5 smart ways to save tax

The tax filing deadline for the financial year 2023-24 is still months away. But this doesn’t mean that you can delay planning your taxes. Tax planning is an important aspect of financial planning. It allows you to maximize the tax-saving potential offered by the Income Tax Act, of 1961. You can reduce your tax liability and save money. Reduced tax liability also means a higher disposable income allowing you to step up your savings and create the corpus required for your financial goals.

So, as you can see, tax planning is connected with other aspects of your financial plan and should not be delayed. To help you maximize tax savings and minimize your tax liability, here are five smart and effective tips –

Section 80C⁴ of the Income Tax Act, 1961 is a popular section that allows you to reduce your taxable income by up to Rs.1.5 lakhs⁴. If you fall in the highest tax bracket of 30%, this converts to a tax saving of Rs.45,000!

Section 80C allows deductions for specified types of investments and expenses. Some of these include the following⁴–

• Life insurance premium payment
• Equity Linked Saving Scheme of mutual funds
• National Savings Certificate
• Tuition fee paid for children
• Public Provident Fund
• 5-year fixed deposits offered by post offices and banks (not NBFCs)
• Sukanya Samriddhi Yojana
• Senior Citizen Saving Scheme

The National Pension System (NPS) scheme allows you to create a corpus for your retirement through regular investments. Some of the benefits of the NPS scheme are as follows –

• It gives market-linked returns since the investments that you make are allocated to different funds that invest in capital market securities.
• It is a long-term investment scheme through which you can accumulate a retirement corpus.
• You get the benefit of partial withdrawals from the fund balance if you suffer financial contingencies.
• The scheme matures when you attain 60 years of age. You can defer the maturity by another 10 years till 70 years of age.
• There are different investment strategies to suit the preference of different types of investors.
• On maturity, you can withdraw up to 60%⁵ of the corpus in a lump sum. This withdrawal is completely tax-free in your hands.
• The NPS scheme promises guaranteed^# pensions, lifelong, that help in creating a regular source of income after retirement.
• You can choose from different types of pension options to get a suitable pension income.

When it comes to saving taxes, NPS offers multiple benefits on the amount that you invest besides allowing exemption on 60% of the maturity proceeds. The tax benefits* available on investments include the following –

• The amount that you invest is allowed as a deduction from your taxable income. The deduction is allowed up to Rs.1.5 lakhs under Section 80CCD (1)⁶. However, the limit of Rs.1.5 lakhs includes the limit allowed under Section 80C and Section 80CCC.
• You can claim a separate additional deduction of up to Rs.50,000 for investing in NPS under Section 80CCD (1B)⁶. This deduction is over and above the limit of Rs.1.5 lakhs allowed under Section 80CCE⁶.
• If your employer contributes to the NPS scheme for your benefit, such a contribution is also allowed as a deduction. You can claim a deduction of up to 10% of your basic pay, including Dearness Allowance, under Section 80CCD (2)⁶. There’s no monetary limit on this deduction. Moreover, the deduction is available even under the new tax regime.

So, with an NPS scheme, you not only plan for a retirement corpus, but you can also enjoy attractive tax benefits* on your investments as well as on the benefits offered by the scheme.

The Union Budget 2023-24⁷ introduced a new tax regime for taxpayers. This regime has lower tax rates at higher income levels. While the new regime has been introduced, the existing regime is not done away with it. Both regimes are available for taxpayers. It is your choice to choose which regime would give you the lowest tax liability.

So, when calculating your tax liability, calculate it under both regimes. Remember, the new tax regime does not allow a maximum of the tax deductions and exemptions that the old one does. So, you would not be able to claim deductions under Section 80C, 80D, or others. However, if you have a high level of income, your overall tax liability, even without the deductions and exemptions can be lower in the new regime compared to the old one.

The tax slabs for the new tax regime are as follows⁷ –

Remember, if you are a salaried taxpayer, you can choose between the old and the new tax regime every financial year. You can switch to the new regime in one year and then switch back to the old one in the next year. You can change the regimes as and when required depending on which regime gives you the lowest tax liability. Similarly, if you have income from house property, other sources or capital gains, you can switch between the old and the new tax regimes multiple times in different financial years⁸.
However, if your income is primarily from business or profession, you would be allowed to switch once. If you switch to the new tax regime, you can come back to the old tax regime only once. Once you switch from the new regime to the old one, you would not be able to opt for the new regime in future⁸.

So, calculate your tax liability under both regimes and choose one that offers the lowest tax liability.

A home loan not only gives you funds to buy your dream home but also helps in saving taxes. There are multiple tax benefits⁹ on a home loan which include the following –

• The principal that you repay for the loan is allowed as a deduction under Section 80C. The maximum limit is Rs.1.5 lakhs.
• The interest paid on the home loan is allowed as a deduction from your taxable income. The limit is Rs.2 lakhs under Section 24 if the house is self-occupied. If the house is let out, there’s no limit. The entire amount of interest paid is allowed as a deduction.
• If a house is under construction, you can claim deduction on the interest paid. The limit is Rs.2 lakhs provided that the construction is completed within 5 years.
• The stamp duty and registration charges that you pay for the property are allowed as a deduction under Section 80C up to Rs.1.5 lakhs.
• If you are first-time home buyer availing of a loan, up to Rs.35 lakhs, between 1^st April 2016 and 31^st March 2017, you can claim a separate additional deduction on the home loan interest. The additional deduction is up to Rs.50,000 under Section 80EE. However, this deduction was allowed up to 31^st March 2017 only provided the value of the house was less than Rs.50 lakhs.
• Union Budget 2019 introduced Section 80EEA that allows an additional deduction on home loan interest. According to the section, loans up to 31^st March 2022 for a property whose stamp duty value is up to Rs.45 lakhs would be eligible for deduction. If this is your first home, you can claim a separate additional deduction up to Rs.1.5 lakhs on the loan interest.
• If you opt for a joint home loan, both you and the co-applicant can claim the aforementioned tax benefits* on the loan.

So, maximize the tax-saving potential of a home loan if you have one.

A health insurance policy has become important given the rising medical costs. The policy offers coverage against medical expenses so that your savings stay protected. Moreover, you also save taxes on the premium that you pay under Section 80D of the Income Tax Act, 1961¹⁰. Here’s how –

• If you buy a policy covering self and/or your spouse and children, the premium paid would be allowed as a deduction. The limit is Rs.25,000 if you are below 60 years and Rs.50,000 if you are 60 years and above.
• If you buy a policy for your parents, the premium paid is also allowed as a deduction from your taxable income. The limit is Rs.25,000 if your parents are below 60 and Rs.50,000 if they are senior citizens.

Thus, with a health insurance plan, you can reduce your tax liability by up to Rs.1 lakh. This converts to a tax saving up to Rs.30,000 if you are in the 30% tax bracket.
Use these smart tips and tricks and lower your tax liability for 2022. Plan your taxes in advance so that you avoid the last-minute rush and hasty decisions that might do more harm than good. Do your research, plan your taxes meticulously and save. Increase your disposable income so that you can save more and create a sufficient corpus for your financial goals.
https://legislative.gov.in/sites/default/files/A1961-43.pdf³