You and me, everyone want to save tax. You must be knowing some ways of tax saving. But still there is scope. Rather, you can always find some extra methods to reduce the tax outgo. Do you want to know the 10 most effective ways to save tax? You must read on this post to save thousands of rupees. This articles is specially written for salaried people.
1. Save Tax Through Salary Restructuring
There may be many expenses which you are doing because of your job. Such as you wear a uniform just for the sake of your job. You travel to the office daily only for the job. You may be entertaining clients and spending over them to fulfill your job. You must be reading certain newspapers, magazines or books for your job purpose.
If you leave the job such expenses would end. It means, these are forced expenses and your employer should pay for this. Such expenses should go to the account of employer expense. Since you are only medium of such expense this should not be part of your income. Government considers such expense non taxable. But It should be mentioned by your employer
Talk to your employer and ask to restructure your pay. You should get perks and allowances for such expense. This should not be part of your salary.
These perks and allowances or non taxable if incurred actually. However, you need to give proof of these expenses to avail tax-free allowances.
Some Allowances Which Save Tax
- Newspaper, Books and Magazine
- Medical Treatment
- Telephone and Mobile
- Personality Development
- Office Entertainment
However, these allowances are given according to the grade. You can’t ask all of them. Your employer will decide the eligibility of allowances. You can only demand.
The professional tax you pay every month is also eligible for tax deduction.
2. Save Tax On Rent Payment
We get a job in a different city or place. We go there to do our job. If the company does not give us accommodation we have to rent out. We live in rented house because of our job. Therefore, expense of rent should be deducted from the taxable income.
Employers do give some part of your remuneration as House Rent Allowance (HRA). You subtract this HRA from your gross income. However, you cannot take full benefit of HRA for tax saving. There is a formula for the HRA tax benefit.
You can deduct the lowest of these from gross income.
- Actual HRA given by the employer
- 50% of the basic salary plus DA if the employee is situated in Delhi, Mumbai, Kolkata and Chennai. Else, 40% of the basic salary plus DA.
- Actual house rent paid by you, minus 10% of basic salary+DA.
You can also use a HRA calculator to find out the HRA tax benefit.
HRA gives you big tax saving. Ask your employer to keep the provision of HRA in your salary structure.
Also, Don’t forget to take rent receipts from your house owner. If your total rent of a financial year exceeds 1 lakh then you need to give copies of registered lease agreement and copy of the homeowner’s PAN card.
You can also give rent to your parents. It would also work for tax saving. But you have to complete all the formalities of lease as stated above.
3. Leave Travel Allowances and Medical Expense
Some personal expenses are also eligible for exemptions. These Expenses are deducted from your gross salary. Your employer may give you part of your salary as medical allowance. Check with the HR department.
If you produce an actual bill of medical expenses, this allowance becomes tax-free. So, Start collecting medical bills. However, it is limited to Rs 15,000 in a financial year. You can give receipts of medical expense of your dependents as well.
Your employer can give you leave travel allowance as well. You are entitled to tax-free leave travel allowance.
- It is also limited to two times in a block of 4 years.
- The travel should occur while you are on the leave.
- It should be within India.
- Travel should be from the shortest route.
- You can claim the maximum for AC-I of the train journey and economy class of air travel.
4. Invest And Reduce Taxable Income
Certain investments give you tax rebate. These investments come under section 80C deductions. The amount invested is deducted from your taxable income.
Many of such investments come under EEE category. It means you need not to give tax at the time of investment, earning and redemption. However, There is a maximum limit for 80C deductions. It has become 1.5 lakhs after the budget of 2014.
List of Investments Which Saves Tax
Contribution to EPF account
Employee Provident Fund is a retirement saving instrument. Contribution to the EPF is mandatory for the employees of organised sector if their bic salary is less than Rs 15000/month.
The employer also contributes equal amount in the EPF account of employee. The contribution to EPF by employer is tax exempt, while contribution by the employee is tax deductible under section 80C. Thus it gives dual tax benefit.
Know More about the Employee Provident Fund
Deposit in PPF account
PPF account is also a long term saving scheme by the government. Anyone can open the PPF account in SBI, post office or other banks. The PPF account gives tax deduction under section 80C.
Know More About Public Provident Fund
Equity Linked Saving Scheme (ELSS)
Equity linked saving scheme are diversified mutual fund scheme which have lock-in period of 3 years. The ELSS invests in share market. It has potential of highest return.
