As all of us know there are two parts to our income, one is the basic salary on which we pay tax and the other is the bonus that we get for the hard work that we put into our job. But do we have an effective and legal way to save tax?
As far as a bonus is concerned, it is taxable as well, but the good thing is that there are some investment and payment plans through which you can save a significant amount of taxes.
With the increase in the number of Income Taxpayers in India, the share of salaried individuals as taxpayers has also gone up.
This has put to difficulty in saving tax, especially if you belong to the lower tax bracket.
The government has introduced a lot of investment plans to help salaried individuals to save tax and that includes investments into PPF and NPS along with special savings schemes and many other schemes.
Here we will take a look at 9 such investment plans which can help you save tax as a salaried individual.
1. Investment in National Pension Scheme (NPS) - 80CCD(1b)
Section 80CCD (1b) of the Income Tax Act permits taxpayers to deduct up to Rs.50,000 for contributions to the Central Government's Pension Scheme. This excludes any deduction previously claimed under Section 80CCD limit of Rs.1,50,000/-
A deduction for an employer's payment to the Central Government's Pension Scheme is also allowed under Section 80CCD (2). There are two requirements that must be met in this case:
- The deduction limit for people who are employed by state governments, PSUs, or private organisations is set at 10% of basic pay + Dearness Allowance (DA).
- The deduction limit for individuals employed by the Central Government is set at 14% of base salary plus DA.
- The deduction limit for those who are not covered underemployment will be 20% of gross total income.
2. Payments made for life insurance, provident fund, children’s tuition, etc - 80C,80CCC and 80CCD (1)
Section 80C of the Income Tax Act allows deductions for expenses incurred for life insurance premiums, provident fund investments, National Savings Certificate (NSC) investments, tuition fees paid for up to two children, Senior Citizen Savings Scheme (SCSS), ULIP, tax-saving fixed deposits for five years, principal repayment of housing loan, and so on.
Section 80CCC also applies to payments paid to annuity pension schemes. Section 80 CCD (1) permits a deduction for contributions paid to Central Government pension plans, but only up to 10% of salary. All deductions made under these Sections are subject to a yearly maximum of Rs.1.5 lakh.
3. Health Insurance Payment – 80D
A health insurance premium paid is deductible under Section 80D of the Income Tax Act. An individual, their spouse, and dependent children can all claim a yearly deduction of Rs.25,000.
In the case of senior persons, the cap is raised to Rs.50,000. Deductions are also allowed for health insurance payments paid on behalf of parents.
The limitations are between Rs.25,000 and Rs.50,000, depending on the parents' ages. A deduction of Rs.5,000 is permitted for preventative health checks, but only within the limitations stated.
4. Interest paid on education loan - 80E
Interest payments on higher education loans are tax-deductible under Section 80E of the Income Tax Act. The loan should be obtained from a financial institution or a charity organisation that has been approved.
Only the paid employee, their spouse, or their dependent children should be eligible for the loan. This is one of the few deductions that does not have an upper limit.
5. Housing loan interest paid -24b (effective method to save tax)
A salaried employee can claim a deduction under Section 24(b) of the Income Tax Act if he owns a home. This is a deduction for the interest on his home loan.
It's important to note that the loan's principal is already covered by Section 80C. In the case of self-occupied home properties, the deduction is restricted to Rs.2 lakh per year.
Additional Advantage: if the housing loan is taken under the name of two people (Joint loan) both can get the deduction of Rs.2lakh per year subject to actual payment of the same.
6. Additional interest on housing loans - 80EE and 80 EEA
Housing loan interest is also deductible under Sections 80EE and 80EEA of the Income Tax Act. These portions, however, have specific financing and property valuation limits and are exclusively available to first-time home purchasers.
The 80EE credit is available for loans taken out between April 1, 2016, and March 31, 2017, and is capped at Rs.50,000 per year. Loans sanctioned between April 1, 2019, and March 31, 2022, are eligible for the 80EEA deduction.
Section 80EEA allows for a maximum deduction of Rs1,50,000 per year. To claim the 80EEA deduction, the taxpayer should not have taken a deduction under Section 80EE.
7. Interest paid on electric vehicle loans - 80EEB
In the 2019 budget, an incentive for the purchase of electric vehicles was introduced. Individual taxpayers may now deduct their electric vehicle loans according to a new Section 80EEB.
The deduction is limited to Rs.1,50,000 and is only eligible if the loan was approved between April 1, 2019, and March 31, 2023.
8. Expenses for a dependant who is disabled - 80DD
The Income Tax Act's Section 80DD allows for a deduction for expenses incurred on behalf of a handicapped dependant.
It might be for medical treatment or maintenance of the dependant. Only if the taxpayer has not already claimed a deduction under Section 80U of the Act is this deduction permissible.
Depending on the degree of the handicap as defined by the Income Tax Act, the deduction amount is either Rs.75,000 or Rs.1,25,000.
9. House rent paid (for salaried individuals without HRA) - 80GG
Salaried persons can claim a tax deduction on rent paid to their landlord under Section 80GG of the Income Tax Act. This deduction, however, only applies if the employee does not get a House Rent Allowance (HRA) from his or her company.
Another requirement is that the employee, their spouse, or their minor kid should not own any residential property near their place of employment.
The deduction can only be made if at least one of the following conditions is met:
- 5,000 per month.
- Long-term capital gains, short-term capital gains under section 111A, income under Section 115A or 115D, and deductions under 80C to 80U make up 25% of total income. Also, before claiming a deduction under section 80GG, the income is computed.
- Actual rent paid minus 10% of total income.
We hope you found this post to be helpful! There are a lot of different investment plans out there, and it’s important to take the time to research which ones are best for you to save tax. If you have any questions about tax saving investment plans, please don’t hesitate to reach out to us at firstname.lastname@example.org.