & blogger, Investor from Visakha -patnam, India. You can read more about SML here.