How to Maximise Tax Deductions in India?

Statements like, “Only 1.6% Indians paid taxes in 2019-20” make it to the headlines year after year.

But did you know “only 3% of the Indian populace is liable to pay taxes”.

Based on the tax structure prevalent in our country, not everyone has to pay taxes.

Only India and Bangladesh have income tax limits that are much higher than the average income, thus shrinking the populace of the people liable to pay tax.

Below are the Tax Slabs applicable for FY 2020-21

Taxable Income SlabsIncome Tax Rates & Cess
0 – ₹2,50,000Nil
₹2,50,001 – ₹5,00,0005% of (total income – ₹2,50,000) + 4% cess
₹5,00,001 – ₹10,00,000₹12,500+ 20% of (total income – ₹5,00,000) + 4% cess
₹10,00,001 & above₹1,12,500+ 30% of (total income – ₹10,00,000) + 4% cess

A surcharge of 10% of the total income has to be paid additionally by people earning higher than ₹50 Lakh annually. Such cess rises to 15% when the income is higher than ₹1 Crore. 

As per current income tax laws, a person is eligible for tax rebate up to ₹12,500 under section 87A, if the net taxable income does not exceed ₹5 lakhs.

And as per Section 10(1), agricultural income is exempted from taxation. 

Salaried Individuals get a standard deduction of ₹50,000 on account of transport and medical allowance.

It doesn’t stop there. The Central Government offers numerous provisions governed by the Income Tax Act, 1961 to ease the financial burden.

You can choose from making investments to claiming expenses as a way of reducing taxes.

Here’s how you can get your tax plan in order and avoid making last minute, irrational decisions in order to save tax.

1.Choosing the Right Investments7.Making Donations to Charity/ Political Parties
2.Buying an Insurance Cover8.Receiving Gifts/ Inheritance through a Will  
3.Claiming Medical Costs on Disability9.Travelling  
4.Buying a Home/ Paying Rent10.Marketing  
5.Booking of Long Term Capital Gains (LTCG)11.Deducting Tax at Source  
6.Investing in Education   
  1. Choosing the Right Investments (Section 80C, 80CCD (1b), 80TTA/80TTB)

Investing money in the right instruments offers the benefit of higher returns along with tax savings.An investor can choose from government related schemes or stock market instruments based on their risk appetite.There is a maximum limit for investments of ₹1.5 lakhs under Sec 80C.

The various schemes that are available for investment are:

  1. Equity Linked Savings Scheme (ELSS) – ELSS offers the chance to earn the highest return but is associated with the highest risk. These are mutual funds that invest minimum of 80% of their assets in equity. They have a lock in period of 3 years and attract a Long-Term Capital Gains (LTCG) Tax of 10% on returns higher than ₹1 lakh.
  2. Employee Provident Fund (EPF) – Organisations with employee strength >10 are eligible for EPF contribution. As per the EPF Act, 12% of the employee’s salary (Basic + Dearness Allowance) is deducted towards EPF. An employee can voluntarily choose to increase this contribution over 12%.
  3. Public Provident Fund (PPF) – PPF is a government backed instrument with a 15-year lock in period. The interest rate is revised every quarter, currently at 7.1%. It falls under the EEE category of investments which makes the investment, the returns and the withdrawal amounts tax exempt.
  4. Tax Saver Fixed Deposits – Banks and Post Offices offer a 5-year Fixed Deposit which is considered as a deduction from tax purposes. The returns offered range between 6-8%. The interest on these FD’s is taxable.
  5. National Pension Scheme –  NPS is a pension scheme run by the government, in an attempt to provide retirement benefits to the employees of public, private and the unorganised sector. Section 80CCD (1b) allows for an additional investment of  ₹50,000 in NPS, thus increasing the maximum deduction from ₹1.5 lakh to ₹2 lakh.

A few other schemes that are available are:

  • Senior Citizen Savings Scheme (SCSS)
  • Sukanya Samriddhi Yojana (SSY)
  • National Savings Certificate (NSC)

Interest Income earned on all Savings Account collectively is subject to tax if it exceeds ₹10,000/ year. This limit stands at ₹50,000/year for Senior Citizens. Banks deduct TDS on Fixed Deposit Interest if it exceeds ₹40,000 in a year at 10%, if PAN details are available. The TDS rate is 20% in case PAN Card details are not furnished.

