Each year we get reminders from the taxmen, the chartered accountant or the employer that it is the season to plan your taxes. In all likelihood, your reaction isn’t going to be like somebody just gifted you the latest iPhone.
Let’s face it ‐ most of us are averse to paying taxes, and at some point in our lives, we all have fantasized about living in a tax-free world.
Apart from the fact that taxes are viewed as a financial burden, what could further add to the stress could be a lack of knowledge about tax-planning. A majority of taxpayers struggle with fitting the tax-saving piece in the puzzle of their finances. Perhaps, it is time to teach taxes to students while they are still in school to prepare them for the inevitable as adults – taxes.
If you can relate to this, then fret not. We have compiled a detailed and elaborate tax-saving guide to ensure your tax-planning journey is smooth sailing.
- Section 80C
- Section 80CCD
- Section 80D
- Section 80E
- Section 80EE
- Section 80G
- Section 80GG
- Section 80TTA
- Section 80DD
- Section 80DDB
- Section 80U
- Section 80GGC
Tax-saving and the Income Tax Act
The Income Tax Act came into effect in 1961. Everything pertaining to the imposition, collection, recovery and administration of income tax falls under the purview of the Income Tax Act.
As a taxpayer, you may have multiple sources of income during your life. According to the Income Tax 1961, your earnings or profits in a given financial year attract taxes.
Whether you are a salaried individual or an entrepreneur or whether you make a rental income, or earn an income from your investments, you have to pay taxes to the government.
To help you in this regard, Section 80C, 80D and 80G of the Income Tax Act list the ways you can save on taxes. If you are confused on how to plan your finances for maximum tax benefits, here are a few recommendations based on your risk appetite:
High risk appetite:
If you are an aggressive investor and you are looking for high returns in addition to tax benefits under Section 80C, you can consider investing a total of ₹1.5 lakh per year in Equity Linked Saving Schemes (ELSS). This is a tax saving mutual fund that has the potential to offer double-digit returns. In other words, you can avail tax benefits in the short-term and earn good returns in the long-term.
Moderate risk appetite:
If you have a moderate risk appetite, you can invest a portion of your money in ELSS and the rest in Public Provident Fund (PPF) and/or tax saving fixed deposits. This strategy gives you the required tax benefits under Section 80C and also helps you balance your risk and returns.
Low risk appetite:
If you are totally risk averse, you can invest in saving fixed deposits or PPF. Here, you avail the same tax deduction of ₹1.5 lakh under Section 80C and the risk exposure on these avenues is minimal.
But, while these avenues offer you fixed returns, the rate of return can be quite low (just between 6-8%). This can be a problem if you take inflation into consideration. Education inflation, for instance, is around 10-12% every year. This means, if you invest in PPF for long-term goals like your child’s education, you may not be able to achieve your goals.
These investments can help you save a maximum of ₹46,800 on tax every year by making these investments.
Additional benefits beyond Section 80C
If you want deductions over and above the limit as specified under Section 80C, you can invest in the National Pension Scheme or the Atal Pension Yojana. Section 80CCD (1B) of the Income Tax Act gives deductions of up to ₹50,000 for contributions towards these schemes. As a taxpayer, you can save up to ₹15,600 under this section.
You can also claim tax benefits for premiums paid towards health insurance for self, spouse, children and parents and term insurance plans. This benefit comes under Section 80D of the Income Tax Act. Every year, you can save up to ₹15,600 on these health insurance payments.
Overall, the combination of these options can help you save up to ₹78,000 every year. This is a considerable amount of money.
How you can save up to ₹78,000 every year
|Investment||Tax applicable||Surcharge (4%)||Total amount|
|Section 80C (ELSS, Term Life Insurance, NPS, PPF etc.)||₹150,000||₹45,000||₹1,800||₹46,800|
|NPS under Section 80CCD (1B)||₹50,000||₹15,000||₹600||₹15,600|
|Health insurance for self, family and parents under Section 80D||₹50,000||₹15,000||₹600||₹15,600|
Let’s now discuss the different sub-sections under Section 80 in detail:
1. Section 80C
Section 80C of the Income Tax Act 1961, reduces your tax liabilities by allowing deductions from your total taxable income in a financial year.
