Complete Guide on Income Tax for Saving More Taxes

How to Save Tax?

We will be looking at how to calculate your income and tax - but remember, beyond the basic calculations there are several clever investments that can be made which can create a substantial savings from your tax liability. Not only that - these modes of investment will also create the financial security and savings that you need for the future.

Let’s take an example:

Mr Vyas has taxable income of Rs. 10,00,000/-
He has at the age of 45 invested in a ULIP life insurance policy where he pays a premium of Rs.1,50,000/- annually. The ULIP policy he has chosen will give him life cover for 15 years as well as a maturity amount of double his investment at the assumed reasonable rate of 9% returns. The dual income tax benefit of ULIP is that not only is the 1,50,000 premium deductible from his taxable income - but the benefit shall accrue at maturity along with the bonus are all tax free in Mr. Vyas’s hands under Section 10(10D) of the Income Tax Act. So on a yearly investment of 1,00,000; Mr Vyas received insurance cover for a period of 15 years - an expected maturity benefit of Rs. 30,00,000/- and bonus of over 1,00,000/- at a modest calculation rate of 8%. The income tax benefit of the maturity proceeds is over and above this calculation.
He also pays an amount of Rs. 50,000/- into PPF. By making the above investments Mr. Vyas can take the entire 1.5 lakhs of deduction available under section 80C.
A further Rs.50,000/- in NPS will be allowed under section 80CCB(1B), taking the entire deduction amount to 2,00,000/-.
Just by taking advantage of one section 80C, Mr. Vyas has reduced his taxable income from 10,00,000 to 8,00,000 and saved around 60,000/- in taxes. Read further to know more about all such benefits and more.

How to calculate your income tax

For calculating your Income Tax Payable, there are certain broad steps to be undertaken.

Let’s understand the steps in some detail.

Step 1: Calculate your Total income

Income is calculated under the following heads:

Income from Salary – All income from an employer that is received as salary is to be offered as Salary income earned. This is detailed in the Form 16 given by the employer to the employee.

Income from Capital Gains – Income earned on sale of capital assets is taxable under the head of Capital Gains. Capital Assets include assets such as land, building, jewellery, stocks, bonds, etc. The long term capital gain tax rate for AY 2020-21 is 10%/ 20% plus cess.

Income from house property – Rental income earned from owned house property is taxable under this head.

Income from business / profession – The profits and gains earned from any business or profession are taxable under this head.

Income from other sources – All other income that is not included under the other heads of income fall under this residual head of income. This includes interest income, pensions received, dividend received, winnings from lottery or gambling, gifts received etc. The classification of income is important from the perspective of filing returns. All income is calculated on the basis of the financial year as defined in the Income Tax Act as the twelve-month period from April 1st of a year to March 31st of the following year. For example, financial year 2019-20 would mean the period between 1st April 2019 to 31st March 2020.

Step 2: Deductions from Taxable Income

The Income Tax Act allows some deductions from the Income that has to be taxed. This is the step that can help you save a lot of tax on your income for the year. Sections 80C to 80U of the Income Tax Act, 1961 specifies these deductions. In addition, there are other deductions under Section 16, 24 etc which could be availed.

So what are these deductions from taxable income and how can a person get the income tax benefits of these?

Spend on a good life insurance policy – not only does a good life insurance policy provide coverage to your loved ones in the event of your death, but it makes for good financial planning as well. The premium paid for life insurance policies of the taxpayer for self and for his dependent wife and children are deductible from tax under Section 80C. This amount is deductible if the annual premium is less than 10% of the sum assured. Section 10(10D) of the Income Tax Act, 1961 provides for certain exemptions with respect to proceeds from life insurance policies. It allows the entire maturity proceeds or surrender proceeds of the policy which include the sum assured along with any bonus completely tax free to the recipient, subject to prescribed conditions. So as you can see payments paid towards life insurance policies have a twofold income tax benefit – for the years while paying the premium as well as for the maturity proceeds.

Tax Saving Investments under Section 80C - There are certain financial investments which has been listed by the Income tax laws as deductible from your taxable income. The key motive of this incentive seems to incentivize people to perform proper financial planning and structuring for present and future. The key point to be noted is that you are creating investments for yourself and receiving income tax benefits on them. However, this benefit is given to individuals and Hindu Undivided Families only.
Investments can be made under section 80C to the extent of Rs 1,50,000. Apart from this, investment in notified pension schemes provide additional benefit to the extent of Rs 50,000 under section 80CCD(1B). This total of Rs.2,00,000/- in investments can save you an amount of Rs.60,000/- if you fall under the 30% tax bracket.

Some of the key tax-saving investments provided under Section 80C are:

Let’s take an example of a person who invests in ULIP (Unit linked insurance plan).

What is a unit linked insurance plan? Is it similar to a fund linked to the equity stock markets?

ULIP is the purchase of units that are invested over a diverse range of securities by trained investment professionals. ULIP is also a tax saving investment. It differs from pure investment in equity linked savings scheme funds as it includes an insurance element as well. This Insurance element causes the ULIP charges to be higher but only in the short run and this is also due to the mortality cost that they include. The good part is that ULIP’s are however required to maintain an overall charge similar to any other mutual fund. So over the long run the ULIP will give the person similar returns, at a similar cost – with the huge added benefit of insurance cover. This is beneficial for long term investments than for short term investments.

An additional income tax benefit on ULIPs over ELSS tax saving investments is that in addition to the Section 80C deduction - the ULIP maturity amount is tax free in the hands of the investor under section 10(10D) subject to minimum lock-in period of five years.

