In India, taxes on income, wealth, and property are essential for the country’s economic growth. Paying income tax on time is a legal obligation for individuals earning above a certain threshold. However, the Income Tax Act of 1961, provides various avenues through which one can legally reduce their tax liability. In this blog, we will see how to reduce Income Tax in India.
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Deductions and exemptions under New Tax Regime
The new tax regime was introduced in the 2020 budget, offers lower tax rates along with fewer exemptions and deductions. Here’s a comparison of the tax slabs under the new regime:
Income Range (INR) | Tax Rate |
---|---|
0 – 2.5 lakhs | Nil |
2,50,001 – 5 lakhs | 5% |
5,00,001 – 7.5 lakhs | 10% |
7,50,001 – 10 lakhs | 15% |
10,00,001 – 12.5 lakhs | 20% |
12,50,001 – 15 lakhs | 25% |
Above 15 lakhs | 30% |
Deductions and exemptions under Old Tax Regime
The old tax regime allows several deductions and exemptions to reduce taxable income. Here’s a comparison of the tax slabs under the old regime:
Income Range (INR) | Tax Rate |
---|---|
0 – 2.5 lakhs | Nil |
2,50,001 – 5 lakhs | 5% |
5,00,001 – 10 lakhs | 20% |
Above 10 lakhs | 30% |
How to reduce Income Tax in India?
In India, Individual incomes are taxed through income tax, while corporate taxes are imposed by the central government. Wealth tax is applied to the net value of assets owned. These taxes generate crucial revenue for the government’s operations and development initiatives. Tax rates vary according to income slabs.
Taxpayers always seek ways to reduce their tax liability, especially as the ITR filing deadline approaches. Many legal methods exist to save on taxes under the Income Tax Act of 1961, including investments in tax-saving mutual funds, National Pension Scheme (NPS), insurance premiums, medical insurance, and home loans. Here are some of the legal ways through which you can reduce your tax.
- Utilize deductions under Section 80C
- One of the most common ways to reduce your taxable income is by taking advantage of Section 80C of the Income Tax Act. Under this section, you can claim deductions up to INR 1.5 lakh annually.
- Here are some popular investment options eligible for 80C deductions:
- Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- National Savings Certificate (NSC)
- Equity-Linked Savings Scheme (ELSS)
- 5-year Fixed Deposit (FD)
- Life Insurance Premiums
- Principal Repayment on Home Loan
- Tuition Fees for Children
- Additional deductions under Section 80D
- Section 80D allows you to claim deductions on premiums paid for health insurance. You can claim:
- For premiums paid for self, spouse, and children up to INR 25,000.
- An additional INR 25,000 for premiums paid for parents (INR 50,000 if parents are senior citizens).
- Section 80D allows you to claim deductions on premiums paid for health insurance. You can claim:
- Claiming home loan interest under Section 24
- If you have a home loan; under Section 24, the interest paid on the loan is eligible for deduction.
- You can claim up to INR 2 lakh per annum on the interest paid on home loans for self-occupied property.
- The entire interest amount paid for a let-out property.
- Standard deduction for Salaried Individuals
- Salaried individuals can avail of a standard deduction of INR 50,000 from their salary income. This deduction is automatically accounted for by employers while computing the TDS on salaries.
- Deductions for savings account Interest under Section 80TTA
- Interest earned in savings accounts up to INR 10,000 per annum is exempt from tax under Section 80TTA. For senior citizens, the exemption limit is INR 50,000 under Section 80TTB.
- Invest in National Pension System under Section 80CCD
- Contributions to the NPS can help you save additional tax. You can claim:
- Under Section 80C, up to INR 1.5 lakh.
- An additional INR 50,000 under Section 80CCD(1B).
- Contributions to the NPS can help you save additional tax. You can claim:
- Tax Savings through rent payments under Section 10(13A)
- If you are a salaried individual living in rented accommodation, you can claim House Rent Allowance (HRA) to lower your taxable income. The exemption amount is the least of the following:
- Actual HRA received.
- 50% of salary (if living in a metro) or 40% of salary (if living in a non-metro).
- Actual rent paid minus 10% of salary.
- If you are a salaried individual living in rented accommodation, you can claim House Rent Allowance (HRA) to lower your taxable income. The exemption amount is the least of the following:
- Deductions for donations under Section 80G
- Donations to specified charitable institutions and relief funds can be claimed as a deduction under Section 80G. Depending on the charity, the deduction can be 50% or 100% of the donated amount.
