Income tax is feared by every earning individual but it is something that just cannot be ignored. The budget for the financial year 2018 will soon be out and like every year, people are hoping to get some concession in the tax payment. But even before that, we have brought you ways through which you can save Rs. 1 lakh using these 4 avenues.
The Income-tax Act, 1961 has various sections that taxpayers can use to reduce their tax outgo every year. And the most common sections in the Act that people use to save on tax are 80C, 80D, 80CCD (1B), and 24 (B).
However, each of these sections come with a maximum investment amount set by the government. Therefore, based on the tax rate of the individual – 5 percent, 20 percent and 30 percent (excluding education cess of 3 percent) — the maximum tax saved will be limited. For example, on an investment of Rs 1 lakh, someone paying 20 percent tax will save Rs 20,000, while someone in the 30 percent bracket will save Rs 30,000 annually.
Below are the details on how much tax you can save under each of these commonly used sections of the Income Tax Act.
Maximum tax saving under section 80C
The best and most popular avenue for tax-saving is section 80C of the Income Tax Act. Under this, an amount equal to the investment you make in specified instruments or expenses, up to a maximum of Rs 1.5 lakh in a financial year, reduces your gross total income (GTI) by the same amount. This, in effect, reduces your taxable income and reduces your tax liability. For example, if your GTI is Rs 10.5 lakh and you make an investment of Rs 1.5 lakh in a specified product, the GTI gets reduced by Rs 1.5 lakh and stands at Rs 9 lakh. Now, your taxable income becomes Rs 9 lakh on which tax has to be paid.
The amount of tax saved
- The amount of tax saved is equal to the amount invested multiplied by your tax rate. For instance, if someone paying 20.6 percent tax invests Rs 1.2 lakh in section 80C, the total tax saved will be Rs. 24,720. If he wants to maximize the tax saving allowed under this section (i.e., Rs 1.5 lakh), an additional investment of Rs 30,000 has to be made, and then total tax saved will be Rs 30,900 — the maximum for someone in the 20.3 percent tax rate.
- Investments which are eligible in the 80C basket includes life insurance premiums, equity-linked savings schemes (ELSS), Public Provident Fund (PPF), National Savings Certificate (NSC), five-year notified tax-saving bank deposits, five-year post office time deposits, Senior Citizens’ Savings Scheme (SCSS), Sukanya Samriddhi Account, Employees’ Provident Fund (EPF) etc.
- “The maximum limit under 80CCD(1) is 10 percent of salary and should not exceed the overall limit of 80C, which is Rs 1.5 lakh, which is only for investments in NPS, allows individuals, both salaried and non-salaried, a deduction not exceeding an amount equal to 10 percent of salary (includes dearness allowance but excludes all other allowance and perquisites). In case non-salaried individuals, the maximum deduction allowed is 20 percent of one’s gross income.
Maximum tax saving under section 80D
- The premium that is paid in interest of the health insurance policies for self, spouse, children, and parents qualify for deduction under the Section 80D of the Income Tax Act. Currently, on the premium paid, the maximum deduction that can be availed is Rs 25,000 a year, provided the age of the individual as well as that of the other family members insured is not above 60.
- If the premium paid by an individual is towards a health policy for his or her parent, who is a senior citizen above the age of 60, then maximum is capped at Rs 30,000. A taxpayer can, therefore, maximize tax benefit under section 80D to a total of Rs 55,000 if his age is below 60, while parents’ age is above 60.
- For those tax payers who are above the of age 60 and are also paying health insurance premiums for their parents, the maximum tax benefit under section 80D would therefore be Rs 60,000.
- Within the maximum limit of Rs 25,000 or Rs 30,000 (as per age), preventive health check-ups get a benefit of up to Rs 5,000. This means, if you pay a premium of Rs 20,000 towards med claim and undergo a health check-up costing Rs 5,000, a total of Rs 25,000 can be availed under section 80D.
Maximum tax saving under section 80CC (1B)
You can invest an additional amount of up to Rs 50,000 a year in NPS under section 80CCD (1B). This can be availed whether or not any deduction is allowed under section 80CCD (1). However, the same amount cannot be claimed under section 80CCD (1) and 80CCD (1B) together in the same year.
Maximum tax saving under section 24(B)
Buying a ready-to-move in property could be better than buying an under-construction one, although the latter could be less costly than the former. Currently, for a house which is self-occupied, one can avail tax benefit on the principal repaid as well on the interest amount.
You can claim a deduction up to Rs 1.5 lakh under section 80C for the principal amount repaid for a self-occupied house and the interest paid is deductible up to Rs 2 lakh per annul.. In an under-construction property, principal repaid does not get any tax benefit but the benefit on the interest paid can be availed in 5 annual installments after the possession of the property.
How much tax is saved:
The maximum tax that one can save under section 24 (for interest deduction up to Rs 2 lakh for a self-occupied house) for in the 5.15 percent, 20.6 percent and 30.9 percent brackets is Rs. 10,300, Rs 41,200, and Rs 61,800, respectively.