Every taxpayer thinks about saving tax. This is the reason why individuals search for legal avenues to reduce the liability of their tax. Income Tax Act provisions have many ways using which an individual taxpayer can reduce tax liability. These provisions form the taxable income and offer tax deductions and exemptions. These deductions and exemptions are the critical factors for lowering your tax liability.
One of the most important aspects of the Union Budget 2021-2022 is that there are not any tax hikes.
The majority of the changes are proposed in PF and ULIP taxation. We will explore this in detail further in this blog. Before that, let us have a look at some best methods for reducing your tax outgo section-wise.
Tax deductions and tax exemptions section-wise
Section 80C
You must make use of the deductions available under Section 80C.
Section 80 C is one of the most important and popular tax deduction sections allowing you tax-free investments and expenses up to Rs. 1.5 lakhs.
Best Options for Tax Saving for FY 21-22
Have a look at some important instruments that qualify under Section 80C deductions:
- Life Insurance
- ELSS investments
- PPF investments
- Home loan principal repayment
- Tuition fees paid
- 5 years fixed deposit
The above-mentioned are the best methods to save your tax in 2021-22.
Equity Linked Saving Scheme (ELSS) and Life Insurance
Ensure to do eligible investments and then claim for the allowed expenditure under this section. Life insurance premiums and ELSS investments are the most popular available instruments for availing a maximum of the Section 80C deductions. Contact us for most profitable ELSS Plans.
Ensure to invest in National Pension Scheme (NPS) scheme
An additional deduction of Rs.50, 000 is allowed under Section 80CCD (1B) if you invest your income in the National Pension Scheme. Hence, NPS investments serve your dual purposes. You can plan for your retirement and also claim an additional deduction.
Unit Linked Insurance Plan (ULIP)
ULIP is the best investment option as it also offers life insurance cover. The premium which you pay for ULIP will partly go for insurance cover and a part will go towards investments.
Before this union Budget, as per section 10(10D) of the Income Tax Act, maturity proceeds of ULIP schemes were tax-free.
In Budget 2021, this exemption of section 10(10 D) has been eliminated for ULIPs. This means if ULIP is issued after 1st Feb’21 and the aggregate annual premium will be more than Rs 2.5 lakh then the maturity amount would be taxed at the rate of 10% in case it is a long-term gain (if the gain is greater than Rs 1 lakh) and at the rate of 15% if it’s a short-term gain.
For ULIPs that are already purchased (before 1st Feb’21), these changes will not be applicable. For them, the maturity proceeds will remain tax-free.
Employee Provident Fund (EPF)
Another major change proposed during this year’s Budget is about taxation of interest on EPF. If employees’ contribution to EPF is more than Rs 2.5 lakh in that particular year, the interest will be taxable just like a tax on fixed deposits in a bank.
These provisions will be applicable from 1st April 2021.
The premiums that are paid for ULIPs or EPF contributions both are eligible for tax-saving deduction u/s 80C of the Income Tax Act. Due to tax on interest of EPF and tax on maturity for ULIPs, the post-tax returns of these two investments are reduced.
Purchase Health Insurance
The premiums paid for a health insurance policy under Section 80D of the Income Tax Act are eligible deductions from your taxable income. So, ensure to invest in a health insurance plan.
However, premiums that are paid for family and self are allowed as a deduction from tax up to a maximum limit of Rs.25,000. In case you buy a health plan for your senior citizen parents, you are eligible to claim an additional deduction of Rs.50,000 that makes the total available deduction Rs.75,000.
Invest in your dream home
Well, for all the homeowners, there is a tax-relief too. The principal repayments of any home loan are deducted under Section 80C. Besides, interest paid on the home loan makes you qualify for deduction under Section 24 of the Income Tax Act. Hence, you can claim a tax deduction of up to Rs.2 lakhs on your home loan interest payments.
Rental Property Deductions
If you own rental property, certain expenses related to maintaining and managing the property can be deducted from your rental income.
Charitable Contributions
Donating to registered charities can provide you with tax deductions. Keep proper records of your donations.