According to Section 80C of the Income Tax Act 1961, taxpayers can claim deduction benefits on any investments, contributions, or payments towards financial products and schemes as stipulated by the Income Tax law. Section 80C came into effect on April 1, 2006, as a replacement of the older Section 88. Currently, the maximum deduction allowed under Section 80C is ₹1,50,000 in a financial year. Earlier, until FY 2014-15, the limit was ₹1,00,000.
Equity Linked Savings Scheme:
Equity Linked Savings Schemes are a type of mutual funds with a lock-in period of three years. It is the only mutual fund category in India, which qualifies for a tax deduction under Section 80(C) of the Income Tax Act. Investments are primarily made in equity markets, thus generating significantly higher returns than other tax-savings schemes in the long run. You can either choose to invest a lump sum amount or take the SIP (Systematic Investment Plan) route. However, you cannot withdraw your money before the three-year lock-in is over. Since these mutual funds invest in the stock markets, they could carry moderately high rik however the risk-factor gets evened out in the long run, making it one of the most profitable tax-saving investments. In terms of taxes on returns, on the gains from your ELSS investments exceeding ₹1 lakh in a financial year, you have to pay an LTCG tax of 10% . If you want to earn decent returns and can stay invested in the long run, ELSS investments can be an excellent venture. ELSS have the shortest lock in and highest returns among all tax saving options. And you can also escape LTCG tax, if you harvest it smartly.
Senior Citizen Savings Scheme:
If you have already retired or applied for voluntary retirement, the Senior Citizens Savings Scheme can be an option as a risk-free tax-saving investment. It is a long-term savings option backed by the Indian government. The maturity period is five years and investors can seek an extension by an additional three years. The current interest rate is 8.6%, and you can only opt for a premature withdrawal after a year of opening the account. If you close your account before two years, 1.5% of the deposit is deducted as penalty. The interest is taxable, and TDS is applicable in case the interest exceeds ₹10,000 per annum. With an SCSS account, you can be assured of a regular income in your post-retirement years.
National Pension System:
The National Pension System is a retirement benefit plan, administered and regulated by the Pension Regulatory Fund Authority of India. If you subscribe to the NPS, your money will be invested primarily in equity and debt instruments, and the value of the investment on maturity will depend on the performance of these asset classes. Currently, the equity exposure is capped in the range of 50% to 75% and is limited to 50% for government employees. You can either decide how much money gets invested in each asset class or opt for an age-based asset allocation model.
On attaining the age of 60, you can only withdraw 60% of the maturity amount; the remaining 40% is used to purchase an annuity to help you receive a pension. Premature withdrawals of up to 25% are only allowed after three years.
NPS is the cheapest equity investment product there is.
Term Life insurance premium:
If you have bought life insurance policies, the premium can allow you to avail tax deductions under Section 80C. Premiums paid to insure self, spouse, dependent children and any member of Hindu Undivided Family are eligible. If the policy has been issued on or before March 31, 2012, the annual premium up to 20% of the assured sum becomes tax-deductible. For insurance policies issued on or after April 1, 2012, 10% of the sum assured is tax-deductible. A life insurance policy will provide your family financial support in case of your untimely death and should be taken by everyone. The tax benefit is an added perk. Choose a life insurance plan appropriate for you and your family. It is important not to view insurance cover only as a way to save taxes.
Public Provident Fund:
The Public Provident Fund (PPF) scheme is a long-term investment option through which you can also avail tax benefits. The current rate of interest on a PPF account is 7.9% p.a., compounded annually and the lock-in period is 15 years. This means you have to stay invested for 15 years although partial withdrawals are allowed from the seventh year. You can open an account with as little as ₹100. The minimum and maximum investments allowed in a financial year are ₹500 and ₹1.5 lakh, respectively. In case your annual investment exceeds ₹1.5 lakh, interest cannot be earned on the excess amount. You will have to make at least one deposit a year for 15 years. PPF is regarded as a safe tax-saving investment avenue. You do not have to pay any taxes on the deposit or interest at the time of withdrawal. Government allows to you to move entire PPF corpus to NPS and enjoy better returns and flexibility.
National Savings Certificates:
The National Savings Certificate is a fixed-income investment offered by the Government of India. You can invest in this scheme by visiting a post office near you. The lock-in is five years, and the current interest rate is 7.9% per annum. The minimum amount required to purchase an NSC certificate is ₹100. Certificates are available in denominations of ₹10,000, ₹5,000, ₹1,000, ₹500 and ₹100. Premature withdrawals are only allowed if the certificate holder has passed away, or if the certificates have been forfeited. The scheme is safe as it is backed by the Government of India that ensures the safety of your capital. Also, only the interest earned in the final year is taxed.
