Ways to Save Income Tax in 2021 in India
You might be earning either through salary or business. While your income increases, your income tax too increases. If you are smart, you can work towards reducing income tax instead of avoiding it. If you are looking various ways to save income tax in 2021 in India, this article is for you. Let us look on different ways where you can save income tax in India.
What is Income Tax?
Income tax is a direct tax imposed by the Government on individuals or entities based on their income or profit earned. It is calculated at a specified rate on the total income of a person. From the total income, certain deductions and expenses can be claimed which reduces your total income and ultimately the tax liability.
Ways to Save Income Tax in 2021 in India
There are a few ways in which you can save income tax in India.
a) By claiming expenses
b) By investing in tax saving instruments u/s 80C
Let’s discuss these points in detail.
9 Tax Saving Expenses in 2021 that can help to save income tax
These are in reality are expenses, however, can be claimed as deduction from total income and thereby reduce income tax.
1) Tuition fees
We spend huge sums of money on the education of our kids. Income Tax laws have the provisions to reduce the taxable income by claiming the tuition fees of children u/s 80C of the IT Act upto Rs 1.5 Lakhs.
2) Repayment of a home loan
If you have obtained a home loan and repaying its installments, the EMIs can reduce your tax burden too. You get the benefit of both repayments of principal and interest component. If it is your first house, then the tax benefit is even more. You can claim home loan interest paid u/s 24 upto Rs 2 Lakhs and home loan principal repayment u/s 80C upto Rs 1.5 Lakhs.
3) Repayment of education loan
The rising cost of education force people, many times, to obtain an education loan. The EMIs of such loan also bring tax benefits to you. The interest paid on education loan is deductible u/s 80E of the IT Act.
4) Deduction of rent paid
If you are paying rent for your house, no matter you are getting HRA or not, you can still get the tax benefits as per the provisions of sec 80GG of the IT Act.
5) Amount paid for health insurance
With increasing uncertainties of life, medical insurance is taken by almost everybody. The amount paid towards health insurance policy and preventive health-check-ups is eligible for deduction u/s 80D of the IT Act. To avail this deduction, never pay your premium in cash. You can claim medical premium paid for you and your spouse up to Rs 25,000 per annum (this amount is Rs 50,000 if you and your spouse is above 60 years). You can claim medical insurance paid for your parents up to Rs 25,000 and if they are senior citizens you can claim up to Rs 30,000.
6) Medical expenses of disabled dependent
If you incur medical expenses on the disabled dependent in your family, you can avail tax deduction u/s 80DD. This deduction helps you to take care of the disabled member even better.
7) Treatment of specific diseases
For certain specific diseases like cancer and AIDS, the IT Act offers some tax relief on the expenses incurred towards the ailment of these diseases.
8) Charitable donations
Your kindness and generosity of making donations can even benefit you by saving your income tax. Several types of donations come under the periphery of the Income Tax Act. Such tax exemptions are covered u/s 80G of the IT Act.
9) Donations for scientific research or rural development
Any donations made for scientific research or rural development is eligible for deduction u/s 80GGA of the IT Act.
9 Ways to Save Income Tax by investing in 80C investment options
Apart from these expenses, there are several investments also that are eligible for tax deduction under section 80C of the Income Tax Act.
10) ELSS Tax Saving Mutual Funds: Investment in Top Tax Saving ELSS Mutual Funds can help you to save income tax u/s 80C upto Rs 1.5 Lakhs. ELSS Mutual Funds can provide 12% to 15% annualized returns if you can invest for 8-10 years. ELSS Mutual Funds have 3 years lock-in period.
11) 5-year Post Office FD or NSC
This FD / NSC can be taken at Indian Post Office. It has a lock-in period of 5 years. It gives good returns on investment apart from the tax deduction. Post Office 5 Years FD offers 6.7% and NSC offers 6.8% interest rate in 2021.
12) NPS – National Pension Scheme
NPS is offered by specific banks. Depending on the options chosen, the returns would vary. The returns here are taxable, but the investment qualifies for deduction u/s 80C.
13) Investment in EPF (Employee Provident Fund)
12% of your basic salary goes in EPF mandatorily. This contribution made by you towards the EPF account is eligible for a tax deduction. This investment option is not only lucrative from the returns point of view, but also an excellent tax saving scheme. If you have completed your 5 years of service, then the interest income and maturity amount so received is also tax-exempt. The current EPF interest rate is 8.15%.
14) VPF (Voluntary Provident Fund)
Apart from mandatory EPF, if you choose to invest more in this account, it turns into VPF. You can invest up to 100% of your basic salary along with DA through voluntary contributions. This investment along with interest is also tax-exempt. The interest is same as EPF Interest. VPF is one of the safe investment option to get higher returns over EPF.
15) PPF (Public Provident Fund)
If you are looking for a long-term investment opportunity, PPF is an excellent option. You can open PPF account that has lock-in period of 15 years, but partial withdrawals can be done after specific period based on cetain terms and conditions. Just like PF, the contribution is eligible for deduction u/s 80C and interest income and maturity is also tax-free. The current PPF interest rate is 7.1%.
16) Sukanya Samriddhi Scheme
This scheme is available only who has girl child. It is one of the best tax-saving investment options where the rate of return on investment is higher than PF and PPF. The current Sukanya Samriddhi interest rate is 7.1%.
17) Life Insurance Premium
If you have taken any life insurance, the premiums paid can be claimed as deduction. One of the first step in financial planning is to take term insurance plan where you have life risk coverage with low premium.
18) Pension funds
The ideal time to start planning your retirement is the time you start earning. And one of the best ways to pile up the funds for your retirement is to invest in pension funds. If you contribute to certain specified pension funds, the amount is eligible to reduce your taxable income. The provisions for the same are covered u/s 80C, 80CCC, 80CCD(1), 80CCD(1B), and 80 CCD(2). You should pick-up pension plan that has low allocation charges.
4 Ways on How Salaried Employees can Save Income Tax in 2021
If you are a salaried employee, there are many additional ways in which you can look upon to save income tax-
19) HRA (House Rent Allowance) Deduction – If you live in a rented house, the allowance of HRA can be claimed as a deduction.
20) LTA (Leave Travel Allowance) Deduction – LTA can be claimed twice in a 4-year block. Expenses incurred by you and your family to travel can be claimed as a tax deduction. One would get several questions about LTA which can be clarified here.
21) Meal coupons – Some employers provide food coupons to their employees. They are not taxable up to Rs. 2600 per month.
22) Leased car – If you are enjoying the car lease policy offered by the employer. You may not be required to buy a car and can save tax on car EMI.
Conclusion: There are many ways to reduce your taxable income and ultimate tax liability. Carefully examine your income, expenditure and investment structure to get the best financial planning.
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Ways on how to save Income Tax in 2021 in India
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