There are a variety of methods by which, individuals or families falling in any tax bracket can reduce their taxable income in the Indian tax system. These methods generally involve investments in certain types of tax saving instruments which allow for deductions under various sections of the Income Tax Act, most notably Section 80C which covers a wide array of tax deductions. This provision in the act allows for deduction on investments of up to Rs. 1.5 lakh annually.
While picking a method that suits your needs, it is imperative to consider factors such as risk, liquidity and potential returns as well as the tax liability on those returns. When returns on these investments are also taxable, they restrict your ability to generate wealth in the long term. Additionally, the tax benefits available on such investments generally means that their potential for returns higher than the market averages is low. Broadly speaking, here are a few commonly types of tax saving methods in India :
1. Tax Saving Investments : There are a wide array of tax saving investments that allow for deductions up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. The returns on these investments are generally subject to market trends. Additionally, some of these instruments may come with the added benefits of exemptions on interest accrued and maturity amounts subject to terms and conditions. One such investment is the Invest 4G Term Plan from Canara HSBC Oriental Bank of Commerce Life Insurance which allows for tax deductions on premiums as per Section 80C of the Income Tax Act of 1961. These investments include:
2.Education Loans : Interest repaid on education loans is completely tax exempt with no limits placed on the maximum deductible amount, however there is no such exemption for the principal amount itself.
3.Long Term Capital Gains Exemptions : Selling a long term asset and reinvesting the income in tax saving instruments such as those mentioned above may entitle you to claim deductions on the same and reduce the capital gains tax levied on the sale. The asset must be in your possession for a period greater than 3 years to be termed as a long term asset. Gains from equity shares and mutual funds are also tax exempt upto Rs 1 lacs in financial year provided that your ownership has exceeded a period of 1 year.
4.Charitable Donations : Donations to relief funds, NGOs, political parties, Swachh Bharat Kosh, Clean Ganga Fund, the National Fund for Control of Drug Abuse and certain other types of charitable organizations are available for deduction between 50%-100% under Section 80G of the Income Tax Act. Donors are required to furnish receipts, addresses, registration number of the trust, PAN numbers and donation amounts when claiming deduction. These donations are also subject to certain other conditions under the act such as cash donations above Rs. 2,000 being ineligible.
5.Deductions On Expenses : Certain expenses such as educational tuition fees, medical expenses for certain diseases as well as for handicapped dependents are tax exempt. Additionally, some expenses made either for or by your employer are tax deductible. These expenses may include transport fees, phone bills as well as some medical and personality development expenses. These types of tax saving methods may not be applicable for all and are subject to various conditions.
6.Home Loans : Home loan repayments on both the principal amount and interest are tax deductible under Section 80C. The cap on interest deductions is set at Rs. 2 lakhs per annum. This method generally works better for larger loans.
7.House Rent Allowance : Those residing in rented accomodation or away from property they own themselves for employment purposes are eligible for a House Rent Allowance of either 40-50% of basic salary , or rental amounts exceeding 10% of salary/income or actual amount of HRA received- whichever is lower. Those living in rented accomodation with no House Rent Allowance are eligible for deductions of Rs. 5,000 per month, 25% of income or rent payments exceeding 10% of total income- whichever is least. This only applies if the concerned party does not own any other property in the city they are living under their own name or those of their spouse or minor children.
8.Leave Travel Allowances : Deductions on expenses incurred during leaves of employment for travel purposes are allowed subject to the submission of expense reports. Two domestic journeys over a period of four years is the upper limit set on these types of tax saving methods.
These types of tax saving methods if employed appropriately, can allow individuals and families to successfully limit the loss of income due to taxation and also gain long term returns on their investments in certain cases. It is vital to have a thorough knowledge of all terms and conditions associated with each method to ensure an informed and measured approach towards limiting taxable income.