Paying taxes is an obligation that every individual whose annual income is above a certain prescribed limit has to fulfil. It is a major source of revenue for the government, and its expenditure and spending on economic activities are totally dependent on the tax collection.
Filing income tax returns can be a daunting task as rules keep changing on a regular basis, making it difficult for individuals to interpret them correctly and comply with them. For salaried individuals it’s still not that difficult, but for businessmen and other professional, it can be quite confusing. It is for this reason that they hire the services of the best tax lawyers in India.
Broadly speaking, there are two types of taxes- direct and indirect, levied on both, individuals and businesses. Taxes levied directly on the income are called direct tax. This article focuses on individual income and how to save maximum tax through various tax saving instruments available under the Income Tax Rules.
Tax Saving instruments
The government of India allows deductions under different heads to give some relief to its citizens so that they can save and invest for their future. There are different ways to save taxes, but one should be careful in choosing a particular instrument as not all of them are same. Different instruments serve different purposes, so choose those which would best satisfy your financial goals.
Under this section, investment up to Rs1500000.00 is exempt from tax. Instruments covered in this section include Life Insurance Premium, ELSS, Provident Funds, National Savings Certificate, Children’s Tuition Fees, etc. Over and above this limit, investment of Rs50000.00 is allowed in National Pension Scheme. Also, additional deduction of 10% of employees’ salary and 20% of gross total income for self-employed persons is allowed for contribution towards Employee pension fund under section 80CCD. Though life insurance and children’s fees are must, you have to be very clear about your goals while investing in other instruments. Whereas for salaried individuals EPF is compulsory, others have to take their own call whether to invest in PF, NPS or ELSS. While PF and NSC give assured returns, NPS and ELSS returns are market linked and fluctuate accordingly. Senior Citizen’s Savings Scheme and Sukanya Samriddhi Yojana are other instruments to save tax.
In life insurance policies, besides term insurance, you have a choice between traditional endowment policies and unit linked policies. ULIPs have the potential to give higher returns, but are more risky.
Family health is a matter of great importance. Modern lifestyle has made people vulnerable to many diseases. And with medical cost getting out of reach of the common man, buying health insurance has become a necessity. Under section 80D, premium up Rs25000 for family health insurance, with additional Rs25000 for parents is exempt from income tax. For senior citizens, the limit is Rs50000. Investing in health insurance serves dual purpose, it saves you tax and at the same time you secure your future medical expenses.
Buying your own house is a dream for everyone. The Indian government has always encouraged people to buy their own home, and allows deductions for interest and principal repayment if you have bought a house through a home loan. A maximum deduction Rs200000 can be claimed for interest payment under section 24 and Rs150000 for principal repayment under section 80C. Additional benefit of Rs50000 is allowed under section 80EE, if the loan amount does not exceed Rs3500000 and the cost of the property is not more than Rs5000000. Buying a house on home loan can be a good option to save tax even if you have the capacity to pay from your own pocket.
Profit made by selling an asset such as, bonds, stock or real estate is called capital gain. If you have held the asset for less than a year, it’s called short-term capital gain and for more than a year, it’s called long-term. Both are taxed at different rates. However, you can substantially reduce you tax liability by investing in another house property or capital gains bonds under sections 54F and 54EC respectively.
To conclude, by judiciously availing the options for deductions under the provisions of various sections of the Indian Income Tax Act, you can substantially reduce your tax liability. However, you must remember that not all tax saving instruments are the same, they serve different purposes for different sections of the society. What is good for someone else may not be beneficial to you. So, be informed and aware of the tax provisions before you choose a particular instrument. Your choice must be based on your financial needs and goals.
Tax saving tips explained above will certainly help you in your tax planning. If you are not comfortable doing it yourself, you can always hire the best lax lawyers in India to help you out.
This article is written by Amy Johnes A legal expert Ahlawat & Associates – The best law firm for Setting up business in India.