Ways To Reduce Income Tax India - How to Reduce Income Tax

 mymoneykarma is here for you. Whether you’re a veteran taxpayer or a newbie - you need to plan your investments correctly to reduce income tax. The income tax laws may appear intimidating but behold and read more to unveil 25 amazing ways to save more.

Little efforts and voila! Let's look at the ways to reduce income tax that can help you save a chunk of your salary to tick off the next thing from your checklist.

1. Tuition Fees

Income Tax laws provide the opportunity to compensate for the expenses you incur on your kid's tuition fees by including them while filing ITR. You can claim this deduction through section 80C of the Income Tax Act and reduce income tax.

2. Deduction on Rent Paid (apart from HRA)

As per the provisions mentioned in section 80GG of the IT Act, you can still get a tax benefit and need not be flustered if you don’t get HRA in your salary. You can claim a deduction of up to Rs.5000 a month under this clause.

3. Repayment of Home Loan

Did you know that your home loan can help you save income tax?

Fascinating, right? You can get tax benefits on both principal and interest components of your home loan installments. You can claim these deductions under section 80C, section 24, and section 80EE of the IT Act.

4. Repayment of Education Loan

Most youngsters resort to education loan to curb the rising costs of educational courses. Such deductions are also available on your education loan EMIs and can help you save a lot. All these deductions are available under section 80E to provide you a tax benefit for interest paid on education loan.

5. Pension Funds

Did you know that your retirement plan can also save you from the burden of income tax?

One of the best ways to secure your life after retirement is to start investing in pension funds. And investing in pension funds helps you to reduce income taxes. You can enjoy such tax benefits under section 80C / 80CCC / 80CCD(1) / 80CCD(1B) / 80CCD(2).

6. Health Check-up & Medical Insurance

Health is wealth!

It is genuinely applicable when you are hunting for means to save income tax. Jokes apart - according to the income tax laws, these expenses can help you get a deduction of up to Rs 60,000 under section 80D of the Income Tax Act if the necessary documents are provided.

Now let’s move on to some lesser known tax -saving hacks.

7. Medical Expenses of Disabled Dependent

If you have a dependent person in your family who is suffering from a disability, then the IT laws let you avail tax benefit under section 80DD. This deduction is meant to help you take care of your disabled family member who is dependent on you, and it can also help you save up to Rs 1,25,000 from your taxable income.

8. Medical Expenses of a Disabled Individual

Similar to deductions under section 80DD, individuals who are suffering from a disability also get to avail tax benefit under section 80U. These provisions help you save up to Rs 1,25,000 from your taxable income and reduce income tax.

9. Treatment for Specified Diseases

Specific diseases or ailments, like HIV-AIDS or cancer, also let you avail tax benefit under section 80DDB based on expenses incurred.

10. Charitable Donations

If you willingly want to help the people in need, then there is another reason to rejoice. While donating, you not only get to achieve your inner peace but also get to save income tax. Several types of donations are entirely exempted under Sec 80G of the Income Tax Act. However, there is an upper limit on cash donations and capped at 10% of the gross total income.

11. Donations for Scientific Research or Rural Development

Any contribution that you make for any scientific research or rural development is also eligible for deduction under section 80GGA.

Now, let's delve into some of the best and most popular tax-saving investments under 80C.

12. EPF

Most employers open an EPF account for you, which means that you are already contributing to your provident fund. Hence, the contribution that you make to your EPF can be claimed as a deduction under section 80C to save income tax.

Those who do not have EPF deductions or those who wish to invest more than the customary EPF deductions may choose to open a voluntary provident fund account (VPF). You can voluntarily invest more (up to 100% of your basic salary + DA). VPF earns you a tax-free interest at 8.4%, and this can help you save a significant amount.

13. PPF

Other than PF, another option is to invest in public provident fund or PPF. Just like PF, you can get a tax deduction on your contributions while the resulting interest income & maturity amount stay exempted from tax.

14. Sukanya Samriddhi Scheme

This scheme is only available for parents or guardians of a girl child and is one of the best tax saving investment options and that help you to save considerably.

15. NPS

NPS or National Pension Scheme is a saving scheme offered by the postal department. It is considered to be a saving scheme with zero risks and is also eligible for 80C deduction.

16. FDs and ELSS

Bank FDs that have a lock-in period of 5 years and certain Mutual Fund SIPs that have a 3-years lock-in period are eligible for income tax deduction under section 80C.

17. Post Office Deposit Account

You can also open five years fixed deposits with any branch of Indian Post Office, and it would work like any other fixed deposit account. But, there's a catch - this deposit account will have a lock-in period of five years, and it offers double the benefit of return on investment. A sure shot way to save income tax and grow your money.

Salaried individuals get access to these additional tax benefits:

18. HRA Deduction for Rent Paid

You can claim the HRA allowance in your salary as a tax deduction if you live in a rented apartment.

19. LTA Deduction for Travel Expenses

LTA can fetch you additional tax benefits. The LTA concession can be claimed for two journeys in a tenure of 4 years, and this can be claimed as a deduction.

20. Tax Benefit on Gratuity

Gratuity received on retirement or termination or on becoming incapacitated or any amount received by the widow of the deceased employee, children or dependents is tax-exempt up to Rs 10,00,000. But, this is subject to various clauses.

21. Meal Coupons

Various employers provide meal coupons like Sodexo or Food cards to their employees.  These aren’t taxable up to Rs 2,600 a month, which helps you save income tax.

