There are many provisions under various sections of the Income Tax Act such as section 24, 80C,80D,80E, 80EE, etc. that can help you save from paying lacs of rupees as taxes. Most of these provisions provide for investment options that generate tax-free income.
The income tax laws not only state the formula to calculate your taxable income but also provides for numerous exemptions and deductions that help you keep a major portion of your hard-earned money all for yourself. Various sections of the Income Tax Act, 1961 offer tax deductions over several investments made by the tax-payers. Based upon these legislations, there is a broad variety of tax saving options available to you, that not only help you save taxes but also generate tax free income. In this article, we have provided a detailed description of plethora of such investment options that will save you from giving away a major portion of your income in taxes.
Deduction under section 24 (Home Loans)
When it comes to investment, the first thing that comes into an individual’s mind is property. Investing in a residential property by borrowing from financial institutions is a very good tax saving option. There are a number of home loan options available in the market for raising the requisite capital.
Section 24 of the Income Tax Act offers a yearly tax deduction on the interest payments made towards housing loan. In case of a self-occupied property, the deduction offered is capped at Rs. 2 lakhs and claims can be made only if the house is constructed completely within five years of borrowing the loan. For a property given out on rent, there is no such compulsion of completing the construction. In addition to this, there is also no cap on the amount claimed as a tax deduction on interest payment in case of rented-out properties. Total interest paid on the home loan on that residential property can be deducted.
Deduction under Section 80C
This section is the favourite of all tax-payers. It enlists a range of investments over which an individual can claim tax deductions. It is to be noted here that the maximum deduction that can be claimed in one financial year over all the options listed under section 80C is capped at Rs.1.5 lakhs. If you have claimed Rs. 1.5 lakhs as deduction over any of the options under section 80C in a financial year no further claims can be made under any circumstances in that particular year. The deductions offered under the section include:
Public Provident Fund
Public Provident Fund or PPF has been the favourite investment avenue for individual tax-payers. Backed by the government, a PPF account can be opened at a bank-branch or post-office, at any age by an individual in his own name or for a minor of whom he is a legal guardian.
A PPF account can be transferred from bank to post-office or vice-versa. It is opened for a period of 15 years and the term can be extended indefinitely, but for five years at a time. In order to keep the account active, a minimum of Rs. 500 is to be deposited every year whereas the maximum amount that can be deposited in one financial year is capped at Rs. 1.5 lakhs.
The interest rate is revised by the Ministry of Finance after every quarter and is currently placed at 8.5% per annum. The interest earned at PPF is exempted from any kind of taxation.
A PPF account can be terminated prematurely only under two circumstances. If an account holder or any of his family members is suffering from a life-threatening disease, then account can be withdrawn on providing a supporting medical evidence. The account can also be terminated prematurely for the higher education of a minor account holder. Under both these circumstances, one percent will be deducted from the applicable interest rate for the account at the time of withdrawal.
Employees’ Provident Fund
Just like PPF, an Employees’ Provident Fund or EPF along with helping a salaried individual to save tax by means of involuntary savings also serves as a source of tax-free income. It is mandatory for the employee to contribute about 12 percent of his salary towards his EPF account. The employer also makes an equal contribution, however, only 3.67% of this goes into the EPF account. The remaining 8.33% of the employer’s contribution is directed into the Employees’ Pension Scheme.
An employee is permitted to increase his contribution to the EPF and can even contribute 100% of his basic salary plus dearness allowance, it then becomes the Voluntary Provident Fund or VPF.
Only the employee’s contributions towards the EPF account is entitled to enjoy yearly tax benefits of up to Rs. 1.5 lakhs under section 80C. The employer’s contributions do not enjoy these benefits. The interest rate for EPF is currently 8.55% and the amount earned as interest is exempted from any taxation given that the employee remains under employment for five or more consecutive years.
One can withdraw from EPF either completely or partially. The partial withdrawal can be made during certain circumstances such as marriage of self or of a family member, higher education, purchase of property, construction and renovation of house, repayment of home loan and retirement. The complete withdrawal can be made either on retirement or if the account holder has been unemployed for more than two months. A certification from a gazetted officer is required in the case a person claims to be unemployed for 2 months.
Equity Linked Savings Scheme
Equity-linked savings schemes or ELSS can be understood as a tax-saving mutual fund scheme. It is offered at every mutual fund house. However, unlike mutual funds, the dividend income for ELSS comes from profit generated by the company and not from NAV. Thus, the returns are dependent on the equity market and are therefore not fixed. The investments made in ELSS are eligible for annual tax exemptions mentioned under section 80C.
The lock-in period for funds invested in ELSS is three years and the amount cannot be withdrawn before completion of three years. The funds received on completion of three years are classified as long term capital gains and are subject to be taxed at a rate of 10%. However, if the gains are less than Rs. 1 lakhs then they are exempted from taxation.
UNIT Linked Insurance Plan
Unit Linked Insurance Plan or ULIP is an integrated plan that offers investment options for capital markets alongside life insurance cover. It is a fusion of protection and savings. The investment vehicle is similar to a mutual fund in both structure and function.
ULIP services are available at various banks and insurance companies such as HDFC, Kotak Life, Aegon Life, ICICI, SBI Life, PNB MetLife, IDBI federal and IndiaFirst. An individual seeking ULIP is required to pay premiums in monthly, annual or semi-annual instalments. A beneficiary need to specify the investment options where his funds are to be directed in proportion.
ULIP can last for a period of 15 or 20 years but the lock-in period is only five years. The beneficiary can leave the plan any time after five years. The funds received on quitting the plan are totally tax-free.
Life Insurance Plans
Insurance plans are one of the favourite tax saving options in India. A beneficiary seeking an insurance is required to pay a fixed annual premium up to a specific period mentioned under the insurance plan. The premium amount depends upon the age and the time duration of the plan coverage.
