50+ ways to save income tax in India

50+ ways to save income tax in India (2018-2019)

There is a famous saying that “A penny saved is a penny earned”. Which means every penny saved is a contribution to your earning. And what better saving can it be than saving your income tax.

There are many ways to save tax on your income. And you are also aware with many of those. Yet, I believe that you’ll find at least one more way to save more tax on your income in this list.

The list is pretty long, so I have tried my level best to keep the descriptions as small as possible.

Calculated on Salary

HRA (House Rent Allowance)

Your HRA is calculated as 50% of your basic salary. It’s 40% for non-metro cities. And this is not calculated as your taxable income.

So if pay your rent more than the HRA you get, then talk to your employer to restructure your salary to increase HRA. Your employer will do that if it’s below 50% in a metro city or 40% in a non-metro city.

Tip:
Never let your rent go above 50% of your basic pay (40% in non-metro locations).

EPF (Employee Provident Fund)

12% of your basic salary is contributed to your EPF account and is not calculated as your taxable income.

However, withdrawing above 50K before completing 5 yrs. of continuous service invites tax. It’ll be non-taxable if employee withdraws more than or equal to 50K, with service less than 5 yrs. but submits PAN along with form 15G/15H.

Tip:
Instead of withdrawing the money, transfer your EPF account online to next employer in case you changed the job.

Standard Deduction of 40K

Do you remember the time, when you used to submit medical bills & Petrol Bills for to get medical and conveyance benefits?

From now on 40K/Year will be exempted from your yearly income, as standard deduction without submitting your medical or convayance bills.

Gratuity

This is one the best benefit I have heard of continuing your employment for longer period of time with same employer.

You get paid gratuity to work for longer than 5 years within an organization. Formula to calculate gratuity is “Last drawn basic salary x Year of service x 15/26″.

For example you worked within an organization for 5 years. And you last drawn basic salary was 80K. Then you gratuity will be calculated like this:
80,000 x 5 x (15/26) = 230,769.23, which is approx 2.3 Lakhs.

Gratuity is exempted the least among any of these amounts:
1. Last drawn basic salary x Tenure of service x 15/26, or
2. Rs.20,00,000, or
3. Actual amount received as gratuity

Money Under VRS

In case you are a government employee and you opted for voluntary retirement. Then the amount you receive under VRS is exempted till the limit of 5 Lakhs.

Long-Term Investments

Fixed Deposits

Investment in Fixed Deposits for 5 yrs. is exempted from tax calculations. But interests earned on it is included in your income.

So if your income crosses the tax slab including the interest amount, then the excess will be taxable as per the tax slab.

Suppose your yearly taxable income is 2.5 Lakhs. And you earned interest of 10K on your FD. Then your taxable income will be 2.6 Lakhs and this 10K will be taxed @5%.

Tax Saving Mutual Funds

Investment in Tax Saving Mutual Funds is exempted from tax calculations. You invest a certain sum of money in it with a lock-in period of 3 yrs. It’s like doing multiple FD’s one by one on a much smaller scale.

The only difference is that it gives you return directly related to the market. So the return you get is directly proportional to the market.

Tip:
Investing Mutual Funds through SIP gives you a better return than lump sum. 

Infrastructure Bonds

If you want to reduce your taxable income by a few more thousand, then this is the best investment. As 20K invested in this instrument is eligible to be exempted from tax calculation over and above your 1 Lakh deduction under 80c.

Let’s suppose your salary is 5 LPA. Then as per the tax slab, you are liable to pay tax above 2.5 Lakh. But already made some tax-friendly investments of 1 Lakhs under 80C, so your taxable income came down to 1.5 Lakhs.

Now if you purchase Infrastructure bond of 20K, then your taxable income will get down to 1.3 Lakh.

Infrastructure Bonds are usually issued by Government recognized bodies, asking money to invest in Government related infrastructure projects. Roads, railways, electricity supply are few infrastructure projects.

Investment tenure in these bonds is usually for a longer period of 10-15 yrs. with a minimum lock-in of 5 yrs.

Life Insurance

You can avail tax benefits up-to 1.5 Lakh/Year on life insurance premium, provided that, you are paying premium maximum up-to 10% of Sum Assured, if you have done your policy after 01-April-2012.

Same is the tax benefit of 1.5 Lakh/Year for premium maximum up-to 20% of sum assured, if you have done your policy before 01-April-2012.

Maturity/Claim amount on Life Insurance

As described on Bank Bazaar, Maturity/Claim amount on life insurance is tax free, if it’s not:

  • Payouts on annuity or pension plans.
  • Group life insurance plans sponsored by employers.
  • Policy bought between the 1st of April 2003 and the 31st of March 2012, whose premium in any year is more than 20% of the Sum Insured.
  • Policies bought after 1st April 2012, if the premium in any year is more than 10% of the Sum Insured.
  • Policies bought after 1st April 2013 for disabled people or those suffering from ailments as under Section 80DDB, if premiums on these policies are more than 15% of the Sum Assured.

