Simple Income Tax Saving Guide
If you are really interested about getting rich, one thing you cannot afford to ignore is the tax laws of the country. Tax laws are deliberately kept wrapped in a shroud of jargon and terminology in order to confuse people. However, they are not that difficult to grasp. After reading this article, you will learn how to take advantage of laws to reduce the amount you pay as income tax..
Simply defined,
Less Taxes = More Money in your Pocket
You have to make sure that you pay the Government as less tax as possible (legally).
You can reduce your tax by claiming for deductions and allowances. The Government has
conferred tax benefits on certain products in the hope of getting you to invest in them. Here is a summary of the deductions and allowances you can take advantage of, to reduce your taxes.
Deductions and Allowances
1. Section 80C : This is the best known tax saving deduction. It allows you to claim tax deductions on 1,00,000 Rupees of your income. If you fall in the highest slab (30%), it means you can save 30,000 per year utilizing this deduction. If, you invest 1,00,000 of your income in certain financial instruments, you simply remove that 1,00,000 Rupees from your taxable income and calculate taxes for what is left. These financial instruments are mostly related to long-term retirement planning. Some of them, like ELSS are high-return investments themselves.
2. Section 80CCF : Apart from the 1,00,000 deduction under section 80 C, you can further deduct 20,000 per year if you invest them in Infrastructure Bonds. This was introduced in Budget 2010. (Now withdrawn)
3. Section 80D: You can still remove more deductions if you or your family are availing of medical insurance and paying premiums (different from life insurance premiums which are covered under Section 80C). A maximum of 15,000 can be deducted from the taxable income if you are paying premiums for yourself or your spouse. A further 15,000 can be deducted if you are also paying premiums for your parents (not your spouses’ parents). If your parents are senior citizens, this amount is increased to 20,000. Therefore, you can claim maximum deductions of 35,000 per year.
4. Section 80DD: You can claim a lumpsum deduction (deduction regardless of what you spend) of 50,000 or 75,000 from your taxable income if you have a disabled dependent whose healthcare costs you need to take care of. You can also claim for deductions if you have purchased a life insurance policy in your name from certain insurers which will pay the disabled dependent upon your untimely death. The deduction is 50,000 for a disabled person and 75,000 for a severely disabled person.
5. Section 80DDD: The amount you spend for the treatment of certain diseases for yourself or your relatives is subject to deduction. The maximum amount that can be deducted in this way is 40,000 Rupees. This is increased to 60,000 Rupees if the amount is spent on the treatment of a senior citizen.
6.Section 80E: If you are repaying an education loan for certain full-time courses , you can claim tax deductions on the interest you are paying towards the loan. As soon as you start the repayment, the interest amount will be deducted from your taxable income for upto 8 years. There is no upper limit to this deduction. The entire interest paid towards the loan will not be considered for taxation.
7.Section 80G: If you have donated money to a charitable institution (philanthropy) , you can remove that from your taxable income. Only certain institutions qualify. Some of them accord you a 100% tax deduction whereas some of them grant you a 50% deduction. The maximum you can remove in this way is 10 % of your adjusted taxable income (Taxable Income – all deductions claimed except for 80G)
8. Section 80GG: You can claim deductions if you are living in a rented house and have to pay rent and your salary does not include a HRA (House Rent Allowance). A maximum of 24,000 can be claimed in this way although only if certain conditions are fulfilled.
9.Section 80U: This is similar to Section 80DD except that the disabled person in question is now you. A similar lumpsum amount of 50,000 or 75,000 can be claimed.
Besides the above Chapter VI A deductions, you can also claim exemptions on certain other expenses upto a limit.
1. Exemption of House Rent Allowance: If your employer pays you a HRA (House Rent Allowance) as a portion of your salary, you can claim exemption upto a certain limit on that.
2. Exemption of Leave Travel Allowance/ Concession : If you are salaried, get LTA / LTC, and actually avail of leave in order to travel, you can claim the LTA / LTC as exempt from income tax under certain conditions and upto a certain limit.
3. Exemption on Interest paid on a Home Loan: If you are repaying a home loan, you can claim exemption on the interest amount of the loan paid as well as any pre-EMI amount that you have paid.
4. Exemption of Professional Tax: If there is a tax levied on your profession, it will be exempt from taxation, whether paid by you or your employer.
5. Exemption of Entertainment Allowance: If you are a Govt. employee, you can claim tax exemption on the Entertainment Allowance paid to you. Deduction for Entertainment allowance being minimum of the Actual Entertainment Allowance , Rs.5000/- or 20% of Basic Salary.
This article was only meant to give you a gist of how you can save on your taxes if you know the right ways to reduce your income considered for taxation.