- Educational Loan Interest under Section 80E
- Interest paid on an educational loan taken for higher education is eligible for deduction under Section 80E. There is no upper limit on the amount of interest that can be claimed, and the deduction is available for up to 8 years.
- Set off and carry forward of losses
- Income tax laws allow you to set off and carry forward losses incurred in a financial year to reduce taxable income in future years.
- For example: Losses from house property can be offset against any other income.
- Capital losses can be offset against capital gains.
- Income tax laws allow you to set off and carry forward losses incurred in a financial year to reduce taxable income in future years.
- Rebates under Section 87A
- Individuals with a taxable income of up to INR 5 lakh can avail of a rebate under Section 87A. This rebate is the lesser of the tax payable or INR 12,500, effectively making their tax liability zero.
Investment options under Section 80C
Section 80C of India’s Income Tax Act is a popular tax-saving tool for individuals and HUFs, offering deductions of up to INR 1.5 lakh annually on various investments and expenses. It encourages savings and investments by exempting interest paid or credited on borrowed money for lending within India.
Additionally, Section 80 allows for a 10% deduction at source on interest payable, provided specific conditions are met. If you pay interest on loans to Indian residents, you can claim this deduction at source. Here are the common investment options:
Investment type | Max. deduction (INR) | Lock-in period |
---|---|---|
Public Provident Fund | 1.5 lakhs | 15 years |
Employee Provident Fund | 1.5 lakhs | Till retirement |
National Savings Certificate | 1.5 lakhs | 5 years |
Equity-Linked Savings Scheme | 1.5 lakhs | 3 years |
5-year Fixed Deposit | 1.5 lakhs | 5 years |
Life Insurance Premiums | 1.5 lakhs | Varies |
Principal repayment on Home Loan | 1.5 lakhs | Varies |
Tuition Fees for Children | 1.5 lakhs | N/A |
Other tax saving options beyond Section 80C
Apart from Section 80C, there are several other sections that provide tax-saving opportunities;
Section | Description | Max. deduction (INR) |
---|---|---|
Section 80D | Health insurance premiums | 25,000 (50,000 for senior citizens) |
Section 80E | Interest on educational loans | No upper limit |
Section 80G | Donations to charitable institutions | 50% or 100% of the donation amount |
Section 80TTA | Interest on savings account | 10,000 |
Section 80TTB | Interest on savings account for senior citizens | 50,000 |
Section 24 | Home loan interest | 2,00,000 (self-occupied) |
Conclusion
In conclusion, understanding how to reduce Income Tax in India can significantly lower your tax burden in a legal and efficient manner. The implementation of these practices requires careful planning and a thorough understanding of the available deductions and exemptions. By following these tips, you can make the most of the tax-saving opportunities available and maximize your savings.
Feel free to share this guide with your friends and family to help them reduce their income tax as well. In case of any expert consultation or filing your income tax in Bangalore and Hyderabad, you can directly reach out to 24eFiling. Our experienced professionals will simplify the process and make your filing process tension free one.
FAQs
1. How can I reduce income tax in India using Section 80C?
You can reduce your income tax by investing up to INR 1.5 lakh in various instruments under Section 80C. These include PPF, NSC, ELSS, life insurance premiums, and more. The amount invested is deducted from your taxable income, thereby reducing your tax liability.
2. What are the ways to reduce income tax in India through health insurance?
Under Section 80D, you can claim a deduction for the premiums paid for health insurance. You can claim up to INR 25,000 for insurance of self, spouse, and children, and an additional INR 25,000 for insuring parents. If the parents are senior citizens, the deduction limit goes up to INR 50,000.
3. How does the home loan help in reducing income tax in India?
Home loans can help reduce your income tax through two sections. Under Section 80C, you can claim a deduction of up to INR 1.5 lakh on the principal repayment. Under Section 24(b), you can claim a deduction of up to INR 2 lakh on the interest paid on the home loan if the property is self-occupied.
4. Can I reduce income tax in India through donations?
Yes, you can reduce your income tax by making donations to charitable organizations. Under Section 80G, donations to specified funds and charitable institutions are eligible for a deduction. Depending on the organization, the deduction can be 50% or 100% of the donated amount, subject to certain limits.
5. How do tax-saving fixed deposits help in reducing income tax in India?
Tax-saving fixed deposits with a tenure of 5 years can help you reduce your income tax. Under Section 80C, you can claim a deduction of up to INR 1.5 lakh on the amount invested in these fixed deposits. The interest earned is taxable, but the investment amount helps lower your taxable income.