Long-term capital gain

Land or house under your possession for more than 3 yrs. is considered long term capital asset. And if you possessed it for less than 3 yrs., then it’ll be considered as short term capital asset.

Now let’s suppose you sold your house or land after 3 yrs. then sale price deducting purchase price and maintenance price is considered as your long term capital gain.

For example: You purchased a house of 25 Lakhs. And invested another 10 lakhs in it’s development and maintenance. Now after 3 yrs. you got an offer to sell it at 80 Lakhs. Then your long term capital gain will be calculated like this (25 + 10) – 80 = 45.

This capital gain of 45 Lakh is taxable. But you can save your tax on it by reinvesting all of that amount, which is 45 Lakhs.

You can do that by purchasing one new house for yourself within another one year or after 2 years. Or else you can can construct one house within another 3 years

Only condition is that the house you purchase or construct must be in India and should not be sold for another 3 years.

Pension Plans

Pension plans have two stages. First is when you are investing and second when you are withdrawing money.

First stage of  investing money in pension plans is tax exempted till the limit of 1 Lakhs/year.

In second stage, only 1/3rd of the corpus you get is tax free, and the annuity you receive is taxable, if you come under tax slab. 

There are different types of pension plans available in Indian market listed below.

  • National Pension Scheme
  • Deferred Annuity
  • Immediate Annuity
  • Guaranteed Period Annuity
  • Pension Plans with and without cover
  • Annuity certain
  • Life Annuity

National Pension Scheme

If you are investing in NPS, then your money will be invested as per your preference in debt and equity market and that investment will result in maturity amount.

On retirement you can withdraw 60% of your corpus and remaining 40% will be given to you as annuity.

1/3rd of this 60% will be taxed when you withdraw the amount and the annuity will be taxed as per the tax slab.

You can save tax upto 2 Lakhs/year investing in NPS. 1.5 Lakh & 50K under different sections.

National Saving Certificate

Investing in this instrument can help you save tax up to 1.5 lakh/year. This scheme normally gives you return of approx 7.5-8% of interest. Which is reinvested in the scheme next year, giving it power of compounding.

On maturity, you will be given every penny of your money. Since this instrument do not provide facility of TDS, so you have to pay your taxes on it by yourself.

Post Office Schemes

Post office schemes are not very popular in middle class. Yet they carry the same benefits as other tax saving instruments. These are basically designed for lower middle class or low earning individuals.

Interest rates and tax benefits in them are also not very much, in comparison to other financial instruments. Yet they carry very low risks. as it has been equipped with all modern amenities, so you can use them to educate your children on basic financial system.

Here are the post office saving scheme available in Indian Market:

And here are the tax benefits you get by investing in them:

Health Insurance & Medical Expenses

Individual/Corporate Health Insurance

Health insurance is a must you should have these days. It mitigates approximately all of your health related risks (with some conditions).

It’s normal practice in corporate sector to provide health insurance to their employees. And corporate health insurance policies cover approximately everything from day one.

Best part is that premium to these health insurances are tax exempted. Whether it’s individual or corporate.

Premium up-to 25K/Year for health insurance is tax exempted.

Health Insurance for parents

It is as important for your parents as it is for you. Instead it is more important for your parents in their old age. Though individual Health Insurance policies do not consider your parents as your immediate family.

So instead of moaning about policies, take another policy for your parents. It also have tax benefits.

You can avail tax benefits up-to 30K/Year for your parents health insurance.

Preventive Health Check-up

Indians have the tendency to avoid regular health check-up. But don’t you think that it’s better to remain fit than to be hospitalized and use your health insurance.

Preventive Health check-ups are best way to remain aware of your health. So that you can keep a check on your health and remain healthy. Sometimes fear plays better part in motivating you to remain healthy.

Best part of doing regular health check-ups is that it’s also tax friendly. You can avail tax benefits of 5K/Year for doing so. So stop avoiding your regular health check-ups.

Medical Expenses for Disabled Individual

If you are disabled then you can also avail tax benefits on your medical expenses.

Though disability is also defined to be above 40% disability under categories of Blindness, Low vision, Leprosy-cured, Hearing impairment, Locomotor disability, Mental retardation, Mental illness.

If you come under this then you can avail tax benefits up-to 75K/Year.

And if come under severe disability, which is above 80% and includes autism and cerebral palsy, then you can avail tax benefits up-to 1.25 Lakh/Year on your medical expenses.

