The I-Tax Act, 1961 provides several avenues by way of deductions under different sections of the Act, to help one invest or make an expense to reduce the tax outgo.
The Income-tax Act, 1961 has various sections taxpayers can use to reduce their tax outgo every year. And the most common sections in the Act that people use to save on tax are 80C, 80D, 80CCD (1B), and 24 (b).
However, each of these sections come with a maximum investment amount set by the government. Therefore, based on the tax rate of the individual – 5 percent, 20 percent and 30 percent (excluding cess of 4 percent) — the maximum tax saved will be limited. Illustratively, on an investment of Rs 1 lakh, someone paying 20 percent tax will save Rs 20,000, while someone in the 30 percent bracket will save Rs 30,000 annually.
Read on to find out how much tax you can save under each of these commonly used sections of the income tax Act:
I. MAXIMUM TAX SAVING UNDER SECTION 80C
The most popular avenue for tax-saving is section 80C of the Income Tax Act. Under Section 80C, an amount equal to the investment you make in specified instruments or expenses, up to a maximum of Rs 1.5 lakh in a financial year, reduces your gross total income (GTI) by the same amount. This, in effect, reduces your taxable income and reduces your tax liability. For example, if your GTI is Rs 10.5 lakh and you make an investment of Rs 1.5 lakh in a specified product, the GTI gets reduced by Rs 1.5 lakh and stands at Rs 9 lakh. Now, your taxable income becomes Rs 9 lakh on which tax has to be paid.
The amount of tax saved is equal to the amount invested multiplied by your tax rate. For instance, if someone paying 20.8 percent tax invests Rs 1.2 lakh in section 80C, the total tax saved will be Rs. 24,960. If he wants to maximise the tax saving allowed under this section (i.e., Rs 1.5 lakh), an additional investment of Rs 30,000 has to be made, and then total tax saved will be Rs 31,200 — the maximum for someone in the 20.8 percent tax rate and Rs 46,800 in the 31.2 percent tax rate.
Eligible investments in the 80C basket includes life insurance premiums, equity-linked savings schemes (ELSS), Public Provident Fund (PPF), National Savings Certificate (NSC), five-year notified tax-saving bank deposits, five-year post office time deposits, Senior Citizens’ Savings Scheme (SCSS), Sukanya Samriddhi Account, Employees’ Provident Fund (EPF) etc. The expenses and outflows that form a part of this basket include tuition fees, principal repayment of home loan and so on. One can invest the entire Rs 1.5 lakh in one investment or diversify across more than one.
As per the section 80CCE, the aggregate amount of deduction under sections 80C, 80CCC (pension plan offered by an insurance company) and Section 80CCD (1) (for National Pension System-NPS) shall not exceed Rs. 1.5 lakh.
“The maximum limit under 80CCD(1) is 10 percent of salary and should not exceed the overall limit of 80C, which is Rs 1.5 lakh,” informs Archit Gupta, Founder & CEO, ClearTax. Section 80CCD (1), which is only for investments in NPS, allows individuals, both salaried and non-salaried, a deduction not exceeding an amount equal to 10 percent of salary (includes dearness allowance but excludes all other allowance and perquisites). In case non-salaried individuals, the maximum deduction allowed is 20 percent of one’s gross income.
So, if one has a basic salary of Rs 30,000 a month (Rs 3.6 lakh annually), investing in NPS will fetch a maximum deduction of Rs 36,000.
How much tax is saved: The maximum that can be saved under section 80C for those taxed at 5.20 percent, 20.8 percent and 31.2 percent is Rs. 7,800, Rs 31,200 and Rs 46,800 respectively.
How section 80C helps in meeting financial goals: Investing in eligible investments under section 80C not only reduces your tax outgo, it also helps you meet your long-term goals. Therefore, link each section 80C investment to a goal and reap the benefits. And remember, not to invest in a financial product merely to save tax.
II. Maximum tax saving under section 80D
The premium paid towards health insurance policies qualifies for deduction under Section 80D of the Income Tax Act. The benefit for health insurance premiums paid for self, spouse, children, and parents. The quantum of tax benefit depends on the age of the individual who is medically insured.