You can invest in tax-saving fixed deposits and claim maximum tax deductions of up to ₹1.5 lakh. The interest rate you get is what the prevailing 5 year FD rate is and the lock-in period is five years which means you can’t take out the money before five years. You can only make a one-time lump sum deposit, while premature withdrawals are not allowed. The minimum investment amount varies depending on your bank, but the maximum amount is capped at the 80C limit i.e. ₹150,000. You can either reinvest the interest or opt for monthly or quarterly payouts. TDS is applicable on the interest earned on your FD, but you can avoid it by submitting Form 15G or Form 15H (in case you are a senior citizen) to the bank. Tax saving FDs provide just enough returns to beat inflation. So, technically your wealth gain are negligible.
Home loan repayment:
If you have taken a home loan, the part of EMI that goes towards repaying the principal amount is eligible for tax deductions under Section 80C. The amount you pay as interest does not qualify for tax deductions in this section.
You can claim tax deductions up to ₹1.5 lakh on tuition fees paid for your child’s education. This benefit is only available to individual parents or guardians and a maximum of two children per individual. The deduction does not depend on the class of the child. However, it must be a full-time education course in an Indian school, college or university. Parents of adopted children, unmarried individuals and divorced parents can also claim these benefits.
2. Section 80CCD
Section 80CCD discusses the tax deductions available to taxpayers regarding the investments in National Pension System (NPS). There are two subsections here:
Section 80CCD (1):
Investments in NPS are eligible for tax deductions under this section. Any Indian citizen between the age of 18 and 60 years can invest in NPS and avail this tax benefit. Even NRIs can claim this benefit.
The maximum deduction you can avail under this section is 10% of your salary (this includes basic salary + DA). For self-employed individuals, the limit is 20% of their gross total income.
Also, the maximum benefit you can avail every year under this section is ₹1.5 lakh.
Section 80CCD (1b):
This subsection provides an additional deduction of ₹50,000 on investments in NPS. This is over and above the ₹1.5 lakh available under Section 80CCD(1). So, in short, you can avail a total tax deduction of ₹2 lakh when you invest in NPS every year.
3. Section 80D
Under Section 80D of the Income Tax Act,you can claim deductions up to ₹1 lakh for contributions towards medical insurance premiums bought for insuring self, spouse, children and parents. . The deductions under 80D are over and above exemptions you can claim under Section 80C. This benefit can be claimed by individuals and Hindu Undivided Families (HUFs).
Spends on preventive health care is also eligible for deduction under section 80D with a maximum cap of ₹5,000/- for self or family and ₹7,000/- for parents.
4. Section 80E
Under Section 80E of the Income Tax Act, the amount you spend in repaying the interest of your education loan can qualify as a deduction from your total income.
The loan should have been taken for the education of self, spouse, children or a student for whom you are the legal guardian and should have been taken from a bank or an approved financial institution.
5. Section 80EE
Section 80EE of the Income Tax Act, 1961 allows a tax deduction benefit on the interest paid on home loans taken by a first-time homebuyer. If you fall in this category, you can claim a tax deduction up to ₹50,000 under section 80EE. This deduction limit is over and above the limit provided under section 80C and Section 24 of the IT Act, 1961.
6. Section 80G
Charity begins at home, but did you know that if you widen the scope of your charitable acts, it can help you save taxes? Section 80G of the Income Tax Act allows you to claim tax deductions on donations made to charitable organizations.
Only the donations made towards charitable institutions registered under Section 12A can qualify for deductions. The donations must have been made through taxable income sources. Only those donations where contributions have been made via cash or cheque or demand draft will be eligible. All taxpayers, including non-resident Indians, are eligible.
Cash donations exceeding ₹2,000 are not allowed as deduction. For donations above ₹2,000 to qualify as a tax deduction, the contribution has to be made using other modes of payment. The various contributions are eligible for a deduction of up to either 100% or 50%, with or without restriction, under Section 80G.
7. Section 80GG
If you are a salaried individual, you may have a House Rent Allowance (HRA) as a component of your salary that you can claim a deduction on it. If your salary does not have an HRA component, but you pay rent for any furnished or unfurnished accommodation occupied for living purposes, you can claim a deduction under Section 80GG on the rent.
