What are the Importance and Benefits of Tax Saving in India?

2022-08-22

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Income tax is not just a compliance but a responsibility and a duty of all citizens of a nation. It is essential for the development of a nation, but you must be aware of where you are paying and whether there are any ways to reduce your tax burden. This is because you may overpay by leveraging the legitimate tax-saving options when there are several in the market. The Government of India offers many provisions to reduce the taxable income in the form of deductions and investment strategies. Here in this blog, you can discover the importance of these tax-saving ways and use them wisely to accumulate wealth and a financially secure future.

Key Takeaways

Smart tax-saving investments can help you build a financial cushion that secures your future while reducing your tax liability.
NPS, EPF, PPF, etc., are the best ways to ensure a steady post-retirement income that is applicable for tax deductions.
Section 80C of the Income Tax Act offers deductions on term insurance, which also offers financial protection to your dependents.
Meeting life goals such as higher education and getting a home via loans can help you reduce tax burdens.
Investing in mutual funds, fixed deposits, and insurance plans can be your dual financial instruments, allowing security with tax deductions.

Importance of Tax Saving

In order to ensure that a country’s government functions smoothly and provides the resources that its citizens need, income tax becomes an essential duty. Therefore, income taxes should not just be considered a burden to bear but rather a responsibility to fulfill.

Every tax season, taxpayers must make sure that they file their returns and pay their fair share of taxes. But keep in mind that the Indian government has also laid out various provisions that allow taxpayers to make their choice of investments and shave off considerably from their taxable incomes.

As a taxpayer, you should be just as concerned with overpaying your share of income tax as with underpaying it. That is why your process of tax return filing should always take the component and benefits of tax saving into account. To understand this topic better, let us explore the importance and benefits of tax saving further.

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Incorporating Tax Saving Early

Every year, a growing number of working professionals are introduced to the taxation system. This includes various recent graduates and young, fledgling professionals. These are first-time taxpayers who are just venturing into their careers and therefore, do not have a large income to be concerned about. Keep in mind that under our tax system, an annual income of Rs. 2.5 lakhs is entirely exempted from tax.

It is easy at that stage in your career to not worry about tax saving being an essential part of your income tax process. The benefits of tax saving can seem inconsequential. However, this can often set an unfavourable precedent for years to come.

As your career grows and your income witnesses an increase, tax saving should become an important aspect of your tax planning every year. Higher incomes are subject to higher tax rates, which is why it is prudent to save up as much of your hard-earned income as possible. Hence, the aspect of making crucial investments that can lower your tax burden for years to come, should be inculcated as early in your career as possible.

Benefits of Tax Saving

There are various benefits of tax saving if it is incorporated into your tax returns every financial year, even if your income is not substantial at present:

The primary benefit of tax saving is that incorporating tax saving investments into your portfolio early on gives you a head-start for the future. Moreover, it gives a longer duration for your investments to start yielding returns for a period when you might need them most. This is particularly useful for market-linked tax saving investments such as Equity Linked Savings Schemes (ELSS), specific tax-saving mutual funds, and Tax-Saving Fixed Deposits.
All of these tax-saving instruments benefit from long-term investment spanning several years. As your responsibilities and needs grow in the future, their earnings can serve as excellent means of meeting your financial requirements such as education, weddings and retirement.
This can be especially achieved by investing in a tax saving option such as a term insurance policy. Even if you do not have any dependents or debt at present, investing in a term plan ensures that your family’s financial needs will be looked after even in your absence.
Tax saving also inculcates a financially healthy habit of setting aside a portion of your income for investments that can help you save taxs and protect your finances in the long run.
Most tax saving instruments offer more than just tax benefits. They also function as important schemes that build up a corpus to meet your short-term or long-term financial goals. Many of these tax-saving instruments are government-backed, which means that they are legitimate, transparent and dependable investments. The primary of these investments is the National Pension Scheme (NPS) which builds a corpus to help you meet your post-retirement needs. It also has a provision to provide you with a regular pension thereafter.
One of the benefits of tax saving is that you can avail deductions for a variety of essential long-term purchases. For instance, there are tax saving deductions in the Income Tax Act for interest accrued on your home loan, your education loan as well as your savings account. Moreover, if you stay on rent but do not receive House Rent Allowance, you can avail a deduction for your house rent amount.

Did You Know?

Under Section 80E, there's no upper limit on the amount of interest you can claim as a deduction for education loans taken for higher studies.

Source: ClearTax

How to Save Taxes?

The desire to save your tax burden is understandable, and doing so in a legitimate way can be a narrow lane to walk in. However, with the proper understanding of the deductions, you can do so pretty easily. Following are the sections of the Income Tax Act with the help of which you can smartly reduce your taxable income.

Section 80C – Deductions on Investments

This is the most-used tax-saving provision so far, which allows deductions of up to ₹1.5 lakh annually. You can choose to invest in the Employee Provident Fund (EPF), Public Provident Fund (PPF), Life Insurance Premiums, and Equity Linked Savings Schemes (ELSS) to avail yourself of the benefits of Section 80C.

Section 80D – Health Insurance Premium Deduction

The next one is Section 80D, where you can claim deductions for health insurance premiums you pay monthly, annually, or quarterly. This coverage can be for yourself, your spouse, your children, or your elderly parents. Here, the deduction limits can differ based on the age of the insured person, where senior citizens are eligible for higher deductions.

Section 80E – Education Loan Interest Deduction

If your child is studying abroad and you have taken a loan to support their education, then you can claim deductions under Section 80E. It is applicable to the interest paid on the educational loans and can be claimed for a maximum of eight years from the year of the loan repayment.

Section 80CCD(1B) – Additional Deduction for NPS

If you are aware of the National Pension Scheme (NPS) and contribute to it, then you are eligible for an additional deduction of ₹50,000 annually. Section CCD(1B) allows you to make your retirement plan even better with a huge deduction option.

Section 80EEB – Deductions for Electric Vehicle Loans

Another one in the line is the deductions made for the purchase of electric vehicles on loan. The government of India is working towards an eco-friendly and sustainable future. To achieve this goal, they allow deductions of up to ₹1.5 Lakh on the interest you pay for the EV loans under Section 80EEB.

Other Exemptions and Deductions

The major deductions can turn the tables, but every single penny counts. Here are some more ways of tax savings that you can opt for:

House Rent Allowance (HRA): If you live in rented accommodation and the employer does not offer you an HRA, you can claim deductions for the same.
Home Loan Interest (Section 24B): The interest you pay on the home loans is also eligible for deductions of up to ₹2 lakh annually.
Standard Deduction: Salaried citizens can easily claim a flat deduction to reduce their taxable income.

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Conclusion

At the end of the day, the benefits of tax saving look different for different taxpayers. However, one tax-saving option should always be considered by every taxpayer - a credible term insurance plan. To that end, an excellent option is the iSelect Smart360 Term Plan from Canara HSBC Life Insurance. Not only does the iSelect Smart360 Term Plan offer extensive coverage to your beneficiaries, it also allows you to avail deductions as high as Rs. 1.5 lakhs under Section 80C.

Glossary

Tax Deduction: A legitimate reduction in the taxable income for eligible expenses.
Public Provident Fund (PPF): A scheme backed by the government that offers assured returns for long-term wealth accumulation.
NPS (National Pension Scheme): This is a government-backed scheme where you contribute to your retirement savings.
ELSS (Equity Linked Savings Scheme): A mutual fund investment scheme that is eligible for tax benefits under Section 80C.
HRA (House Rent Allowance): A component of the salary that provides tax benefits for paying rent.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.