Currently, on the premium paid, the maximum deduction that can be availed is Rs 25,000 a year, provided the age of the individual as well as that of the other family members insured is not above 60.
If the premium paid by an individual is towards a health policy for his or her parent, who is a senior citizen above the age of 60, then maximum is capped at Rs 50,000. A taxpayer can, therefore, maximise tax benefit under section 80D to a total of Rs 75,000 if his age is below 60, while parents’ age is above 60.
For those tax payers who are above the of age 60 and are also paying health insurance premiums for their parents, the maximum tax benefit under section 80D would therefore be Rs 1,00,000.
Within the maximum limit of Rs 25,000 or Rs 50,000 (as per age), preventive health check-ups get a benefit of up to Rs 5,000. This means, if you pay a premium of Rs 20,000 towards mediclaim and undergo a health check-up costing Rs 5,000, a total of Rs 25,000 can be availed under section 80D. Most prominent hospitals offer preventive health check-up packages. With lifestyle ailments on the rise, it’s advisable to get a health insurance policy..
How much tax is saved: The maximum that one can save under section 80D (Rs 25,000 considered) for those paying 5.20 percent, 20.8 percent and 31.2 percent tax is Rs. 1,300, Rs 5,200, and Rs 7,800 respectively.
How section 80D helps in meeting your financial goals: Most financial planners suggest getting a medical insurance plan even before investing. An adequate health insurance cover helps to avoid the need to dip into one’s savings earmarked for long-term goals.
How to read the table
” If someone paying 20.8% tax invests Rs 1.5 lakh (max allowed) in Section 80C, the maximum tax saved will be Rs 31,200.
” Further, premium paid for health insurance (max Rs 25,000) under section 80D, saves maximum tax of Rs 5,200. The total tax saved, therefore, becomes Rs 36,400.
” Additionally, investment in NPS under Section 80CCD (1B) helps save more tax, taking the total tax saved Rs 46,800.
” Now, if interest deduction of a home loan is considered, the total tax saved becomes Rs 88,400.
III. MAXIMUM TAX SAVING UNDER SECTION 80CCD (1B)
You can invest an additional amount of up to Rs 50,000 a year in NPS under section 80CCD (1B). This can be availed whether or not any deduction is allowed under section 80CCD (1). However, the same amount cannot be claimed under section 80CCD (1) and 80CCD (1B) together in the same year.
How much tax is saved: The maximum tax that one can save under section 80CCD (1B) for those paying 5.20 percent, 20.8 percent and 31.2 percent is Rs. 2,600, Rs 10,400, and Rs 15,600 respectively.
How section 80CCD (1) and section 80CCD (1B) helps meet your financial goals: NPS is a retirement-focused scheme and provides for lifetime annuity (contains principal and returns), which is entirely taxable. One, therefore, needs to be careful while making use of this additional tax benefit as it will amount to merely deferment of taxes. To know more about NPS before investing in it, click here to read it.
IV. MAXIMUM TAX SAVING UNDER SECTION 24(B)
Buying a ready-to-move in property could be better than buying an under-construction one, although the latter could be less costly than the former. Currently, for a house which is self-occupied, one can avail tax benefit on the principal repaid as well on the interest amount.
You can claim a deduction up to Rs 1.5 lakh under section 80C for the principal amount repaid and the interest paid is deductible up to Rs 2 lakh per annum.. In an under-construction property, principal repaid does not get any tax benefit but the benefit on the interest paid can be availed in 5 annual instalments after the possession of the property.
How much tax is saved: The maximum tax that one can save under section 24 (for interest deduction up to Rs 2 lakh for a self-occupied house) for in the 5.20 percent, 20.8 percent and 31.2 percent brackets is Rs. 10,400, Rs 41,600, and Rs 62,400, respectively.
How section 24(b) helps in meeting your financial goals: Let us take the example of a home loan of Rs 25 lakh at 8.35 percent with a tenure of 15 years and equated monthly instalment (EMI) of about Rs 24,000. The interest paid in the first year amounts to nearly Rs 2.05 lakh, reduces as the tenure progresses. It’s good to own a house with one’s own equity but to bridge gaps, home loans come handy and gives tax breaks too.