  1. Buying an Insurance Cover (Section 80C, 80D, 10(10D))

Investing in insurance has a two-fold benefit. It not only provides financial security in times of a medical emergency or untimely death but also aids in wealth accumulation through lower tax pay-out.

Tax Waiver is applicable on both the premium paid for a life insurance policy and the amount disbursed on maturity. The premium paid is exempt under Sec 80C up to a maximum limit of ₹1.5 lakhs/ year. The maturity amount received is exempt if the premium paid does not exceed 15% of the sum assured. For policies issued before Apr 1, 2012 the limit was higher at 20%.

Health Insurance is covered under Sec 80D and offers a deduction of ₹25,000 for self, spouse or children. Dependent siblings are covered in the same. An additional exemption is offered for parents at ₹25,000 if they are below the age of 60 and ₹50,000 if they are above 60 years of age.

A sum of ₹5,000 spent on Preventive Health Check-up can also be claimed as a deduction under this section. However, the overall limit remains the same.

  1. Claiming Medical Costs on Disability (Section 80DDB, 80DD, 80U)

Certain sections of the IT Act make provisions for differently-abled individuals or for a family member with a disability to claim tax benefits, as taking care of them is never easy. Proper proofs of expenses and disability need to be submitted for claims.

Medical bills of up to ₹40,000 are subject to tax waivers provided they are incurred for the treatment of specified diseases. The exemption limit for senior and super senior citizens is ₹1 lakh. The treatment charges that are covered are only neurological diseases, malignant cancer, AIDS, renal failure, or haematological diseases.

Section 80DD allows for further exemptions for hosting a dependent member with a permanent disability. The total expenses made for the member is eligible for exemption.

For an individual with disability, up to ₹75,000 can be claimed to finance the expenses of individuals having 40% or higher disability, while the exempted amount goes up to ₹1.25 lakhs for people who suffer from 80% or higher disability.

  1. Buying a Home/Paying Rent (Section 80C, 24(b), 80EE, 80EEA, 10(13A))

The Income Tax Act supports both a home owner and a renter in saving taxes.

Investing in a home and availing a home loan provides benefits on both the principal amount and the interest paid during the year.

Deductions can be claimed on repayment of the principal part of the EMI up to ₹1.5 lakhs under Sec 80C. Exemption on interest paid is available as per Sec 24(b) up to ₹2 lakhs annually on a self-occupied house. For an under-construction property, the exemption on interest can be claimed after possession within 5 years post the construction is completed.

Did you know? Taking a joint home loan with your spouse, on a self-occupied property, doubles the benefits under Sec 80C and Sec 24. They offer up to ₹1.5 lakh & ₹.2 lakh per borrower, respectively, as a benefit on principal & interest payments.

Property purchased by a first-time home buyer, for home construction, can also avail tax benefits on the interest paid up to ₹50,000, provided the construction is completed within 5 years under Sec 80EE. This however has certain qualifications to be met on the price of the property (<₹45 lakhs) along with the total loan amount (<₹35 lakhs). If the home on which the first home loan has been taken is occupied by you, you can get another loan for the second house. There is no limit on income tax deduction on the interest payment of the second home loan.

Renters needn’t worry as there is a benefit in your favour too.

Employers pay a component as House Rent Allowance (HRA). There is an exemption provided against that based on the below rules.

The first one being, that your salary structure must constitute an HRA component.

The exemption on the rent paid is the lower of the three:

  1. Annual HRA received.
  2. 50% of the yearly basic salary if the individual is residing in a metro city (40% in case of non-metro cities).
  3. Total annual rent – 10% of the basic salary.

Sec 80GG allows a certain rebate to individuals who don’t have the HRA component.

They can claim an exemption to the tune of the minimum value of the below:

  1. Rent payment of up to ₹5,000 per month.
  2. 25% of the gross total income.
  3. Total rent minus 10% of basic salary.
  1. Booking of Long Term Capital Gains (LTCG) (Section 53, 54(H))

Tax on Long Term Capital Gains (returns from assets held for longer than 3 years) can make or break returns from an investment. It is extremely important to effectively book profits on shares, mutual funds or sale of a house to ensure minimum tax incidence.