Medical Expenses for Disabled Dependent

If you have a disabled dependent in your family, then also you can avail the same benefits as mentioned above.

Treatment of Specific Disease

Treatment of several defined severe diseases, which require too much medical attention are provided tax benefits.

Neurological, Cancer, AIDS,  Kidney failure, Blood Disorders are several kind of diseases, treatment of which are provided tax benefits to certain extent.

Deductions allowed under this depends on the age of the person, who underwent the treatment.

If the persons age is under 60, max deduction allowed is 40K. If the age is in the bracket of 60-80, then max deduction allowed is of 60K. And if the age is above 80, then the deduction allowed is max to 80K.

Allowances

Mobile Bill

Lets suppose you are using your mobile for official communications on regular basis. Then ask your employer to include your monthly mobile bill in allowances.

This will exclude your monthly mobile bills from your yearly income and will reduce your taxable income on actual.

Internet Bill

Same as above, you can also ask your employer to ask your internet bills to be included in your monthly salary as allowance. Now your monthly internet bill will also be excluded from your yearly income.

Meal Coupon

Coupons given to you within the limit of Rs. 50/meal are tax exempted. Anything over and above this in the name of meal coupon is taxable.

LTA

Image Credit: H&R Block

Leave Travel allowance are the allowance you receive 2 times from your employer in block of 4 years.

Actual travel expenses incurred on your journey via Economy Air Fair, A.C. First Class Train Ticket, and A.C. Deluxe Class other mode of transportation in case of non-connectivity by Air or Rail are fully exempt from tax.

Car Leased by Employer

If you have been provided a car by your employer to deploy your official duties. Then the reimbursements you get are totally tax free. 

If you use that car only for personal use then the reimbursements you claim are totally taxable.

And if you use that car for both personal and professional use. In that case the value of official use is calculated on the CC of your car.

Which is below or above 1600 CC. If you use car above 1600 CC, then 2400/month is exempted. And if you use car below 1600 CC, then 1800/month is exempted. 

Drivers salary of Car Leased by Employer

In case you are also being provided driver by your employer, then 900/month is the exemption limit. Which can be increased on providing online transnational details of salary to your driver.

Loans

Interest paid on Education Loan

If you have taken loan for higher studies, from reputed financial or charitable institutions for self or spouse or children (no sibling or relative) to repay it in max 8 years then all the interest to be paid on it is tax exempted.

For example, you have taken education loan for your spouse’s higher studies from reputable financial institution. And you opted to repay it within next 10 yrs. then the interest paid till 8th year only will be exempted from your tax. 

Home Loan Principal

Let’s suppose you took a home loan. Then while filing income tax, principal and interest amount are mentioned separately. Which means that you get tax benefit on your home loan principal amount as well. 

But the max limit to claim tax benefit on home loan principal amount is of 1.5 Lakh/Year. Anything above it will be taxable.

One thing must be kept in mind, that this amount will again be calculated as your income and will be taxed, if your sold your house before completing 5 yrs. of possession in the year you sold it.

Home Loan Interest

As I mentioned above, in case of home loan, while filing income tax you have to mention your principal and interest amount separately. So your interest amount on your home loan is also tax exempted.

Max limit to claim tax benefits for interest paid on home loans per year is of 2 Lacs.

Home Loan for Renovation

What more good it can be that you also get tax benefits on home loan for renovation as well.

Only thing is that you do not get tax benefit on principal amount of home loan for renovation. And the capping limit for tax exemption on interest amount is of 30K/year.

Donations

Charity with receipts

Believing in a cause and contributing to it is a great aspect of life. And if you do so by giving charity for some cause then don’t forget to ask for the receipts.

After all it’s gonna contribute to you as well. Just share the receipt while filing tax and everything you contributed will be exempted from tax.

Donation for scientific research

This is one of the most popular culture in foreign countries to donate money on scientific research. Every penny donated via online mode for this cause is tax exempted.

Such kind of donations are done for scientific research, statistical research, or social science research, to approved associations, colleges or institutions.

Sadly this is one of the most underutilized provision in India. But if you use this provision, then you can claim 100% of your contribution to be exempted from your taxable income.

Donation for Rural development

Donations made not only for scientific research, but for rural development is also 100% tax exempted.

If you donate money to institutions approved by national committee or to public sector company or to local authority or to an association to implement rural development projects then with receipt, you can claim 100% of your donation to be tax exempted.

Donation to political parties

Apart from that if you are a political party enthusiast and is happy with the work done by your party. Then it’s obvious to have a feeling to contribute to them as well.

In case you are already donating money to them, then you can also claim 100% tax rebate on such donations as well.