In order to claim tax benefits under Section 80G, these are the conditions that have to be fulfilled.
- You are either self-employed or salaried.
- There should be no HRA component in your salary during the year for which you are claiming a deduction under Section 80GG.
- You or anyone from your family, i.e., your spouse or minor child or HUF of which you are a member ‐ should not own a residential property in the city you are living or running a business.
- This benefit is only applicable to individuals and Hindu Undivided Families (HUFs).
- You are not eligible for a deduction if you are claiming a benefit, for a house you own in another location, listed as Self-Occupied Property.
You can claim the least of the following amounts:
- ₹60,000 annually (₹5,000 monthly)
- Total rent paid minus 10% of the total income
- 25% of annual salary
For example, you earn ₹8 lakhs annually and do not get HRA, but pay a rent of ₹16,000 per month, i.e. ₹1.92 lakhs in a year.
As per the first condition, you can avail a tax exemption of ₹60,000. According to the second condition, the permissible deduction would be ‐ ₹1,92,000 ‐ ₹80,000 (10% of income) ‐ ₹1,12,000. Under the third condition, ₹2 lakhs. The least of these amounts will qualify as a tax deduction under Section 80GG, which means you can claim only ₹60,000 as a tax deduction.
8. Section 80TTA
Section 80TTA allows you to claim a deduction of ₹10,000 on your interest income. This deduction is only available to individuals and HUFs. The deduction is allowed on:
- The interest earned on a savings bank account.
- The interest earned on a savings bank account with a co-operative society engaged in banking activities
- The interest on a savings bank account with a post office
Your entire interest income will qualify as a deduction if it is less than ₹10,000. If your interest income is more than ₹10,000, your deduction shall be capped at ₹10,000.
9. Section 80DD
Living with a disability or taking care of a family member with a disability is never easy. Certain sections of the Income Tax Act have provisions that allow different-abled individuals or a family member with a disability to claim tax benefits.
You can claim a deduction under section 80DD of the Income Tax Act if you have a dependent who is differently-abled and entirely dependent on you for maintenance.
10. Section 80DDB
Under Section 80DDB of the Income Tax Act, you can claim tax deductions on medical expenses incurred to treat specific ailments. Deductions can only be claimed on the treatment for the diseases listed under Section 80DDB. The treatment must be for the taxpayer or a family member such as a spouse, parent or sibling, dependent on the taxpayer.
Only individuals and Hindu Undivided Families (HUFs) can claim deductions under Section 80DDB. Tax deductions are only available to residents of India. From Assessment Year 2019-20 onwards, a tax deduction equal to the total amount paid for the treatment or ₹40,000 can be claimed depending on whichever is lower. For senior and super-senior citizens, a deduction of ₹1,00,000 or the actual amount paid for the treatment can qualify as a deduction based on the smallest amount.
To qualify for a tax deduction under Section 80DDB, you will need to produce a certificate of the disease. If you have been treated at a private hospital, you must acquire the certification from the same hospital. This is also true for treatments conducted at a government hospital.
11. Section 80U
Under Section 80U of the Income Tax Act, individuals who have been certified to be at least 40% disabled by relevant medical authorities according to government rules, can claim tax benefits. Any person suffering from the following ailments can claim tax benefits under Section 80U. These are:
- Low vision
- Hearing impairment
- Locomotor disability
- Mental retardation
- Mental illness
A person suffering from at least 40% disability, can claim a tax deduction up to ₹75,000. For those severely disabled, i.e., with 80% disability or more, the tax deduction limit under Section 80U is ₹1,25,000.
12. Section 80GGC
Section 80GGC of the Income Tax Act allows individuals to claim tax deductions on contributions made to political parties registered under Section 29A of the Representation of the People Act, 1951 and electoral trusts.
Should you choose to contribute to a political party, tax deductions can be availed on 50-100% of the contribution amount. According to Income Tax Act regulations, you can donate up to 10% of your gross earning to any political organisation of your choice.
Before choosing a tax-saving instrument, it is important to factor in the risk level, lock-in period, liquidity and returns. There is no point in opting for a tax-saver product if doesn’t suit your also individual needs. It also helps to stay updated about the latest developments in tax-saving provisions. Barring Section 80C, many taxpayers are not familiar with the other sections of the Income Tax Act using which they can significantly reduce their tax burden.