We all know how tough it is to make an earning? It is even more hard to see taxes getting deducted more than you expected. Hence, it is not only required to be educated on the tax exemptions of respective country but it is also equally important to know how to save taxes legally and pay only that you are liable to.
Truly speaking, saving taxes isn’t as difficult as it may seem to be. All that is required is to claim maximum tax benefits available in your country. There may be many things that you do which unknowingly may save your taxes. To figure out the tax expenses, we have studied and made a list of parameters which can save a lot of taxes incurred,
1. Tuition Fees - Income tax laws provide you the opportunity to compensate the expenses incurred on children’s tuition fees by claiming deduction under 80C of IT Act.
2. House Rent Allowance (HRA) - You may claim the HRA component in your income towards rent paid for your lodging. If there no HRA component separately provided by your employer, you may still claim deduction under section 80GG of IT Act.
3. Repayment on Home Loan - You can get benefit on both the principal and interest component of your home loan instalments by claiming deductions under section 24, section 80C and section 80EE. If this is your first house, you can save even greater amount of tax.
4.Pension Funds - Savings for retirement is a great mandate for every person who starts earnings and this needs to be done right from day one. One of the best ways to do so is to start investing in pension funds. You may also reduce your taxes when you contribute to such pension funds with the provisions covered under section 80C/ 80CCC/ 80CCD (1)/ 80CCD(1B) / 80CCD(2).
5. Repayment on Education Loan - Your education loans may bring huge tax benefits to you and the claims can be covered under section 80E.
6. Medical Insurance and Health Check Up - You can get deduction upto the upper limit set for that financial year by making your claims under section 80D. You would need to produce the bills of your expenses to get deduction on them which otherwise would have been taxable.
7. Medical expenses of Disabled Dependant/Individual - If you have a dependant person suffering from disability, you may avail tax benefit under section 80DD and help take care of your disabled family member. Similar to the dependant, if the individual is suffering from disability himself, he may avail tax benefit for himself under section 80U.
8. Treatment of specified diseases - Treatment of diseases such as Cancer and AIDS is very expensive and requires much financial relief to both the person suffering from such diseases as well as to his family members.On the basis of expenses incurred by the individual, treatment of such diseases are subject to tax benefits under section section 80DDB.
9. Charitable Donations - Donating to a noble cause or doing good for the society may help you in reducing your taxes by claiming deduction under section 80G. There is an upper limit on cash donations upto Rs.2000. You may also note that you need to check to which organisation you are making your charitable donations, as there is a government approved list of organisations, or those which clear the eligibility criteria.
10. Donations for scientific research or rural development - If you have surplus money that you may want to invest, you may avail dual benefits of both investing in scientific research or rural development as well as avail tax benefits under section 80GGA of the IT Act.
11. Tax Saving Instruments - There are multiple tax saving instruments under section 80C, which not only provide returns but also reduce the tax burden upto the available limit declared for that financial year,
a. Employers Provident Fund (EPF)- The interest income and maturity amount that you get as a result of investing in EPF is tax exempted if you have completed 5 years
b. Voluntary Provident Fund (VPF) – As 12% of your basic salary goes in EPF, you may choose to invest more covered under section 80C. In case you do so (such as invest 100% of Basic+DA), your EPF becomes your VPF and earns you as tax free interest rate of 8.4%.
c. Public Provident Fund (PPF) – It is a good option to make a long term investment in a public provident fund which is tax free and gives you an interest rate of 8% to 8.5%
d. Sukanya Samridhi Scheme – This is one of the best investment schemes in India offering a high rate of interest when compared to PF and PPF. This scheme however is applicable to the parents or guardians of a girl child.
e. National Pension Scheme (NPS) – This is considered as a highly secured option with almost negligible risk and is offered by the postal department. The interest earned here after maturity and retirement is taxable though the contribution made annually is non taxable under section 80C
f. Five Years Time Deposits – Five year fixed deposits can be made in any post office branch and offer a dual benefit of return on investment as well as tax deduction
12. Leave Travel Allowances (LTA) – LTA is another component of the salary which can be claimed for two journeys in a period of four years for you and your family
13. Donations to Political parties – This medium is less explored but donating to political parties may reduce tax burden if it satisfies certain criteria under section 80GGC
14. Gratuity – The gratuity received on retirement or on other valid occasions is exempt upto Rs.10,00,000 (proposed for Rs.20,00,000) subject to certain conditions
15. Meal Coupons – Employers providing meal coupons such as Sodexo are non taxable upto Rs.2600 pm
16. Expenses related to Internet or Telephone – Expenses incurred by employees in using such services are either pre-paid or can be reimbursed by the employers and tax benefits can be claimed on such expenses
17. Voluntary Retirement Service (VRS) – When employees in Public Sector or State Government take voluntary retirement, the money they receive is non taxable upto Rs.5 lakh
18. Distributed profit to partners in partnership firms – Partners get tax benefits because their partnership firm has already paid taxes on the profits made and it is then decided to distribute between the partners
19. Travel, Hotel and Food Expenses – Business owners who travel a lot may show such expenses as part of business expenses (and not out of pocket from the compensation drawn for themselves) and claim tax deduction accordingly
20. Capital Gains – You need to pay taxes if you make capital gains, however if you make a loss, the IT department allows you to set that off against any gains made in the next 8 years and it has to be set off against only capital gains and nothing else. Long term capital losses may be set off against long term capital gains as well
21. Salary Restructuring – Higher income attracts higher taxes. Hence, it is most important to ask your employer to structure your salary in such a way so that your take home pay is maximised and tax outgo is minimised
There maybe several other instruments to reduce the taxes and provide added benefits. If you feel they can be shared, feel free to place your notes in the comments section below.
[Note: We have provided the tax benefit instruments taking India as an example. The parameters though may not be accurate but maybe checked for similarity in respective country of residence]
All figures are taken as on Jan’19