Under the section 80C of the Income Tax Act, life insurance plans enjoy an annual tax exemption of 10% of the premium paid. The maximum amount of exemption amount is fixated at Rs. 1.5 lakhs. The funds received on the maturity of an insurance plan are completely exempt from taxation.
Repayment of Principal on Home Loans
While section 24 deals with tax benefits on interest payment, the repayment of principal amount falls under section 80 C according to which a borrower can enjoy yearly tax deduction of up to Rs. 1.5 lakhs. However, there is one condition for availing these benefits that the house must undergo complete construction within five years of taking the loan.
Sukanya Samriddhi Yojana
Launched under the banner of “Beti Bachao, Beti Padhao” campaign, Sukanya Samriddhi Yojana (SSY) is aimed at benefiting the girl child. Under this scheme, small deposit accounts can be opened at any bank branch or post-office for a girl who is under the age of 10 years with a deposition of at least Rs. 250.
A family can open a maximum of two SSY accounts, one account for each girl child. The amount that can be deposited in a SSY account every year ranges between Rs. 250 and Rs. 1.5 lakhs. Such depositions enjoy enjoy tax deductions under section 80 C.
The rate of interest offered for an SSY account is currently 8.5%. It revised by the Government of India every quarter.
A SSY account can continue for a maximum of21 years and gets dissolved on the marriage of the girl. Partial withdrawal of 50% can be made for the higher education of a girl child after she reaches an age of 18 years. All the returns from an SSY account are exempted from any kind of taxation.
National Saving Certificate
A National Saving Certificate (NSC) is a low-risk savings bond and is available at post-offices. A person can purchase a NSC in his own name, for a minor or jointly with another adult. NSCs are currently available for two fixed maturity periods, for five years and for ten years. There is no limit on how many NSCs can be bought but only a maximum of Rs. 1.5 lakhs invested for NSC are eligible as a tax deduction in one year.
A NSC is only available for individual residents of the country. Hindu undivided Families and NRIs cannot purchase the. However, if a person holding a NSC moves abroad and becomes an NRI, he is allowed to hold the NSC till the time of maturity.
The interest rate on NSC is revised after every six months by the Government of India and is currently fixated at 8% per annum. The interest earned every year is added back to the original investment and therefore, deductions can also be claimed over the interest amount earned in that year as it is compounded to the investment amount.
Along with other investments mentioned under section 80C an individual can also avail tax deductions for the tuition fees that he pays for the education of his children provided that the overall limit of Rs. 1.5 lakhs is not breached. It is to be noted here that an individual can claim deductions only for the education of his children and not for anybody else’s education. Also, a single tax-payer can avail deductions for education of only two children.
Tax Saving Fixed Deposits
Tax saving fixed deposits are similar to regular fixed deposits with one difference that they come with a lock-in period of five years. The amount contributed towards these deposits is eligible for claiming annual tax deduction of up to Rs. 1.5 lakhs under section 80C. These deposits can only be made by individual resident tax-payers at any bank with an investment of at least Rs. 1,000. The interest rate offered over fixed deposits differs from bank-to-bank. The interest earned is liable to be taxed.
Deduction under section 80CCC AND 80CCD (Pension Funds)
Section 80CCC provides for extension of the tax deduction of Rs. 1.5 lakhs annually under section 80C to include pension funds. Any amount contributed by an individual towards a pension fund is eligible for claiming annual tax deduction which amounts to 10% of his basic salary or 20% of his gross total income or Rs. 1.5 lakhs, whichever is lesser.
The accounts opened under the National Pension Scheme(NPS) and Atal Pension Yojana (APY) also enjoy tax benefits. According to section 80CCD, an individual can claim a maximum of Rs. 50,000 as deduction from taxes in a year for the amount he has deposited in NPS and APY accounts.
Furthermore, section 80CCD also states that an employer contributing towards employee’s NPS account can claim 10% of his basic salary as tax deduction.
Deduction under section 80D (Medical Insurance)
Section 80D talks about tax benefits available over premium towards medical insurance. A deduction of not more than Rs. 25,000 is applicable for premium payment on medical insurance for self, spouse or dependent children. For medical insurance of parents (under the age of 60 years), an additional deduction of up to Rs. 25,000 can be claimed. If the parents are above the age of 60 years, the additional deduction can amount up to Rs. 50,000. In case, a tax paying individual as well as his parents are older than 60 years, then the deduction can amount to as high as Rs. 1 lakh.
Deduction under Section 80E (Education Loan)
This section deals with tax deduction that can be availed over the interest paid towards an educational loan starting from the time of beginning of repayment. There is no ceiling over the amount of deduction.The deduction can be availed for a maximum time period of eight years and the benefits end as soon as the loan gets repaid completely.
Deduction under Section 80EE (First Time Home Buyer)
Alongside deductions mentioned under section 24 and section 80C, a person who is buying a house for the first time by means of taking a loan is offered with some additional benefits. First time buyers who took a loan between 1st April 2016 to 31st March 2017 are entitled for an additional annual tax deduction amounting up to Rs. 50,000 till the complete repayment of the loan is made.
Deduction under section 80G
Section 80G provides for tax deduction on donations made towards charitable organizations. 50% or 100% of the donation amount can be claimed as a tax deduction based upon the kind of charitable organisation towards which donation was made.
Deduction under section 80TTA (Interest on Savings Account)
As per section 80TTA, the interest income of up to Rs. 10,000 from savings account exempted from taxation. It is available for both individuals as well as Hindu Undivided Families.
There is a plethora of legitimate investment options available in the financial market that help you save taxes in a lawful manner. Some of these sources, as has been discussed in the article, can also serve as a source of tax-free income generation.