This is the time of the year when all working professionals are busy in maximizing their tax savings in order to have more disposable income in hand. In such a situation let's discuss the various avenues available with a common taxpayer to maximize his/her savings.
There are certain expenses on which Income Tax provides a tax relief to the taxpayers and thus these are exempted from income tax. Some of these are as follows:
House Rent allowance: HRA is the amount given by the employer to employee to meet the rental expenses which he might be incurring for residential purposes. Some part of this HRA is exempted from taxation as per below conditions
Exemption of HRA u/s 10(13A) is minimum of the following
Medical Reimbursement: Medical reimbursement upto an amount of Rs 15000 is exempted from income tax under Section 17(2) provided all medical bills incurred on treatment of family members (family includes spouse, children, dependent parents and siblings) are submitted.
Transport Allowance: Income Tax exempts transport allowance upto a limit of Rs. 1600 (Rs. 800 upto and including A.Y. 2015-16) for all employees.
Leave Travel Allowance: It is the remuneration paid by the employer to the employee for travel anywhere in India with family or alone. LTA for two trips in a block of four years subject to the amount not exceeding Air economy or Rail AC is non taxable. Moreover the fare should be of shortest distance and only for a single destination.
DeductionsThere are certain amounts which Income Tax allows as deductions and thus can be reduced from the taxable income of taxpayers.
Save Tax under Section 80C, Section 80CCC, Section 80CCD
Income Tax allows for a max deduction of Rs 1.5 lacs combined under Section 80C, 80CCC, 80CCD through investment in any or all of the instruments ranging from Provident fund, PPF, Infrastructure bonds, fixed deposits (5 years or more), Sukanya Samriddhi Account, NSC, insurance/pension plans, unit linked insurance, equity linked savings scheme etc. Apart from the above it also includes tuition fees of children and repayment of principal of home loan.
In Budget 2015 (applicable from FY 15-16) finance minister introduced an additional deduction of Rs 50k under Section 80CCD over and above Rs 1.5 lacs towards investment in National Pension Scheme
Save Tax under Section 80D, Section 80DD, Section 80DDB
Income Tax allows for certain health related deductions under Section 80D(Medical Insurance of Self, spouse and children), Section 80DD(Medical Treatment of Handicapped Dependents), Section 80DDB(Treatment of Specified Diseases)
Under Section 80D government allows a deduction of Rs 25000 (Rs 30,000 in case of Senior Citizen)wef from FY 2015-16 (earlier this limit was Rs 15000 and Rs 20000) for payment towards Medical Insurance of self, spouse and dependent children and an additional 25000 (Rs 30,000 in case of Senior Citizen) wef from FY 2015-16 (earlier this limit was Rs 15000 and Rs 20000) for Medical Insurance of parents. Thus an employee can claim an additional deduction of max Rs 60,000 over and above Rs 1.5 lac of Section 80C under Section 80D.
Under Section 80DD Income Tax allows for deduction on the amount spent on maintenance (including medical treatment) of a disabled person. The amount of this deduction has been increased to Rs 75000 for a dependent with disability and Rs 1,25,000 for a dependent with severe disability.
Save Tax on Section 24 (Interest on Home Loan)
Apart from max Rs 1.5 lacs allowed under 80C for principal paid towards home loan, Income Tax allows for a deduction of Rs 2 lac paid towards interest of home loan on self occupied property. This complete amount of interest is tax deductible in case the property is given on rent. In such a case earnings earned from rent is eligible for tax payment. For details read article on Save Tax On Home Loan.
Save Tax on Education Loan (Section 80 E)
A taxpayer who has taken loan on higher education of self, spouse, children or student of whom he is a legal guardian is allowed to claim a deduction under Section 80E of the interest paid towards education loan. This exemption is only available on repayment of interest and not on repayment of principal and there is no maximum limit on claiming deduction under this Section.
Save Tax under Rajiv Gandhi Equity Saving Scheme (RGESS)
A taxpayer having an annual income of less than Rs 12 lacs is eligible for additional deduction (under Section 80CCG) of max Rs 25000 for investment in RGESS. This scheme is applicable only for first time investors who have never invested in shares/mutual funds.
Save Tax on Long Term Capital Gains
If a taxpayer is having a Long Term Capital Gain through Sale of a Long Term Capital Asset (Long Term Capital Asset is that asset which was owned by a taxpayer for more than 3 yrs) the tax to be paid is 20% of the Gain. Under Section 54 of Income Tax this tax can be saved by investing this gain in some specified instruments like Residential Property,Specified Bonds etc.
Save Tax on Donations (Section 80G)
Under Section 80G, Income Tax Act allows for deduction on donations made for social, charity or philanthropic cause. This deduction is allowed only if donations are made to specific organisations and the amount depends on the purpose of donation. The deduction varies from 50% of donation made in some cases to 100% of donation made in other.
The deduction is not allowed on donation made in kind and is only allowed on the one made through cash or cheque. Maximum deduction allowed on donation done through cash is Rs 10,000 and for any amount above it the taxpayer has to make payment is cheque.
Save Tax on Capital Gains on Equity Shares
In order to encourage investment on Equity government exempt the gains arising from sale of shares and Mutual Funds after one year of purchase else these are taxed at 15%. Thus in order to save tax an equity investor should avoid selling his shares/mutual funds within one year of purchase.