Among 120 crore Indians, only 1% of the population pays income tax, and just over 5,000 pay more than Rs. 1 crore, according to the latest data disclosed by the government for the assessment year 2012-13. However, a total of 2.87 crore Indians filed income tax returns for that year, but 1.62 crore of them did not pay any tax. The news is rather shocking, as the tax avoidance in India is done as much by the wealthy as the lower classes.
Let us learn a few ways in which we can pay income tax, while also saving our hard earned money.
Tips to Save on Income Tax
- Have a Savings Account:
You should know that in our country, the interest income on saving accounts is not taxable up to Rs. 10,000. Those who have earned more than 10k will have to pay tax only on the exceeding amount.
- Maturity or Claim Amount for Life Insurance:
Life insurance policies will remain the traditional method to save tax. These policies offer “triple benefits” of life insurance cover, long-term savings and tax benefits. According to the amendments introduced in the Finance Act, 2003, the maturity benefit of an insurance policy is tax exempted if the premium paid did not exceed 20% of the sum assured.
- Invest in Shares or Equity Mutual Funds:
Those who have invested in stocks and Mutual Funds know well that dividends are distributed to shareholders, all of which are tax-free in the hands of the receiver, even if you haven’t completed one year since you bought the stock.
- Sell Shares after One Year:
Investing in stocks or mutual funds lets you earn profits that are 100% non-taxable. The only condition is that you should sell your equity, whether shares or mutual funds (equity), only after holding them for one year.
- Keep Provident Funds for 5 Years:
Withdrawal of your PF is not taxable if the employee has rendered continuous service for five years or more to the employer. It means you don’t have to pay taxes on the interest received from EPF/PF investments, if you have kept your provident fund active for at least five years before you start withdrawing money.
- Tax Saving from Home Loan:
Income tax deduction on your home loan(s) works in three ways. Firstly, when the principal amount is re-paid in the current financial year, under section 80C, offers a deduction up to Rs. 1,50,000. Secondly, the interest paid is offered a deduction up to Rs. 2,00,000 separately under section 24. Lastly, as a benefit on interest on home loan for first time home buyers, Rs. 50,000 under section 80EE is exempt. Moreover, there is no limit on income tax deduction on the interest payment of a second home loan.
- Save Tax on Education Loan:
Under Section 80E, the interest paid on education loans, when taken for higher studies of self, spouse and children is non-taxable. As a matter of fact, there is no upper limit on the amount.
- Have Medical Insurance:
Under section 80D, medical insurance policy buyers can claim deductions of Rs. 15,000 for medical insurance of self, spouse and dependent children, and Rs. 20,000 for medical insurance of parents above 65 years.
- Make Donations:
Under Section 80G, donations to specified funds or charitable institutions are tax exempted. However, the donor needs to retain the stamped receipts of the donations, making sure the charitable organization is registered.
- Opt for ULIPs:
The new, online and ultra cheap ULIPs have emerged as a lucrative life insurance product, which other than providing risk cover for the policy holder, invest in many qualified instruments in India, such as stocks, bonds and mutual funds. The ULIP investors are given the flexibility to switch their corpus from equity to debt, and vice-versa. Tax deduction is available on ULIPs under Section 80C, provided the sum assured is at least 10 times the annual premium.