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Tax Saving Options for AY 2021-22 & What is the Maximum Tax you can Save?

Tax Saving Options | AY 2021-2022 | Best Tax Savings Plan

All of us want to save money as much as we can, within ambit of law. All of us should always pay our income tax as it goes in nation-building and strengthening the economy. But, intelligent, planned and strategic investments can help us save some money to pave the way for a financially secure future. Here are some of the top options every taxpayer must explore in order to save their income tax.

Five Tax Saving Options Under Section 80C

To encourage saving, the Government of India provides concessions on taxes if you invest in certain financial instruments each year. Amounts invested in these classified instruments are eligible for deduction from your taxable income.

For example, if your taxable income is Rs 8 lakhs and you invest Rs 1 lakh into Public Provident Fund (PPF), LIC premium or home loan like options then your taxable income will become Rs 7 lakhs. This Rs 1 lakh deduction is claimed under Section 80C of the Income Tax Act.

Section 80C is one of the most popular tax-saving options amongst income taxpayers and offers several avenues to invest money and save taxes each year. The annual limit for claiming tax deduction is currently fixed at Rs 1.5 lakhs. The following instruments are widely popular because of specific advantages of each:

1. Public Provident Fund

The current rate of interest is 7.1% and is a safe option if you are looking at risk-free, stable returns in the medium-to-long term. PPF accounts opened at select bank branches and post offices, have a minimum tenure of 15 years, and can be extended in blocks of 5 years.

The amount deposited in PPF accounts is deductible, under Section 80C, from taxable income although partial withdrawals are permitted only from the 7th year onwards. A minimum annual deposit of Rs 500 is mandatory to keep the account active.

2. National Pension Scheme (NPS)

NPS is a voluntary pension scheme that is exempt from taxes both at maturity and annuity (up to 40%) stages. Contributions to NPS are also deductible, under section 80C, from taxable income.

3. Life Insurance Plans

The most robust and solid instrument if you are looking for a wholesome investment. Use this if you are looking for inflation-beating returns, wealth creation, and financial protection for your family. No other instrument offers financial protection for your family besides tax benefits under section 80C.

Some saving plans from Canara HSBC Life Insurance even offer guaranteed returns thus giving you peace of mind. In case of untimely demise, future premiums are paid (for specific policies) by the company so that the family’s lifestyle and education aspirations remain unaffected.

In addition to investments made in NPS Under Section 80C, there is now an additional opportunity under Section 80CCD(1B) to claim an additional deduction of up to Rs 50,000. If you have invested Rs 1.5 Lakhs in Life Insurance, you can still invest another Rs 50,000 into NPS and deduct a total of Rs 2 lakhs from your taxable income.

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4. Health Insurance/Mediclaim Under Section 80D

Health insurance not only safeguards you against costs for hospitalization but also saves taxes on premiums paid. This dual advantage is because the premiums paid are deductible under section 80D of the Indian Income Tax Act. What’s more, you can include even the premiums paid for your family and dependant parents.

Amounts of up to Rs 25,000 for health insurance cover for yourself, your spouse, and your dependent children can be deducted from taxable income. In addition, you are also eligible to claim an additional deduction of Rs 25,000 paid towards health insurance for your parents if they are below 60 years of age. In case you and your parents are both above 60 years of age, then you can claim a deduction of up to Rs 50,000 each, i.e., a total of Rs. 1 lakh!

For example, if you are 40 years old and are paying Rs 35,000 towards premiums for your family and Rs 45,000 for your father who is 70 years old. In this case, you can claim a deduction of Rs 25,000 and Rs 45,000 that works out to a total of Rs 70,000. Alternatively, if you are paying Rs 18,000 for your family and Rs 55,000 for your parents, you can claim a deduction of up to Rs 68,000.

There is also an incentive for underdoing preventive health check-ups. Rs 5000 spent for health check-ups for you, or your family is also eligible for deduction under section 80D although under the overall limit.

5. Home Loans – Section 24B

Buying a home with a home loan is not just for building your nest or fulfilling your family’s dreams. Not only do you save money spent on ever-increasing rents, but you can also save some money that would have otherwise been paid in taxes.

a) Home Loan Principal: Home loan EMIs have two components-Principal and Interest. The principal component that is repaid each year is eligible for a deduction, under Section 80C, from your taxable income, and within the overall Rs 1.5 lakhs limit of Section 80C.

b) Home Loan Interest: A maximum of Rs 2 lakhs of interest is also eligible for a deduction, from taxable income, under Section 24B, if the property is self-occupied.

c) Registry and Other Charges: Whenever you register your property, you are also eligible for claiming deduction of the amounts paid towards stamp duty and registration.

With so many avenues to invest and also save taxes, you must explore each one for its benefits and returns before zeroing in on the right one for you. Even with the above options, you can claim a deduction of up to Rs 5 lakhs from your taxable income. If you fall in the 30% tax bracket, you will end up saving a neat Rs 1.5 lakhs with only the above options!

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Annual Income (In Lacs)

FAQs Related to Tax Saving

First of all, your gross total income is taken into account and all applicable deductions/exemptions are deducted out of it, the resultant amount is the net income, upon which the Income Tax is calculated, on the basis of income tax slabs that are announced each year in the Union Budget.

How much tax you can save depends on your financial portfolio and profile. The most common avenue for tax-saving is Section 80C, which allows you deductions up to Rs 1.5 lakh in your taxable income. The implication is that you can save up to Rs 46,800*in taxes in a year, depending upon the income tax slab you belong to. Similarly, other avenues like interest on loans, health insurance etc also provide deductions capped at a certain amount.

*Tax saving of Rs.46,800/- is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on life insurance premium of Rs.1.5 lakh, who is having taxable income upto Rs.50 lakhs.

You can choose from many investments that are tax-exempt: not an exhaustive list, but includes Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), life insurance plans, Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), tax-saving bank FDs.

First of all, make investment of Rs 1.5 lakh in investments instruments covered under Sections 80C to reduce your taxable income. Claim deductions for the interests paid on home loan and/or education loan if any. Get a health insurance policy and claim for other medical expenditure like preventive medical healthcare check-up, expenditure on rehabilitation of handicapped dependent relative, among others. Mainly, the idea should be finding out which tax saving avenues fit well with your larger financial goals and invest in them!

The maximum limit of investment that will reap the benefits of deduction from taxable income under Section 80C is Rs 1.5 lakh.

There is no limit to the number of tax-exempt investments one can have in a financial portfolio. However, it is important to note that there is a limit to how useful any instrument can be for the purpose. This is because the amount of deduction that can be claimed for specific instruments is capped at a maximum value. At the same time, keep your financial portfolio balanced so that it also provides safety, returns and liquidity.

First of all, make use of the Rs 1.5 lakh deduction allowed under Section 80C. This can be done by making investments in life insurance premium, Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), among others.

Second, make use of the deductions available in respect of health insurance and other medical expenses. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of Self and your family i.e., Spouse and children. This can include preventive healthcare check-ups too upto Rs 5000/-. Under section 80D you can also claim additional deduction upto Rs. 25000/- (Rs. 50000 in case of senior Citizen) for health insurance of your parents.

Apart from Section 80C, various deductions and exemptions has been provided under the provision of Income Tax Act, 1961 like deduction under section 80D can be claimed for the payment of health insurance, deduction upto Rs 50,000 on home loan interest under Section 80EE. Any donations you make to charitable institutions are also allowed as deduction under Section 80G, subject to condition prescribed therein.

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