How To Save Your Hard-Earned Money From Income Taxes?


When somebody says, 'Tax Returns', our brain switch just turns 'off' because who will do all that paper-work?! Plus, it's so complicated to understand. But think about it, we are already paying so many taxes. Taxes on food, taxes on clothes, taxes on travel, taxes on movies! So, Ladies and Gentlemen, it is time to turn that switch back 'on' because by doing our tax planning, we can save a lot of money, and that in turn will get us more money. Options such as Equity Linked Savings Schemes (ELSS), NPS, and PPF are highly helpful in saving your taxes and money. In fact, tax saving mutual funds such as ELSS tax saving options have become very popular simply because they not only save you money but also help you grow your capital.

Now, what is Income Tax? Suppose you are earning 'x' amount of money. Out of that, you have to give away some to the government so that it can use it for public services. Now, we can't control how and where our government is using our money, but the Income Tax Department of India gives us back our money if we save more money. Isn't that great? Let's first understand how much are you paying in the first place. It all depends on the tax slab you fall into. If your income is less than 2.5 Lakh per annum, then you pay 0% tax on your income. If it's between 2.5 Lakh to 5 Lakh then you have to pay 5% tax on your income after you deduct 2.5 Lakh from it. For example, suppose you are earning 4.5 Lakh per annum. Subtract 2.5 Lakh from it because for 2.5 Lakh you don't have to pay any taxes. What's remaining? 2 Lakh. Now you have to pay 5% of 2 Lakh, which is Rs.10,000 and that is the income tax you are paying.

If your income is between 5 Lakh - 10 Lakh per annum, then you need to pay 20% income tax. For more than 10 Lakh, it is 30%. This tax slab is different for senior and super-senior citizens. So, as you can see, 30%, 20%, and even 5% is too much, especially when we are paying GST for everything. Food, clothing, travel, petrol, internet, electricity, movies, it's like we are paying taxes for breathing! So, if the Income Tax Department itself is giving you back your money, i.e. rebating your money, then why won't you take back your own money?
Now, how to get back your money? There are 5 ways to do it. The first method involves spending money a certain way and the rest 4 are by saving it. Let's start with spending money. The IT Department will give you back your money if you spend it on the following things:

House Rent Allowance
If you are paying rent, then under Section 10(13A), you get an exemption of an amount that is equal to the minimum of these 3. It will either be your HRA from your salary slip, 50% of your basic (if you are living in metro) or 40% of your basic (if you are living in a non-metro) or the rent paid by you. You deduct that amount from 10% of your Basic.

Moving from rent to home loan. Suppose you are living in your own house and have a home loan on it, then congratulations! You can claim both principal and interest. Under Section 80C, you can claim the principal and the max limit of 80C is Rs.1,50,000. Under Section 24, you can claim the interest and the max limit is up to Rs. 2,00,000.

Third expense is Provident Fund. This is something you have to contribute in while you are working. The best part is, it comes with a tax exemption under 80C. So, your PF is usually 12% of your Basic.
Fourth and the most important expense, education. Under 80E, suppose you or your spouse or your children take an education loan, then you can claim the interest until it is fully paid or for 8 years, whichever is sooner. This means, suppose you took a loan for doing your engineering, then you can claim it even while you are doing your job. Sec 80E is for education loan but under 80C, you can also claim the tuition fees of your children. Only for the first 2 kids, okay? And finally, under 80G, you can file returns for a maximum of Rs.10,000 for contributions made to charitable institutions, relief funds. So, if you have contributed to the Kerala CM Relief Fund, then you can claim it now.
As you can see, there are so much tax returns you can claim by spending money. However, if you are not doing any of these, then don't worry. The Government of India allows Tax Exemption even when you save money. To help you decide which of these 4 saving options is best for you, we are going to compare them based on the following 3 parameters:

  • Lock-in period: how long you'll have to wait before you take out your own money.
  • Average returns: the % of the interest you will get out of it.
  • Tax on maturity: the amount of tax you'll have to pay on the final amount that you get at the time of withdrawing your money.
Let's start with the option of Saving Money through the Public Provident Fund (PPF), which is basically a retirement fund. If you save your money through PPF, then you can save your taxes under Section 80C. The sad part is, the Lock-in Period of PPF is 15 years. If you are in dire need of money, then you can withdraw only after 5 years and only up to a certain percentage. Hence, withdrawal is definitely a problem with PPF. The average returns are around 8% but the good part is you don't have to pay any taxes on the final amount at the time of withdrawal.

Our next option is a Tax-Saving FD, which is basically a type of Fixed Deposit that comes with a tax benefit under Section 80C. The best way to invest in a Tax-Saving FD is in a bank that has your salary account. That way, you can automatically set up for the FD amount to directly move to your salary account after maturity without you having to do anything.

Our next saving option is Health Insurance. You might be thinking 'nothing bad will happen to me.' However, bad luck doesn't knock on the door before coming, and you wouldn't want you or your family to spend all your savings or worse beg for money. The best part about Health Insurance is that it helps you save taxes. Under Section 80D, you can claim up to Rs.25,000 for yourself and your dependents, and an additional of Rs.30,000 if both your parents are above the age of 60.

Our last saving option of the day is, ELSS. Equity Linked Saving Scheme, which is basically an Equity Mutual Fund with tax-benefit under 80C. The lock-in period of ELSS is just 3 years, average returns in the past have been between 14-18%, and the returns generated are taxable.

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