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The financial year is nearing its end in a couple weeks. If you have not done your tax planning yet, it is not too late. The Income Tax Act, 1961 offers several options that may reduce your tax liability during the year.
Here are six tips that will help you save taxes.
1. Rent payments
If you live in a rented house in the location of your workplace, you may be able to save tax on the lease amount. Employers provide House Rent Allowance (HRA), which is deductible from your gross income. The deduction is whichever is the lowest of the following:
- Actual HRA provided by the employer
- 50% of basic salary plus dearness allowance (DA) if living in metros or 40% of basic salary plus DA for other cities
- Actual rent paid minus 10% of basic salary plus DA
2. Investments under Section 80C
Section 80C of the Income Tax Act, 1961 allows deductions for up to INR 1.5 lakh per annum. Several tax saving investments are available under this section. Some of these include Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS), National Saving Certificate (NSC), Time Fixed Deposit (FD), and National Pension System (NPS) etc. An amount of up to INR 1.5 lakh per annum towards home loan principal repayment is also available under Section 80C as deduction.
Each of these options has certain terms and conditions, such as lock-in period, withdrawal limits, and interest / returns. It is important that you understand these factors in order to choose the most appropriate tax saving options based on your personal needs.
3. Home loan interest
The interest paid towards the home loan is eligible for tax benefits under Section 24 of the Income Tax Act, 1961. The deduction is limited to a maximum amount of INR 2 lakh per year. An additional deduction of INR 50,000 was provided from the financial year 2016–17 for loans sanctioned between 1st April 2016 and 31st March 2017 for a home loan amount up to INR 35 lakh where the value of the property is less than INR 50 lakh.
4. Medical insurance
In addition to the deduction of INR 1.5 lakh under section 80C, you are able to save tax for the premium paid towards medical insurance. The deduction is available for self, spouse, dependent parents, and children. The maximum deduction is limited to INR 25,000 per annum for self, spouse, and children. A further deduction of up to INR 25,000 for health insurance premium of dependent parents is allowed. If your parents are aged over 60 years, the maximum deduction allowed increases to INR 30,000 per year.
5. Medical expenses and leave travel allowance
Certain personal expenses are exempted from your gross taxable salary. It is recommended you save all your medical bills during the year. You may enjoy tax-free medical allowance for up to INR 15,000 per annum for actual medical expenses incurred supported by medical bills as proof.
Your employer may provide leave travel allowance (LTA). This is tax-free if you meet the following conditions:
- You must travel during your leave
- The travel is restricted to domestic locations
- You must use the shortest route
- LTA may be claimed twice in four-year blocks
- You may claim LTA for economy class airfare or first-class air condition fare by train
6. Charitable contributions
If you donate towards charity, you may claim this amount towards tax deductions. However, not all charitable organisations are included and you must check for eligibility before making the claim. Donations to political parties, certified non-government organisations (NGOs), and Prime Minister Relief Fund are eligible for 100% tax deductions. Contributions made to certain scientific institutions and religious bodies are also eligible for tax rebates.
One of the most important tips on how to save tax is to provide a timely declaration to your employers. Companies pay quarterly advance tax and deduct your Tax Deducted at Source (TDS) every month. This amount is based on your estimated tax liability during the financial year. In case, you do not provide a declaration at the beginning of the year, the projected taxes may be high. This will result in higher TDS deduction each month.
Moreover, if you do not provide a timely declaration on your various expenses and investments, the TDS deduction may be higher than your actual annual tax liability. Although you may claim for a refund while filing your income tax returns, you end up paying extra taxes for the time being. Therefore, consider the aforementioned tips and declare your tax planning at the start of the financial year.