So within the options available for claiming deduction under Section 80C there are many choices to be taken into consideration – for maximum benefit. There are also other tax saving option other than Section 80C which are explained below.

Spend on a great health insurance policy for self and family: The health care costs have left no doubt in anyone’s mind that medical insurance is an absolute necessity for every single person. The lack of adequate medical insurance has brought many an unfortunate to the brink of financial ruin. The Government in its efforts to encourage the purchase of medical insurance has offered a tax exemption under section 80D.

Under Section 80D an amount of Rs.25,000/- is allowed as a deduction from taxable income when this amount is paid for medical insurance of self, spouse and children. In case of tax payer being above the age of 60 years the higher deduction is shall be available for Rs.,50,000/-.

For a person who pays for health insurance of dependent parents an additional Rs.25,000/- is allowed as deduction. In case the parents are aged above 60 years then a deduction of Rs.50,000/- is allowed.

In total a maximum deduction of Rs.1,00,000/- can be claimed under this section which gives a tax saving of over 30,000/- in the 30%slab. As you can see these savings can be quite substantial. Using an income tax calculator will help you know the benefit you can gain.

You can also avail deduction of Rs. 5,000 for the cost incurred for preventive health check-ups for self, spouse, children or parents. This amount is over and above premium limit of Rs 25000/50000 specified above.

Make a note of any expenses incurred for a disabled dependent relative. Under Section 80DD – any expenses incurred for a disabled dependent – depending on the extent of their disability is allowed to be claimed as a deduction from taxable income. The expenditure incurred for their treatment as well as maintenance can be claimed under sections 80DD and 80DDB respectively.

Under Section 80DDB - If persons for whom medical treatment is taken are:
Upto 60 years – a deduction of Rs.40,000/- is allowed. Over 60 years – the deduction allowed is Rs.1,00,000/-. Under Section 80DD - If the disability if more than 40% but less than 80% then the deduction allowed is Rs.75,000 For disability of 80% or more – which is classified as a severe disability – a deduction of Rs.1,25,000/- is allowed.

Interest paid on loan taken for higher education: In another case we see tax deductions being held out as an incentive for reform, under Section 80E of the Income Tax Act, 1961. In case of loans taken for higher education of self or spouse or children from approved financial institutions, the interest paid thereon is allowed as deduction. It is better to plan your finances and take a loan for education for the period where the benefit is available.

Interest paid on loans taken for purchasing a single residential property is also deductible from tax under Section 80EE. So it might be better to take a housing loan if you don’t already have a house property in your name as a tax planning measure.

Donations made to a recognized institution under 80G: If you donate an amount every year – findi a recognized institution that you can donate to makes your donation amount deductible from Taxable income. The deduction is available depending on the charity chosen. The deduction allowed can be 50% or 100% of the amount donated depending on the charity donated to and the qualifying amounts. The qualifying limit is 10% of the gross total income of the person.
For example donation to the Prime Minister’s relief fund is eligible for 100% deduction without any qualifying limit whereas donation to associations to promote family planning or sports allows 100% deduction subject to a maximum limit. In some examples donations to certain charities gives you 50% of the amount donated as deduction. For example donation to PM’s drought relief fund gives 50% deduction without any qualifying limits and the donation to some other approved charity gives 50% deduction with qualifying limit.

Interest received on savings bank account held by an individual: Section 80TTA allows interest income from saving bank account/s to be taken as a deduction subject to a maximum amount of Rs.10,000/-. This is only for Individuals and HUF’s.

Specific Deductions: There are many sections that allow specific deductions for example for an author on royalty income or to a patent holder or some other such. It is a good idea to consult a tax practitioner with full details of the sources of income so they might guide you on all possible tax saving measures that can be taken.

Section 24 allows deduction of interest paid for purchase of house property: in case of house property bought the interest expense paid on the purchase of it can be claimed as a deduction upto Rs. 200000 under Section 24.

Step 3: Appropriate rate of tax as per category of taxpayer and the slab rates of tax applicable.

As per the slab rates and basic rates discussed for all kinds of assessee’ s each person’s tax liability will be calculated on the basis of slab rate as applicable. Once the listof sources of income are ready and the deductions have been claimed. However, income from Long term capital gain and Income from gambling would be taxed at different rates of tax and the remaining income is taxed as per the slab rates given.

Step 4: Deduction of the Income Tax Rebates allowable under the Income Tax Act.

Tax rebate is a deduction allowed from the tax calculated as payable to government. This rebate is given under Section 87A of the Indian Income Tax Act, 1961. Under Section 87A a tax rebate is allowable to those Individuals whose total annual income falls below Rs.5,00,000. This rebate is limited to a maximum of Rs.12,500/-.
This in effect causes that - no tax is payable for income under Rs.5,00,000/- of Income but it is important to note that it is still essential to file a return of income. Individuals with income exceeding Rs.5,00,000/- do not get the benefit of any rebate under section 87A.

Step 5: Deduct the Taxes already paid:

By way of TDS, TCS and advance taxes has to be deducted from the Tax amount calculated. The balance amount is either the Tax payable or tax refund receivable. All certificates of Tax deducted at source, tax collected at source and challans of advance tax paid have to be maintained securely. Once the tax liability is determined the prepaid sums of tax has to be deducted from the payable amount and the balance amount is either the amount left to be paid or they may be a refund due to you, which will be claimed at the time of filing of the Tax Return.