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Stream Ways to Reduce Your Taxable Income in India - ICICI Direct

12 Mins 07 Aug 2023 0 COMMENT

One must have certainly come across the term “Income tax” at some point of their lives, especially during the end of a financial year. One also looks for ways so that he or she can minimize their tax liabilities. In this article, we will look at some ways to reduce taxable income.

Income tax, put simply, is the tax one pays to the government for the income they earn. These taxes then act as a source of revenue for the government to assist in building and running the country.

Tax planning is an important subset of planning one’s personal finances as one can take advantage of various legal provisions which can help in minimizing one’s taxable income.

This can be done by making use of deductions and exemptions under various sections of the Income Tax Act of 1961, by investing in tax saving instruments, and structuring one’s income and investments in a manner which is tax efficient.

Section 80C deductions

Let us begin by looking at deductions mentioned under Section 80C.

First and foremost, it should be noted that the deductions under Section 80C have an upper limit of Rs. 1.5 lakh.

Under this section, one can invest in ELSS, which is the acronym for Equity Linked Saving Schemes. Equity Linked Saving Schemes are a type of mutual funds which come with a lock-in period of 3 years, and invest 65% of their assets in equities and equity-related securities. Due to this, ELSS funds may deliver more return as compared to other deductions available under Section 80C. One can save up to Rs. 46,800 in taxes by investing a total investible amount of Rs.1.5 lakh in one financial year. The returns which one gains after investing in ELSS funds fall under Long Term Capital Gains, or LTCG in short, and are taxable at a rate of 10% if these returns exceed Rs.1 lakh in a financial year.

One can also invest in Public Provident Fund, which happens to be a savings scheme backed by the Indian government, and is eligible for individuals to claim deductions. Investments in Public Provident Fund come with a maturity period of 15 years, and any interest earned by individuals on this is exempt from taxes. Under this section, one can also claim a deduction on the principal payments paid for a home loan up to Rs.1.5 lakh per year, and interest payments are not included under this deduction. One can also claim a deduction of up to Rs.1.5 lakh on the tuition fees for two children who attend an educational institute.

One can also make investments in tax-saver FDs, which come with a maturity of 5 years to claim deductions up to Rs.1.5 lakh while also earning interest on the deposited amount.

One can also claim deductions by making investments in the National Pension Scheme, or the NPS, which falls under the Sections 80C and Section 80CCD. This scheme acts as a pension saving scheme and is generally preferred by salaried individuals who are employed in the private sector. The maximum deduction which can be claimed under Section 80CCD(1) is 10% of the salary. When it comes to those who are self-employed, the exemption limit happens to be 20% of the gross income. The Section 80CCD(1B) also provides an additional deduction of Rs.50,000 upon investing in NPS, bringing the total deductible amount to Rs.2 lakh.

Section 80D deductions

Individuals are also entitled to claim deductions under Section 80D for the medical insurance premiums paid by them in the previous financial year. A maximum of Rs. 25,000 can be claimed by an individual for the insurance premium paid for self, spouse and dependent children. A maximum of Rs. 50,000 can be claimed by an individual for the premium paid for self, spouse, dependent children and dependent parents below the age of 60 years. Similarly, a maximum of Rs. 75,000 can be claimed for the insurance premium paid for self, spouse, dependent children and dependent parents above the age of 60 years.

Section 24 deduction

One can also make use of Section 24 to claim a deduction of up to Rs.2 lakhs on interest payments for a home loan, given that the housing property is self-occupied or vacant. If the house happens to be rented, then one can deduct the whole interest amount.

Section 80EE deduction

Similar to this, one can also claim a deduction of up to Rs. 50,000 in interest payments under Section 80EE if one is buying a housing property for the first time. In this case, the value of the housing property purchased must be less than or equal to Rs.50 lakh, with the maximum loan of Rs.35 lakh, taken between 1st April 2016 and 31st March 2017. Similarly, one can claim a deduction on the interest amount up to Rs. 1,50,000 if the loan has been taken between 1st April 2019 and the 31st March 2022 by a first-time home buyer, under Section 80EEA.

Section 80GG deduction

If a salaried employee is not receiving a House Rent Allowance component in their salary, then they can claim a deduction on the taxable income paid as rent under Section 80GG. Given that one files a declaration in the form 10BA and does not happen to have ownership of any residential property then they can claim a deduction of the lowest amongst the following 3, namely: actual rent minus 10% of income, or 25% of total income, or Rs.5000 per month. If the individual does receive a House Rental Allowance from their employer, then they can claim a deduction of the lowest amongst the following 3, namely: the entire HRA received, or the actual rent which is paid and reduced by 10% of the income, or 40% or 50% of the income, depending upon where the employee is residing.

Conclusion

To conclude, we can very well state that the Indian tax system permits a multitude of deductions and exemptions which can be employed by one to reduce their taxable income and quite a few tax-saving investment avenues as well. One should aim to thoroughly research and exhaust all possible avenues of deductions to optimize the amount of taxes they pay. It will also help investors to maximize their savings by reducing the tax outgo.

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