5 Ways of Saving Income Tax in 2021

Feb 17, 2021

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With the end of financial year 2020-21 approaching and Income tax payments coming up; either you have a well-planned tax-saving strategy or you might end up paying a large amount of tax due to the lack of financial planning.

Most of us tend to remain relaxed at the beginning of the financial year but begin to panic towards the end of financial year. Filing our income tax at the end of financial year becomes a daunting task and the hassle revolves around submission of insurances, rent receipts, bills, investments, and other required documents.

This year to save yourself from financial stress and taxes, let's analyze all the instruments available to you for tax-saving.

The Income Tax Act, 1961 has various sections that taxpayers could utilize to reduce their taxable amount every year. It allows for specific deductions, which you can claim while filing IT returns. The most common sections in the Act to save tax are 80C, 80D, 80CCD, etc. However, each section has a maximum investment amount set by the government. Hence, there is a limit on the maximum amount of tax you can save.

The few important aspects on the tax front of the Union Budget 2021 are as follows:

  • No type of tax hike

  • No income tax filing required for senior citizens above 75 years of age  whose only source of income is pension and interests

  • ITR forms would have pre-filled information on dividend, interest and capital gains to ease the compliance for individual taxpayers

Eventually, we all look for various options to save some extra money and saving on taxes is one way to do it. In order to understand how much you could save on taxes with proper financial planning, you need to be aware of different tax-saving options. You may tend to invest in particular investment avenues for the future and with the right investments; you can save on income tax significantly.

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Tax liability is usually a kind of burden on taxpayers, whether it's the salaried class or non-salaried class individuals. Here we have mentioned some insights on ways to reduce your income tax in 2021:

1. Get Insurance cover

Investing in insurance policy for yourself and your family have many benefits and one of them is tax-saving. Under section 80C of the Income Tax Act, 1961, you could reduce the amount you invest in insurance policy, as there are deductions on the premiums and payouts of life or term insurance plans.

Premiums paid towards the life insurance are paid back in large lump sum or partially, as decided earlier in case of demise of the insured person, and it will be tax-exempt, if the amount is under Rs 1.5 lacs.

Notably, medical care is accelerating rapidly, and you must hold a health insurance cover. You could save your taxes on health insurance, as per section 80D of the Income Tax Act and the upper limit for this deductible amount is Rs 25,000/- and could extend to Rs 50,000/- for senior citizens. Health insurance will ensure you hold an adequate amount for any medical emergencies if and when these arise.

2. Investment avenues

While you invest into various market-linked or other investment options, it offers you capital appreciation over time and helps you save on your taxes. Most common tax-saving option in mutual funds is Equity Linked Savings Scheme (ELSS), which comes with a lock-in-period of 3 years, lesser compared to fixed deposits and Public Provident Fund (PPFs).

Other options like fixed deposit, post office time deposit, and national saving certificates (NSC) are non-market linked tax-saving investments. And the market-linked instruments offer tax-benefits on capital gains as well.

ELSS has a lower lock-in-period and it is one better option for investing in mutual funds for tax-saving. Whereas for conservative investors, the government backed tax-saving scheme NSC and the principal invested in it qualifies for tax exemption up to Rs 1.5 lacs. The investment returns on PPF accounts are tax-free, you can open a PPF account at an authorized post office or bank and it is suitable for investors who avoid volatile equities or mutual funds.

Start retirement saving, you may feel it's too early to plan for retirement, but it's never too soon to start retirement planning. Under section 80C, pension plans are eligible for deductions and pension plans hold various options. However, the payouts received from the pension plans as lump sums or annuities are taxable.

Under section 80C, you could claim for deduction from these different investment options of FD, NSC, ELSS, ULIP, EPF, PPF, etc. only if the total amount does not exceed Rs 1.5 lacs per annum.

3. Education loan

A quality education is essential in today's dynamic and competitive environment. However, the cost of education is rising every year and parents and/or students take education loans for higher studies for a bright future.

Thankfully, an education loan is also a tax-deductible instrument and eligible for deduction under section 80E of the Income Tax Act, 1961. If you have taken an education loan, then the interest paid on that education loan is deductible and this benefit is only for individuals and not HUFs. But, there is no such limit on the amount that is allowed for deduction; the total interest paid will be allowed as deduction under section 80E.

4. Voluntary Donations

Many of you at some point in your lives have felt to donate to a cause you sincerely believe in, to make a difference and contribute towards the society.

Under Section 80G, of the Income Tax Act contributions made to the relief funds and charitable institutions can be claimed for deduction. Any taxpayer individual, company, firm, etc can claim it.

The donations made should be via cheque or draft if exceeding Rs 2000/- to be considered for tax deduction. The ministry of finance has specified some organizations that one can make donations to and some donations get 100% deduction while some get 50%, depending on the eligibility of donations made.

5. Home loan

To invest in a house or buy a dream home is a long-term financial goal many of you persist, and this comes with multiple tax benefits that significantly reduce your taxable amount. You must have seen government initiatives that encourage citizens to invest in a house like Pradhan Mantri Jan Dhan Yojana to bring down the issue of accessibility and affordability.

If you have opted for home loan, you can claim the principal amount of the loan repaid in the current financial year for deduction under section 80C and the maximum limit for deduction is Rs 1.5 lacs.

In addition, Section 24 allows you to claim a deduction of interest paid on the home loan up to Rs 2 lacs. However to claim this deduction, the house property should not be sold within 5years of possession.

Under section 80EE, first-time home owners can claim a deduction up to Rs 50,000/- and to claim this deduction, the amount of loan taken should be Rs 35 lacs or less and the value of house/property should not exceed Rs 50 lacs.

Having said that, it is important for you to understand that not all tax-saving options are in terms of asset-class, so you should be cautious and choose the tax-saving option that best suits your requirements like the safety, liquidity, and the return offered by the tax-saving instruments.

There are many ways to save taxes in India, as the amount of gifts you get on marriage or inheritance from a person's will, or from other events are tax-exempted (gifts are exempt from tax up to Rs 50,000/-). Besides, there are two tax schemes, old and new, to calculate your taxable income. Taxpayers are free to choose old tax regime or new tax regime depending on which reduces their tax liability to the maximum extent.

If you are looking to reduce your taxes by planning smartly for 2021, note these points and it will help you to substantially reduce your total taxable income for a stipulated financial year.

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

 

PS: PersonalFN understands that not everyone might be an expert on tax planning and if you choose to invest in ELSS, it is vital to choose a worthy scheme because it holds a lock-in-period for 3 years.

To save you from the financial stress and to help you invest in a worthy ELSS scheme, we recommend the PersonalFN's Definitive Guide to Select ELSS (Edition 2021).

This Guide will show you how picking a worthy ELSS, a tax saving mutual fund, that could potentially maximise your wealth and act as an effective tool for tax planning. It includes:

  • Why ELSS is a worthy option for tax planning

  • Mistakes to avoid while investing in ELSS

  • How to select the best ELSS for tax planning

  • How have ELSS performed as a category

  • Some of the best ELSS to invest in

  • Who should consider investing in ELSS

  • How should one go about investing in ELSS

 

If you are looking to exercise your tax plan and invest in ELSS funds towards the end of FY2020-21, then subscribe now to PersonalFN's Definitive Guide to Select ELSS (Edition 2021).

 

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