22. Medical Bills and Daily Travel Allowance

A Standard Deduction of Rs 40,000 has replaced the erstwhile conveyance allowance & medical reimbursement, and the change in the law has been applicable since FY 2018-19.

23. Car Leased by Employer

Several employers offer car purchase or services to their employees, which can help them save tax and money on several fronts.  However, those who avail of this facility cannot take the benefit of daily travel allowance.

24. Internet or Phone Expenses

Expenses incurred in using the phone and internet devices provided by the employer can be included while filing ITR and can be claimed to reduce income tax.

25. Salary Restructuring

While switching jobs, it is always a great idea to restructure your salary to maximize the take-home pay and minimize the tax outgo. 

Section 80C - 6 Fixed Income Investments Under Section 80C to Save Tax in 2020

 Public Provident Fund (PPF)

PPF is a favorite mode of investment among the Indian middle-class. It’s considered to be a safe investment that offers an interest rate of 8%.

You may choose to invest a lump sum or make periodic contributions to your PPF account. You can claim a tax deduction for investments of up to Rs 1.5 lakh in a fiscal year under section 80C of the Income Tax Act. PPF is a safe investment avenue as the government reviews it. Currently, the investment, interest and maturity proceeds in PPF are entirely tax-free. New investors can buy this scheme either at a post office or any designated branch of a public sector bank that provides this facility. Also, there are a few private banks that offer the facility to invest in PPF.
Sukanya Samriddhi Yojana (SSY)

The current interest rate offered in SSY is 8.5 percent. You can make a contribution of up to Rs 1.5 lakh per account in a financial year under section 80C. However, there’s a catch. Sukanya Samriddhi Yojana is applicable only to the parents of a girl child. This scheme can be availed for a maximum of two daughters who are not more than ten years of age during the time of opening the account. In this scheme, you can claim a deduction for investments up to Rs 1.5 lakh only in a fiscal year according to section 80C of the Income Tax Act. There are no restrictions on the number of deposits that you can make either in a month or a financial year. The interest rate of SSY is linked with government bond yield and is subject to change every quarter as per the discretion of the government. You can utilize the maturity proceeds of this program for the education and wedding expenses of your daughter.

Voluntary Provident Fund (VPF)

The current interest rate offered by VPF schemes is 8.65%. You can contribute your entire basic salary and DA (dearness allowance) to this fund. However, you can only claim a standard tax deduction for investments up to Rs 1.5 lakh in a fiscal year under section 80C of the Income Tax Act. Hence, if you have already crossed your 80C limit through other investments or expenditures, such as EPF, PPF, ELSS, FDs, etc., then you won't be able to use the additional VPF contribution to save more tax amount.

If you’re wondering how VPF and EPF are different, then let’s help you understand. Unlike EPF, VPF facilitates the employees to voluntarily deposit beyond a fixed contribution limit in their PF accounts. However, in VPF, it is not necessary for the employer to make a matching contribution as it is mandatory in EPF. VPF also has lock-in conditions until retirement or resignation, whichever is earlier.

VPF is an excellent investment tool for saving tax under section 80C as it gives a tax-free return. Further, the gains are risk-free since the government guarantees them. VPF offers you the dual benefit of a tax saving scheme and a retirement planning scheme, and salaried employees should allocate a higher proportion of their salary to VPF for substantial tax-saving.
Senior Citizens' Saving Scheme (SCSS)

The current interest rate offered by SCSS is 8.7%. A maximum contribution of Rs 15 lakh is allowed in this scheme. As a  senior citizen, you can claim a deduction for investments up to Rs 1.5 lakh in a fiscal year under section 80C. SCSS is a tax-saving instrument for people who are above the age of 60. However, if you have opted for voluntary retirement, you can start investing in SCSS even at the age of 58. On October 3, 2017, the Ministry of Finance announced that the minimum age limit for retired defense personnel is reduced to 50 years for investing in SCSS. This scheme has a lock-in period of five years. And, if you want to extend the tenure further, you can continue it for another three years. No partial withdrawal is allowed before the expiry of the lock-in period. However, in case of an emergency, you can prematurely close the account with a penalty levied on the withdrawal.
Tax-Saving Bank Fixed Deposits

The current interest rate offered in tax-saving bank Fixed Deposits (FD) is around 7-8.25%. The maximum amount that you can invest in this scheme is Rs 1.5 lakh, for which you can claim a deduction in a fiscal year under section 80C. The tax saving bank fixed deposits have a lock-in period of 5 years. This scheme is highly preferred for investments due to the assurance of capital preservation and returns as compared to equity investments in terms of tax-saving. It is convenient for the last minute tax savers, and the interest rates on this scheme are reviewed and changed periodically by the banks.
National Saving Certificate (NSC)

The current interest rate offered in NSC is 8%. There is no cap on the amount of investment that you can make in NSCs. However, you can only claim a deduction of Rs 1.5 lakh during investment declaration. Currently, National Savings Certificate is available for five-year subscriptions only. The interest rate is reviewed every quarter by the government and modified accordingly. Although interest earned from National Saving Certificate is taxable, the interest amount is considered re-invested (except in the last year of tenure) as it is not paid back to the investor until the maturity of the instrument. Hence, the re-invested interest component also qualifies for deduction under Section 80C of the income tax act. The interest earned in the final year of the tenure is not considered re-invested and is paid back to the investor for that year along with the principal and accrued interest in the previous years.