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How to save income tax

Beware the ides of March,” the soothsayer warned Julius Caesar before his gory assassination. This was what Viral Patel was thinking about when the month approached. Well, nothing so gory could have happened to him, but it was a time to be wary nevertheless. Because it was a time when he had to ponder about how to save tax and make those investments before the month was out. The tax authorities in their infinite wisdom had told us how to save income tax in India, and Viral had better grasp at that straw before was too late.

Under section 80C of the income tax act, Viral can reduce his taxable income Rs 1.5 lakh and save a fair bit of income tax. There are also other sections that enable him to save tax in India. These include Section 80D, which allows him to claim deduction of Rs 25,000 on medical insurance premiums, or Rs 50,000 for senior citizens.

Viral had taken a home loan, so the interest payable on the loan could be deducted from his taxable income to the extent of Rs 50,000 under Section 80EE, up to a maximum of Rs 2 lakh. The principal amount is also allowed as a deduction of Rs 1.5 lakh, but under Section 80C. So if Viral claimed deduction on principal on a home loan, he wouldn’t be able to claim the same from other investments.

Tax-savings instruments under Section 80C include Public Provident Fund (PPF), Equity-linked Savings Schemes (ELSS), National Pension Scheme (NPS) and specified five-year bank deposits.

Let’s see how to save tax on salary and other income through these tax saving instruments. Viral’s taxable income was Rs 13 lakh per annum:

How much income tax can Viral save?
How much tax Viral had to pay without tax saving investments   How much tax Viral had to pay with tax saving investments  
Total income 13,00,000 Total income 13,00,000
    Less investments under Section 80 C 1,50,000
    Less medical insurance premium 25,000
    Less home loan interest 2,00,000
Total taxable income 13,00,000 Total taxable income 9,25,000
Income tax payable 210,6000 Income tax payable 1,01,400

 

So with a total income of Rs 13 lakh per annum, Viral would be able to save Rs 1.08 lakh each year in income tax. That’s not a sum to be sniffed at. Even Viral hadn’t taken a home loan, he would have been able to save a sizeable sum. His taxable income in that case would be Rs 11.25 lakh, on which he would pay income tax of Rs 1.56 lakh. So Viral would be saving income tax of Rs 54,600!

Now that we have understood how to save income tax on salary and other income, here’s a look at various tax saving instruments:

Comparing Tax Saving Investments
Instrument Returns Risk Lock-in period Whether there is tax on interest/ returns
Public Provident Fund (PPF) 7-8 per cent Negligible 15 years No
ELSS mutual funds Not fixed; top rated funds have shown 15-18 per cent returns in the past few years Higher, depending on market conditions Three years Yes
National Pension Scheme 7-8 percent Low Until the time of retirement Annuity income is added to income and taxed according to tax bracket
National Savings Certificates 7-8 percent Low Five years Only on interest earned on fifth year according to income tax slab
Five-year bank deposits 7-8 percent Low Five years Yes