Know More About Equity Linked Saving Scheme
Sukanya Samriddhi Account
This is a government saving scheme for the girl child. It gives highest return among all the small saving schemes. The investment is locked till your girl child turns 18. The investment and maturity amount is tax-free.
Know More About Sukanya Samriddhi Account
Tax Saving Fixed Deposit
Tax saving Fixed deposit is like any other fixed deposit of bank. The only difference is the lock in period of 5 years. The interest earning of tax saving FD is subject to tax.
Know More About Tax Saving Fixed Deposit
National Saving Certificate (NSC)
It is post office small saving scheme. The national saving certificate is issued for 5 years. The interest rate of this scheme is 7.8%. the NSC gives tax benefit under section 80C. The interest is subject to tax.
Know More about National Saving Certficate Scheme
Senior Citizen Saving Scheme
This is also an small saving scheme by the government. It is designed for senior citizens. This scheme gives regular income. The interest rate of senior citizen saving scheme is better than NSC or PPF. The retired defence personnel can subscribe this scheme at any age.
Know more about the Senior Citizen Saving Scheme
5. Expenses Eligible For Tax Saving
There are some expenses which also give a deduction for tax saving. These expenses are also counted under the limit of 80C.
- Tuition fees for self and children
- Insurance scheme premium
- Home loan principal payment- Home loan EMI has two-part, principal and interest. Principal part gives tax saving benefit under section 80C. Know more about the tax benefit of home loan
These expenses and above mentioned investment in aggregate should not exceed 1.5 lakh limit.
6. Medical Insurance Deduction
Medical Insurance expense gives you the deduction, over and above the 1.5 lakh limit. You can save tax through the health insurance premium of your family and dependent parents. Also, health checkup can also give you tax saving. You can deduce these expenses from your total taxable income.
- Up to Rs 25,000 for the health insurance of self and family. You can also include health checkups of up to Rs 5,000 within this limit.
- Up to Rs 25,000 for the health insurance of parents. If they are above 60 years, This limit goes up to 30,000.
7. Enjoy Tax Benefit On Home Loan Interest Payment
Home loan interest payment enjoys separate tax saving. The limit of deduction for home loan interest payment is ₹2.0 lacs. This deduction can give you a very big tax saving. However, the loan amount should be big to get the full benefit. You can also double your tax saving through the joint home loan.
8. Set Off Capital Gain, Save Tax
Salaried people need to give capital gains tax on their investments. Shares attract only short-term capital gains tax while property and gold attract both short and long term capital gains taxes. However, you can set off your capital gains from an investment with the capital loss of another investment. Note, you can set off short-term capital gain only with short-term capital loss and long term capital gain with long term capital loss only.
You can also carry forward your capital loss up to 8 years. This will give a fairly good chance of tax saving on account of capital loss. Suppose you incur trading loss in shares. This loss can be carried forward up to seven years. In subsequent years your trading profit can be set off with this big loss.
9. Giving Away Money For Charity? Why Pay Taxes
You can save tax on your donations. However, not every charity gives you 100% tax saving. Donations to the PM relief fund, some notified NGO and political parties can give you the 100% tax benefit. You can also donate to scientific institutions and religious body and claim tax rebate.
10. On Time Tax Declarations And Investments
Practically, this is the most important tip of tax Saving. Employers need to pay advance tax every quarter. Therefore, they deduct TDS every month from your salary. The TDS is deducted according to your projected tax liability for that financial year.
If you don’t declare your planned tax saving, investment and expenses of the year, the projected tax will be higher. Accordingly, the employer would start deducting TDS every month from the first quarter of the financial year. It may happen that when you declare all of your tax saving instruments, It would have become very late. The company may have cut more TDS than required. Of course you can claim tax refund while filing income tax return, but for the time being you pay extra taxes. So, give a tax declaration at the beginning of the year.
There is an opposite scenario which is more worrisome. Suppose, initially you declare all the available tax saving option to save the maximum tax. But you avoid tax saving, investment and tax saving expenses till the last quarter. Now in the month of January and February you will have a big burden of investing or Big tax cut. So, it is better to start tax saving investment from the beginning of the financial year.
I hope this post will give you a basic idea about the tax saving ways. For detailed information about the individual tax saving method you can read my other detailed posts. You can also read my post on Top 10 Tax Free Incomes in India.
(Photo credit: Tax Credits)