As December approaches, people begin making efforts to save on taxes, as December 31st marks the end of the year. Many want to plan trips or start something new in the upcoming year. Many individuals aim to reduce their income tax by investing in tax-saving instruments before this deadline. If you’re also thinking about ways to save on taxes but are unsure of what to do, don’t worry. Here are six easy tips that will help you save on taxes.
1. Tax-saving instruments
Every financial year, you can reduce your taxable income by up to Rs 1.5 lakh under Section 80C by investing in tax-saving instruments. If you choose the old tax regime, you will get the benefit of this deduction. However, if you choose the new tax regime, you will not receive this benefit. Some tax-saving investment products that offer tax exemptions under Section 80C are as follows:
- Employees Provident Fund (EPF)
- Public Provident Fund (PPF)
- Fixed Deposit (FD) with a tenure of 5 years or more
- Life insurance policies
- ELSS (Equity-Linked Savings Schemes) mutual funds
2. National Pension Scheme (NPS) and other pension schemes
Select appropriate components in the salary structure
It is beneficial for salaried individuals to assess the salary structure provided by their employer and select components that optimize tax benefits. For example, individuals living in rented houses can benefit from opting for House Rent Allowance (HRA), reimbursement of telephone/internet expenses, education allowance, food coupons, etc. By doing so, they can claim the relevant deductions/exemptions when calculating their taxable income.
3. Increase EPF contribution
Salaried individuals have the option to make additional contributions to the Voluntary Provident Fund (VPF) alongside their EPF contribution if they have not yet reached the investment limit of Rs 1.5 lakh. This additional contribution can also be deducted from taxable income under certain conditions. Furthermore, the employee’s contribution to the National Pension Scheme (up to 10 per cent of salary) can provide the employee with the benefit of additional deductions.
4. Tax benefits on home loans
If a housing loan is obtained from a financial institution, such as a bank, NBFC, or housing finance company, to purchase or construct a house property, the interest and principal payments on the loan can be claimed as a deduction from taxable income, within the limits specified under tax rules. However, this tax benefit is available only if the old tax regime is chosen. It’s important to note that the deduction on the principal repayment is subject to an overall limit of Rs 1.5 lakh under Section 80C.
5. Tax benefits from health insurance
Income tax rules provide a deduction on premiums paid for health insurance policies covering oneself, their spouse, dependent children, and dependent parents. Therefore, individuals can buy health insurance for themselves and their family members to cover medical expenses in case of health emergencies, while also availing tax benefits on the premiums paid for these policies. The deduction is allowed up to a maximum of Rs 25,000 for self, spouse, and dependent children, and Rs 50,000 for senior citizen parents.
6. Choose the right tax regime
The government introduced a simplified optional personal income tax regime from the financial year 2020-21. Under this regime, individuals or Hindu Undivided Families have the option to pay taxes at lower slab rates if certain conditions are met. This regime does not offer certain exemptions and deductions. Individuals should compare the tax payable under both the existing and new tax regimes and choose the one that is more beneficial for them.