No matter what your chosen career, the fact is that everyone works very hard to earn money. People sweat day in and day out to fulfil their professional commitments and the reward is their salary. If this salary only serves the survival needs, the whole purpose of the hard work remains unfulfilled, as future is uncertain and preparing for it financially is the only certain thing you can do.
With regards to your earnings, savings can grow only when you have enough money left in hand after your regular financial commitments like utility bills, child’s education, and monthly groceries. These regular expenses cannot be avoided, but what about the taxes?
A major part of your income, as much as a third, can go away in government taxes. However, there are some legitimate ways in which you can save on your taxes and grow your wealth. Of course, business owners have several ways to reduce their taxes to the government, salaried individuals too have ways, but they are quite different.
Plan your investments wisely to meet your goals and avail tax benefits
Saving on your taxes and at the same time growing your wealth is not a hypothetical situation. Investing your money in the right investment avenues can help you in this regard. Before you consider the different tax-saving options available to you, it is important to evaluate your goals.
Savings for tax benefits should be with an investment objective. You should analyse your professional and financial growth in the next 3, 5, 7 or 10 years and plan your investments accordingly. Depending on whether you have short term or long term goals, you can choose the appropriate investment tools.
Here are a few options available to salaried individuals to save on taxes
Step 1: Save taxes through interest payments on your loans (Section 80E and Section 24B)
Education Loan (Section 80E)
Higher education can be a great way to not just secure your child’s future but also get some immediate tax benefits by way of education loan. Under Section 80E of the Income Tax Act, interest paid by the assessee on the education loan during the previous assessment year is completely deductible for seven subsequent years from the year the assesse started paying the interest.
Home Loan (Section 24B)
Just like education loan can help you avail some income tax benefits, home loans also quality for tax benefits. Besides being a long-term asset for you, your home also makes you eligible for tax deductions. You can claim a deduction under 80C for up to INR 1.5 lakhs for the repayment of the home loan principal.
Apart from this deduction, you can claim deduction for interest payments under Section 24B. If the home loan is a joint loan with your spouse, the tax deductions are available to both you and your spouse, thereby you can get optimum tax benefits as a family
Step 2: Save taxes through investments (Section 80C)
Section 80C of the Income Tax Act allows for tax benefits for expenses incurred to the assesse for investing in certain specific investment vehicles. For eligible investment tools, 100% of the amount invested or INR 1,50,000, whichever is less is deducted from the taxable income of the assesse. Here is the list of eligible investment tools for which the deduction is applicable.
• Life insurance premium paid for self or any dependant’s policy.
• Any contributions made towards statutory provident fund, recognized provident fund and the approved superannuation fund.
• Any contribution made towards Public Provident Fund.
• Amount deposited with the Post Office Savings Bank for a period no less than 10 years.
• NSC (VIII Issue) subscriptions.
• Investment with the mutual fund equity linked savings scheme.
• Any fixed deposits with scheduled banks for a period of more than 5 years.
Step 3: Save taxes through investment in your and your family’s health (Section 80D)
Health insurance policy
If you take a qualified health insurance policy, the interest payed thereof is eligible for deductions under Section 80D. This deduction is available to a limit of INR 15,000 for self, spouse and children. An additional deduction up to the limit of INR 20,000 is available for insurance of dependent parents (if senior citizens and INR 15,000 if not senior citizens). The maximum deduction for health can be up to INR 40,000.
Future protection of your family
Life Insurance policies are in a way a form of financial protection that you can offer to your family in case anything happens to you. The premium paid towards life insurance policies is eligible for deductions under Section 80C.
Step 4: Save taxes through donations (Section 80G)
When you make any donations to charitable organizations, you are eligible to claim deductions from your taxable income under the Section 80G. There are various donations that are specified under the act, which are eligible for either 100% or 50% deduction from the taxable income of the assesse.
Step 5: Save taxes through contribution to the New Pension Scheme (Section 80CCE) and National Savings Certificate
Under the regulatory issued by the government agency – PFRDA, salaried employees can avail tax benefits with contributions to the New Pension Scheme. Apart from the tax savings, the returns are linked to the market and thereby the tax paying individual can also grow his wealth.
Salaried individuals can also claim tax benefits of up to INR 1,50,000 through investment in the National Savings Certificate (NSC) scheme. The interest rate of the NSCs is fixed every quarter and is linked to the government security rates. The interest rates also depend on the lock-in period of your investments. While the interest earned on NSCs is fully taxable but the same can be re-invested.
Breaking the shackles
There is a general misconception among people that tax savings can only be availed through insurance policies. However, that is not the only source. A balanced portfolio of health policies, ELSS mutual funds, PPF and the New Pension Scheme can help salaried individuals save taxes as well as grow their wealth systematically.