Every citizen of India has a legal and moral obligation to pay taxes on their earnings. At the same time, some taxes may appear to be excessive, and you may intend to lower your tax burden. Fortunately, the Indian government offers legal solutions for taxpayers to reduce their tax burden through various investment opportunities. In this blog, we take you through the legal ways you can reduce taxes in India.
Here’s everything you need to know on how to save money on taxes in 2021.
What is Income Tax?
Individuals and corporations pay income tax, which is the tax imposed by the central government on income received within a financial year. Taxes are one of the government’s primary sources of revenue. The government uses this money to build infrastructure, provide healthcare, education, subsidies to farmers and the agricultural sector, and other government welfare programs.
Income tax is a form of direct taxation. It is a tax imposed directly on income earned by you during the financial year. The tax calculation is based on the income slab rates in effect during the year you earned that income.
Related read: How To Save More Taxes Using An Income Tax Calculator?
What are the 7 different ways to reduce taxes in india?
Lets us take a look at 7 different ways to reduce taxes in India.
- Purchasing a life insurance policy is the best approach to protect your life and your family’s financial future. Unit Linked Insurance Plans (ULIPs), plans with maturity benefits, money-back policies, term plans, and other types of life insurance are available. Another advantage of life insurance is saving money on taxes according to Section 80C of the Income Tax (IT) Act.
- The tax rates for premiums and payouts under the IT Act were not amended in the Budget 2021-2022. Hence, you would not be taxed until your life insurance premiums amounts exceed Rs. 5 lakh. Similarly, the sum you get at policy maturity is tax-deductible as well.
- Money can be invested under your unearning wife or a wife in a lower tax bracket. It can also be given to her as a gift. If the money is invested in tax-free instruments, such as tax-free bonds, and the income received is tax-free, it is clubbed to the husband’s income due to clubbing provisions. However, you will not be taxed because it is a tax-free instrument. If the money is re-invested, it is recognised as the wife’s income rather than the husband’s income.
- In the status of guardian of the minor, a parent can open a PPF account in the child’s name. PPF, or Public Provident Fund, is a tax-saving plan that delivers income tax benefits under Section 80C. It’s also a smart way to save for the long term. This is because both the interest and the maturity are tax-free.
- Also, if a savings account is opened in the name of a minor child, the interest on that account is exempt up to a limit of Rs 1500 per minor child.
- For self-insurance, spouse insurance, and dependent children insurance, you can claim a deduction of up to Rs 25,000 under Section-80D. If your parents are under the age of 60, an additional deduction of Rs 25,000 is allowed, and if your parents are over 60, an additional deduction of Rs 50,000 is available. If both the taxpayer and the parent for whom the medical coverage has been purchased are over the age of 60, the maximum deduction available is Rs 1,00,000.
- If you have children 18 years or older (either studying or earning at a lower tax bracket than you) you can plan your taxes smartly. You can gift and invest your surplus money in their name. It will not trigger gift tax or income clubbing. Income earned by your significant children from investments made with gifts given by you will be taxed exclusively in their hands.
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- Investing in market-linked securities that are aligned with your financial goals might help you stay invested despite the stock market’s unpredictable movements. It’s time to move away from taxable fixed savings accounts like bank FDs and RDs.
- Evaluate several tax-saving tools this year, such as the National Pension Scheme (NPS), tax-saving insurance such as Unit Linked Insurance Plans, some mutual funds, Equity Linked Saving Schemes (ELSS), and so on. You are free from paying tax on ULIPs and ELSS with premiums under Rs 1.5 lakh and a three-year lock-in period. Tax rebates on capital gains are also available for market-linked products.
- The tuition fees for two children’s education are eligible for a tax deduction of Rs 1.5 lakh under Section 80C. The fee can be paid for any Indian school, college, university, or educational institute. Section 80E of the Income Tax Act of 1961 allows you to claim additional interest on your student loan. The overall interest portion of the EMI paid during the financial year is deducted.
- There is no upper limit on the amount that can be deducted. The loan should be used to fund your own children’s higher education. It is only available for 8 years, beginning the year you start repaying the loan or until the interest is fully returned, whichever comes first.
Related read: Income Tax Returns (ITR) AY 2021-22: Which ITR Form Should You File?
What are the legal options for saving taxes?
The sections and investments are listed below to assist you in understanding how to save your taxes:
|80C||Investments in PPF, PF, insurance, NPS, ELSS, etc||1,50,000|
|80D||Investment in medical insurance for self or parents||25,000 / 50,000|
|80EEB||Interest on electric vehicle loan||1,50,000|
|80E||Interest on education loan||Full amount|
|24||Interest paid on the home loan||200,000|
|10(13A)||House Rent Allowance (HRA)||As per salary structure|
Everyone must follow the laws passed by the government. At the same time, you could also save your hard-earned money by following these simple legal ways to reduce taxes in india. After all, you’re paying taxes on your earnings and want to maximize your take-home revenues!
How can we help you?
At ICI, we have a team of professionals with significant expertise and experience that can assist you with meeting all of your income tax responsibilities, including timely compliance.
Our service range includes: