Taxes are the bitter truth to you and me. We all understand that our government runs on the taxes given by us. But, everyone loves to save tax. We want to learn every tax saving ways and tips. Today I would tell you all about the income tax saving. You would know about that income which are not taxable. Also, you you would learn about the investments and expenses which reduces your tax liability. I would also cover the tax planning as it is equally important.
Also Read: Income Tax Meaning and Rules
Income Tax Exemption / Tax Free Income
The government considers certain income tax-free. Such incomes are listed in section 10 of the income tax act. Although there are almost 100 exemptions listed under this section, I would only talk about the most useful for common people.
HRA : House Rent Allowance
This exemption is available to salaried individuals as they get House Rent Allowance. Most of the employers give HRA to their employees. This allowance is given to compensate the rent expense of an employee.
This HRA is not fully taxable. Rather most part of the HRA is considered as the tax free income. Note, 100% of the HRA is not tax free. The Tax-free part of the HRA is calculated on the basis of a formula.
Like HRA, Leave travel allowance is also tax free. Employers give you leave travel allowance as part of remuneration. However, this tax-free income also comes with some condition. You can avail the tax benefit of LTA only two times in a block of 4 years.
Other Allowances and perks
Employers give many allowances and perks to their employees. These benefits also enjoy tax concession. A certain part of such allowances is considered for income tax exemptions. Examples of such benefits are given below.
- Driver allowance
- Transport Allowance
- mobile bill
- Children education
Employers give a gratuity to the employee who leaves the service after 5 years. Gratuity is mandatory under labour rules. Gratuity can’t be arbitrary, rather, It should be given according to the prescribed formula.
A gratuity given under formula is considered as the tax free income. Only gratuity up to 10 lacs is eligible for tax exemption.
Provident Funds are retirement saving schemes. The money accumulated under this scheme gets tax benefit. The PF withdrawal amount is considered tax free.
The provident fund may be the EPF, PPF or GPF. However, these exemptions also come with certain conditions. Such as EPF is tax exempted only if your EPF account is 5 years old. You can’t withdraw PPF amount before 7 years.
Some lump-sum pension payments are also eligible for tax exemption. These include the commuted pension and NPS maturity amount.
The commuted pension is the pension which you get by reducing your regular pension. Often people take commuted pension after the retirement. This lump sum amount becomes totally tax free if you are a government servant.
For a private employee, tax exemption is available only 1/3 of the commuted pension. In case, the employee does not get a gratuity, the tax exemption would be available for 50% of the commuted pension.
Lump sum Payment under NPS scheme is also exempted from the tax. However, the lump sum payment should not be more than 40% of the total maturity value.
Dividend income from the share is also tax free. This exemption is given because companies already pay dividend distribution tax. Thus dividend comes in your hand is already tax deducted.
The income from agriculture land from farm activities is tax free. This include, farming, harvesting and food processing. This exemption is given to promote farming in the country. However, you have to report the farm income while filing income tax return.
Long-term capital gains from the shares and equity mutual fund are tax-free up to a Limit. If total Gain is less than 1 lakh in a year, it would not be taxable. Else, there would be 10% tax without any indexation benefit. This rule is applicable since FY 2018-19. Earlier all the long term capital gains from the shares were exempted.
Income Tax Deductions / Tax Saving Investments
We can also save tax by routing our money towards certain investments. The government gives this benefit to promote some types of investment and expenses. In fact, government deducts your taxable income corresponding to your investment. That is why these investments are termed as the income tax deductions. These include ELSS, PPF, EPF, insurance and long term deposits.
Tax deductions are given under various sections of income tax act. Most of the tax deductions are grouped under section 80C. Besides this, there are section 80D, 80G, 80E etc. These sections also give you the benefit of tax deductions.
The salaried employees get the benefit of the standard deduction of ₹40,000. This amount is deducted from their income which results in tax benefit. The standard deduction is reintroduced in budget 2018. However, with this deduction, the government has ended the tax exemption to the medical and transport allowance.
Section 80C Deductions
The government gives section 80C tax deduction to promote certain types of investment. In fact, such investments play important role in nation building. When you invest money to help industry, infrastructure or society of the country, the government also holds your hand and waives some tax.
There is the wide range of investments and expenses under section 80C which makes you eligible for tax deduction. However, you must note that total deductions can’t exceed the prescribed limit. As of now the limit of the section 80C is 1.5 lacs. Following investments and expenses are included under section 80C and give tax benefit.
- Life Insurance Premium
- Tax saving Mutual Funds
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- National Saving Certificate (NSC)
- Senior Citizen Saving Scheme
- Sukanya Samriddhi Account
- Tax Saving Fixed Deposit
- Pension Schemes/NPS
- Children Tuition Fees
- Home Loan Principle Amount
- Long Term Infra Bond
Other Than Section 80C Deductions
There are some more income tax deductions which are not part of section 80C. Because of the separate section, the maximum limit of 80C section does not apply to these sections. Following expenses gives you tax benefit under various section of income tax act.
- Medical Premium (section 80D)
- Actual Payment Towards medical treatment (80DDB)
- Maintenance or Medical treatment of disabled dependent (80DD)
- Donations to Charity (80G)
- Interest on Loan for Higher Education (80E)
- Interest on Home Loan (80EE)
- Interest in Case of disable person (80U)
- Saving Account Interest (80TTA)
Income Tax Planning
We use tax exemptions and tax deductions to save some money. Our Ultimate purpose is to protect our earnings. But to get maximum benefit from deductions and exemptions, we must adopt tax planning. Without tax planning, it would be difficult to get enough benefits. Tax planning involves following steps.
There are some investments which you might be already doing. For example EPF investment and tuition fees is the compulsion. Hence you should factor in these investment while you invest for tax saving. As your total 80C deductions can’t exceed 1.5 lacs.
Start Income tax Saving investment In the beginning of the financial year. Starting early, you can equally distribute your investments in coming months. You would not be burdened in the last quarter of year.
You should not invest your money only for the sake of tax saving. Rather, that investment should fit in your long-term financial planning.
Choose your investment according to your goal and risk profile. Besides traditional insurance plan, there are various other schemes which gives you more benefit. ELSS and PPF are such schemes.
Start Paying income tax from the first quarter, it is always convenient to pay tax in parts. Otherwise, there may be a huge burden in the last quarter of the financial year.
In this post, I have told you all about the income tax saving. Now you know what are the tax exemptions and tax deductions. You should also appreciate the importance of proper tax planning.