Sale of Shares/Mutual Funds attracts an LTCG of 10% for returns > ₹1 lakh.

If sale proceeds from a capital asset are reinvested into assets specified under the IT Act, there are exemptions available.

Section 53 of Income Tax Act exempts capital gain arising out of the sale of the residential house if sale proceeds realized from the sale are reinvested in either purchase or construction of another residential house. The Capital Gains must not exceed ₹2 crore.

Similarly, Section 54EC provides for exemption of capital gains arising from the sale of capital assets if such sale proceeds are invested in bonds of government companies notified by the government from time to time.

Booking of capital losses is another way of lowering tax from capital gains. The capital loss can be set off against the gain. Short-term capital loss can be set off against short-term as well as long-term capital gain, long-term capital loss can be set off only against long-term capital gains.

  1. Investing in Education (Section 80C, 10(16), 80E)

The IT Act allows for exemptions to the extent of tuition fees paid for children by the parent. This forms part of the 80C deduction.

A scholarship received by an individual is 100% tax exempt, irrespective of whether it is from a public or a private institution.

As per Sec 80E, interest amount paid on education loan is tax free. However, such benefits are only applicable for the first eight years of loan repayment.

  1. Making Donations to Charity/ Political Parties (Sec 80G, 80GGC)

Donations made to Charitable Institutions (registered under Sec 12A) can help save tax. The donations should be made from taxable sources of income.

All donations made in the form of cheque, draft or online transactions offer either 50% or 100% exemption. While cash donations only allow a maximum exemption of ₹2,000.

Any donation made to political parties or contribution to electoral trusts is eligible for tax waivers, under Section 80GGC. Such donations have to be made through wired or banks transfers, cash deposits are not allowed. The entire amount donated is exempted from any income tax calculations, provided the organisation is registered under Section 29A of the Representation of People Act of 1951.

  1. Receiving Gifts/ Inheritance through a Will

In a country like ours, where weddings are an opulent affair, it is bound to involve receipt of gifts. All gifts received on account of wedding are tax exempt.

Wealth received through inheritance in the form of a Will is not taxable in India.

  1. Travelling (Sec 10(5))

Entrepreneurs travelling for work can claim such expenses on travel and accommodation as a business expense and deduct the same from taxable income. The bookings however should be made from the company’s account.

Section 10(5) aids employees in covering costs of travel tickets for spouse, children, and parents on domestic travel. Employers provide a Leave Travel Allowance (LTA) component in the salary structure of their employees. Tax exemptions can be claimed twice in four years and proper proof of travel needs to be submitted by the employee.

  1. Marketing

Money spent on marketing expenses is tax exempt for the business owner. It not only promotes the growth of the business but also helps in saving taxes.

  1. Deducting Tax at Source

Entrepreneurs buying a service or a product are eligible to deduct tax at source before making the payment to the seller. If a business owner fails to do so, then those expenses will not be considered a business expense while determining taxable profit and will result in additional tax burden.

Additionally, there are a few other tax saving options that are available.

  • Interest paid on the loan to purchase an electric car is exempt to the tune of ₹1.5lakhs.
  • Money received from Gratuity is exempt from tax up to ₹20 lakhs.
  • Hiring family members who do not have any other source of income is a significant way to reduce taxes for entrepreneurs.
  • Making use of non-digital transactions is discouraged by the government. A single payment of ₹20,000 in cash in a single day is disallowed in the books, thus increasing tax burden, thus encouraging online payments.
  • Strategically using the 4-year Indexation Benefit (the benefit that you get to pay tax only on the gain over and above inflation helps reduces the total tax payable on debt mutual funds.

No one likes to willing part with their hard-earned income in the form of taxes. The lack of knowledge about tax planning adds to the stress of paying taxes. However, when the government is extending its support in reducing the tax burden through innumerous provisions, we must do proper tax planning. It is suggested to begin planning in the first quarter of the financial year based on an individual’s financial goals.

Income Tax is a key source of revenue for the government for conducting its administrative and public welfare activities.

“After military service, the most patriotic thing you can do as a wealthy person is pay your taxes. – Mark Cuban “

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s