As the financial year-end draws closer, people scramble to make last minute tax saving plans to reduce their income tax. If you are also one of them, then keep reading for part 1 of the series on 'Last Minute Tax Planning Tips' to reduce your tax payout.
Before we move on, it is important to note that your deductions will be affected by the tax regime you've chosen for yourself.
In Budget 2020, the Finance Ministry announced an alternative tax regime that offers a lower tax rate but the taxpayer will have to give up many income-tax deductions and exemptions that are available in the old tax regime.
While the new tax regime could be beneficial for some taxpayers, the deductions and exemptions in the old tax regime offer a last minute tax planning opportunity.
If you've chosen the old tax regime then here are some tips to reduce your income tax:
Extend your provident fund investments
If you're a salaried employee then you're most likely contributing 12 percent of your salary (Basic + Dearness allowance (DA) to the Provident Fund (PF), as mandated by the government. In addition to this amount, you can also avail the benefit from the Voluntary Provident Fund (VPF) or Public Provident Fund (PPF) by voluntarily contributing a percentage of your salary.
Both are government guaranteed schemes with fixed returns. While they may not offer the highest returns, there is a negligible risk with these investments. However, if you want liquidity then PPF may not be the best option for you as it has a lock-in period of 15 years because only a partial withdrawal can be made with certain terms and conditions attached before 15 years.
VPF, on the other hand, offers comparatively more liquidity as the amount can be withdrawn after five years. If the VPF amount is withdrawn before the completion of the lock -in period of five years, the whole amount will be taxable.
Plan your retirement
Another option to claim a deduction is through the premiums made towards a new, renewed or a continued pension policy or an annuity plan offered by an approved insurance company. A deduction, not more than 10 percent of the salary (Basic+DA) or 20 percent of gross income for self-employed, can also be claimed through enrolling into the National Pension Scheme (NPS).
In addition to the deduction under 80C, the 80CCD(1B) allows an additional deduction of Rs. 50,000 over the 1.5 lakhs limit if you voluntarily enroll yourself in NPS.
Put your money in Savings accounts
The interest income from the savings account in a bank or Post office is also deductible under Section 80TTA of the Income Tax Act. However, a maximum of Rs 10,000 can be claimed as a deduction.
Keep in mind, that this deduction is NOT available on the interest income from Fixed Deposits, recurring deposits and corporate bonds. However, a deduction under 80C can be claimed on Fixed Deposits made in Post Office scheme (also known as Post Office time deposit if the scheme is for atleast five years).
Senior citizens (60 years or above) are allowed to claim a deduction of up to Rs 50,000 from bank Fixed Deposits or other deposits held in cooperative banks or Post Office.
Want Equity returns with low risk?
If you are one of the people who get shivers investing in the highly volatile equity markets, Mutual Funds are one of the safe ways to go.
Among several kinds of Mutual Funds you'll find in the market, Equity Linked Saving Scheme (ELSS) is the only kind that offers a deduction under section 80C. It is also the only option under 80C investments that lets you reap the benefits from equity markets.
Other benefits of ELSS include a short lock-in period, chances of earning better returns as compared to other 80C options like deposits schemes and PF. Although it is better to have a longer horizon period if you invest in ELSS to mitigate the effect of market volatility.
Education never goes to waste!
Your parents were right when they asked you to enroll in higher education courses. Apart from receiving that education, you also get a tax benefit if you took out an education loan.
If you have enrolled yourself in a high education course and have taken out a loan from a financial institution or an approved charitable institution to pay for it, voila! you are eligible for a deduction under section 80E. The interest paid on this loan is eligible for a deduction for a maximum of eight years from the year you start paying back the interest on this loan.
You can claim a deduction of the tuition fees paid for the education of two children in a school located in India under 80C. The spouse can also individually claim for two more children in case of more than two children in a family. However, the maximum deduction for an individual is the 80C limit of Rs 1.5 lakh. Single parents or unmarried guardians are also eligible to claim this deduction for their children.
Note: The total of all deductions under section 80C of the Income Tax Act are restricted to a maximum of Rs. 1.5 lakhs.
These are some ways, among many others, that can reduce your tax liability. Look out for part two of this series to know more ways to save those rupees in your pocket.