Business Expenses

Distributed profits among partners in a partnership firm

There is no tax in the hand on partners if their partnership firm is making profits and partners decide to distribute profits among themselves. Partners get tax benefit because their partnership firm has already paid taxes on the profits.

Business Travel Expense

Business person need to travel a lot in order to expand their business. And every expense done for business is shown under business expenses in books. And this reduces the tax liability of business persons on travel expenses.

Business Hotel Expense

Hotel expenses done by business persons to expand their business are booked under business expenses. And as I told you earlier, business expenses are reduced from revenue and this reduces the tax liability as well.

Business Food Expense

It’s not always an luxury for a business person to enjoy home cooked food. They tend to eat out a lot while meeting people outside their normal reach. But this expense is a kind of investment fro them in 2 ways.

First they get to eat healthy even being far from home. Second this food expense is exempted from their taxable income.

Business Entertainment Expense

Business persons are also in heavy need to have legitimate good network of their own. For which they need to attend business parties where people of their interest are available.

But it may also happen that they also have to be host of the party. And in both the cases, their expenses to do so is exempted from their taxable income.

3 Lakhs on Patent Registered

If you recently got any patent registered on your name, then 3 Lakhs on such registration is tax exempted.

Hindu Undivided Family (HUF) account for a side income

If you are a full-time employee and have a side business as well, then you can save a lot of tax by opening a separate HUF account. Just deposit your business income under HUF account name. As HUF is considered a separate entity and is also taxed separately.

Let’s suppose you earned 8 Lakh/Year as your salary and 8 lakh/year from your side business. Now without HUF account you will be taxed on 16 Lakhs on that year, as per income tax slab, but with HUF account, both earning will be calculated as earning by separate entities.

In case you have opened HUF account, then your first 2.5 Lakh on both the income will be exempted, which means you automatically got your first 5 lakhs exempted from your total income. And then you’ll be paying taxes on rest of the income, as per tax slab.

Miscellaneous

Child Tuition Fees

Child education in this era is ready to tear your roof. Gone are those days, when your parents paid an average tuition fee of around 15k/year max to give you convent education.

But now, school fees are like competing with fees we paid for our degree. And you have to turn out your pocket to provide quality education to your child.

Anyway, nothing can be done for school fee, but we can claim tax rebate for tuition fee we pay for our child education.

Educational scholarships

Educational scholarships received to you are fully tax exempted.

Interest up to 10K on the savings account

Interest above 10K on your savings, in your saving account is taxable.

Though receiving interest of 10K on saving account is not a normal thing. I am not saying that people do not receive interest of 10K on their savings. But that’s not a normal scenario.

So if you received any interest above 10K on your savings, then be ready to pay tax on it. Else be ready to invest it somewhere else.

Interest Income on NRE Account

If you are an NRI and have saving account or fixed deposit in India, then you don’t have to pay taxes in the interest earned on it.

Many Indians, living abroad take great advantage of this. They take long-term loan abroad, which usually ranges between 3-4% and deposit it in their Indian NRE Saving account. 

Merely doing this they earn around 4% above what they have to repay abroad.

Profits & Dividends on Shares

If you have invested in shares or planning to invest in shares, then please do it with long term objective. By long term I mean to hold it for at-least 1 year. I am not sure about returns, but if you get profits from it, then it’ll be exempted from your taxable income . 

And dividends received from Indian companies are tax exempted because companies declaring such dividend already deducts dividend distribution tax before paying you.

But dividend received above 10 Lakh/Year is taxable.

Profits & Dividends on Equity Mutual Funds

Same as above, investing in equity mutual funds and holding it for more than 1 year, makes your profit more tax friendly. And that means the profits you earned from your equity mutual fund investment, if not withdrawn for 1 year, will not be calculated in your taxable income.

In case of dividends, you can withdraw it anytime you want and it’ll not be taxable.

Wedding Gifts

Do you know that gifts received on your wedding in any form are totally tax free? Yes, they are and without any limit.

But do remember that there is difference between Gifts and Dowry.

Agricultural Income

Every penny you earn from your agricultural land, as agricultural income is tax-free in India.

Renting or leasing of agricultural land or building and sale of agricultural produce is considered as agricultural produce.

Family Inheritance

Everything you receive as family inheritance from your family is non taxable in India.

Rent to Parents

People living with their parents in their parents home can also save taxes, by giving rents to your parents. And presenting those receipts for tax exemption.

Salary Restructuring

If you are well aware of the things impacting your taxes, then this is one of the best option to do. 

Just reach your employer and ask them to restructure your salary in more tax friendly way.

Now before we part our ways, here is what I want you to do. Comment below mentioning how you save tax on your income.

Please share this article in your circle, if it helped you. Don’t forget to ask questions, in case you feel stuck somewhere. 

Read Next: How setting financial goals can help you to get rich

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