“The hardest thing in the world to understand is income taxes.” This is a quote from Albert Einstein, who came up with, probably, the most difficult theory in the previous century — the theory of relativity. Even he found income tax confusing. That said, some simple hacks could help you reduce your tax deductions and increase your take-home salary. Let’s take a peek at some tax saving tips. But before that, let’s see how tax deductions reduce your take-home salary.
- Understanding your salary
Say, your monthly salary is Rs. 1 lakh. Your salary, after taxes, would be less than Rs. 85,000 every month. But, the taxed amount, which is Rs. 15,015 to be precise, could be reduced to Rs. 10,800. Let’s see how. You can invest up to Rs. 1.5 lakh per financial year to claim tax deductions under Section 80C of the Income Tax Act. By using the current tax rates, your take-home salary would rise to more than Rs. 89,000.
- Mutual Funds among other options
You can claim tax deductions for life insurance premium payments or contribution towards provident fund under Section 80C of Income Tax Act. You can even claim tax deductions for repaying your housing loan or for tuition fees of your children. Of all the available options, mutual funds are investments with the potential for higher returns.
- Mutual funds are designed to reduce taxes
Though investing Rs. 1.5 lakh could save you taxes, you might still have to pay capital gains tax on the returns you earn. But these taxes can be avoided by investing in equity linked savings scheme (ELSS). ELSS schemes are tax-saving mutual funds that invest in the stock market with a lock-in period of 3 years. The primary advantage is that you wouldn’t have to pay capital gains tax on the returns you get from ELSS.
- Why ELSS is a better tax-saving option?
ELSS has given higher returns compared to other tax-saving investment avenues. Your money would have grown by 12.59% every year if you had invested in an ELSS three years back. On the other hand, Public Provident Fund (PPF) grew at 8.35% over a similar time. The other advantage is that you can redeem your ELSS investment after three years, whereas it is 15 years for PPF. Moreover, ELSS invests in stocks. That means you can spread your investments while saving taxes.
Bottom line
With some investments under Section 80C such as tax saver mutual funds, you could substantially increase your take-home salary. You could invest in ELSS if you want higher, tax-free returns while claiming your tax deductions for three years, the duration of the lock-in period.
Click to know more and invest in Franklin Templeton ELSS.
References
http://www.incometaxindia.gov.in/pages/tools/income-tax-calculator.aspx
https://cleartax.in/s/income-tax-slabs
https://cleartax.in/s/elss