In India, how may income tax be reduced?

income tax

The saying “a penny saved is a penny earned” applies to tax planning, which presents an opportunity to avoid overpaying taxes. In India, individuals with an annual income of up to Rs. 2.5 lakhs are exempt from paying taxes. Deductions from gross total income for tax-saving investments, eligible expenses, donations, and more can be claimed to significantly reduce the amount of tax owed. Here are some top tax-saving tips that most people use.

Salaried individuals have the option to claim a standard deduction of up to Rs. 50,000 on their income.

HRA (House Rent Allowance)

The available deduction is whichever is the lowest of the following:

  • the actual House Rent Allowance (HRA) received,
  • 50% of the basic salary and dearness allowance (DA) for individuals residing in metro cities (40% for non-metros), or
  • actual rent paid minus 10% of the basic salary and DA.

The Chapter VI A of Income Tax Act contains the following sections:

Section 80C of the Income Tax Act, 1961 offers several deductions that can be claimed by an individual or a Hindu Undivided Family (HUF) to reduce their taxable income. These deductions include:

  1. Provident Fund (PF): Contributions made to Employee Provident Fund (EPF) or Voluntary Provident Fund (VPF) are eligible for deduction under section 80C.
  2. Public Provident Fund (PPF): Investment in a PPF account is eligible for deduction under section 80C.
  3. Equity Linked Saving Schemes (ELSS): Investment made in ELSS mutual funds is eligible for deduction under section 80C.
  4. National Savings Certificate (NSC): Investment in NSC is eligible for deduction under section 80C.
  5. Tax-saving Fixed Deposits (FD): Investment in tax-saving FDs with a maturity period of 5 years is eligible for deduction under section 80C.
  6. Senior Citizens Savings Scheme (SCSS): Investment in SCSS is eligible for deduction under section 80C.
  7. Unit-linked Insurance Plan (ULIP): Investment in ULIP is eligible for deduction under section 80C.
  8. Life Insurance Premium: Payment of premium for life insurance policies is eligible for deduction under section 80C.
  9. Sukanya Samriddhi Yojana (SSY): Investment in an SSY account for the girl child is eligible for deduction under section 80C.
  10. Tuition Fees: Payment of tuition fees for two children is eligible for deduction under section 80C.
Section 80C allows a maximum annual deduction of Rs. 1.5 lakhs.
Home loan deduction : There are two types of tax deductions available on home loans in India:

1. Deduction on Interest Paid: Individuals can claim a deduction on the interest paid on a home loan under section 24(b) of the Income Tax Act, 1961. If the property is self-occupied, the maximum deduction allowed is Rs. 2 lakhs per year. However, if the property is not self-occupied, there is no upper limit on the deduction amount. The actual interest paid on the home loan during the financial year can be claimed as a deduction subject to the maximum limits mentioned above.

2. Deduction on Principal Repayment: You can claim a deduction on the principal repayment made towards a home loan under section 80C of the Income Tax Act, 1961. The maximum deduction permitted under this section is Rs. 1.5 lakhs per year, which is part of the overall limit of section 80C.

  • Section 80CCD: This section allows for an extra deduction of up to Rs. 50,000 for contributions made towards the NPS scheme, in addition to the deduction available under section 80C. It is known as Section 80CCD.
  • Section 80D : Payment of Medical Insurance Premiums: Individuals can claim a deduction for paying medical insurance premiums for themselves, their spouse, dependent children, and parents. The maximum deduction allowed under this section is Rs. 25,000 per year. An additional deduction of up to Rs. 25,000 is available for paying medical insurance premiums for parents who are less than 60 years old, or up to Rs. 50,000 if they are 60 years or older. Therefore, a taxpayer can claim a maximum deduction of up to Rs. 75,000 (Rs. 25,000 + Rs. 50,000) under section 80D for the financial year.
  • Section 80E: An individual can claim a deduction on the interest paid on a loan taken for higher education without any upper limit.
  • Section 80EEB: An individual can claim a deduction on the interest paid up to Rs. 1.5 lakh on a loan taken for the purchase of an electric vehicle.
  • Section 80TTA: Assessees, other than resident senior citizens, can claim a deduction on the interest earned on savings bank accounts up to Rs. 10,000.
  • Section 80G: An individual can claim a deduction on donations made to certain funds, charitable institutions, etc. The limit of deduction varies depending on the nature of the donee. It can be 100% of the total donation, 50% of the total donation, or 50% of the donation with a cap of 10% of the gross income.
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