How to Save Tax in India?

Taxes have been imposed since time immemorial. From the very first kingdoms and empires all around the world, kings and monarchs introduced monetary and non-monetary taxes and imposed them strictly on their subjects.  Taxes are collected in India on income, wealth, and real estate. Individual income is subject to income tax; corporation taxes are collected by the federal government. The net worth of the assets that people or businesses own is subject to the wealth tax.

In addition to these taxes, there is a wealth tax on unencumbered immovable properties (such as houses and apartments) owned by individuals or corporations.

The income earned from these taxes is crucial for the proper functioning of the country, as the government requires these revenues to support economic growth and progress. According to India’s tax slabs, the tax changes depending on the relevant income.

What Are Taxes?

Taxes are monetary fees levied on individuals by governments on the local and central levels. This monetary amount is then used to fund various public and non-public services, and taxes can be segregated into two major categories:  

• Direct tax: Direct taxes are monetary taxes issued towards any individual or corporation. The main feature of direct taxes is that the burden of the tax cannot be shifted from one individual to another. For example, income tax is a direct tax since it is charged directly to an individual and cannot be passed to other individuals.

• Indirect tax: Indirect taxes are monetary taxes passed on to the consumer from any producer or manufacturer. For example, a producer charges a minimum retail price (MRP) inclusive of taxes that they are liable to pay to the government.

What Is Income Tax?

The word “income tax” refers to a category of tax that governments levy on revenue produced by organizations and people under their control. Government duties, public services, and citizen goods are all paid for through income tax revenue. Governments receive funding from income taxes. They are used to pay for debts owed to the government, fund public services, and supply residents with goods. Many states and municipal governments, in addition to the federal government, also demand payment of income tax. If you are a salaried employee, then income tax is charged on your salary, which is your income. If you are a business owner, income tax is charged on what you earn from your business. The revenue collected from income tax is used to fund the nation’s operations and schemes. However, the amount of tax an individual pays depends on several factors, such as their income amount, their investments, their industry of operation, etc. And let’s be candid for a moment—almost no one wishes for a large percentage of their income to be given away in taxes, as it means fewer savings and a downgraded lifestyle. 

The New And The Old Tax Regime

• Old tax regime

The government has introduced nearly 70 exemptions and deduction options through various sections introduced over some time in the Income Tax Act. These deductions and exemptions severely cut down on the amount of money an individual has to pay as income taxes. However, the tax exemptions and deductions can be availed of under the old tax regime, which was the existing income tax structure, until Financial Year (FY) 2020. That’s when the new tax regime was launched by the Union government, almost eliminating the benefits of tax exemptions and deductions.

• New Tax Regime

The New Tax Regime, launched by the Union government in the financial year 2020-2021, brought several tax reforms that have been in demand for a long time. The new tax regime is different from the old in that the new tax regime does not dictate what investment instruments people should choose to save. Rather, it provides varying income tax slabs, or tax rates. This diversification of multiple income tax slabs has allowed people to choose the lower end of the tax slab they fall into. Anyone can choose a slab that best matches their annual income levels.  

The best part about the options of the new and old tax regimes is that every citizen has the right to choose the one that best suits their needs and long-term aspirations. The Union government is not forcing any individual to succumb to one tax regime over another by introducing penalties or other frictions within the system.

Tax Exemption Vs Tax Deduction vs. Tax Credits

Tax exemptions, tax deductions, and tax credits can be defined as three different strategies that can help individuals save taxes on various fronts. However, all three have different ways of saving taxes. Let us explore them one by one.

• Tax exemption: Tax exemptions are the amounts of tax reductions you receive while claiming certain benefits via tax-saving investments. Tax exemptions reduce the tax amount you have to pay to the government by a considerable amount if done right.

• Tax Deductions: Tax deductions are the monetary transactions that are not counted in the tax calculation in the first place. Tax deductions forego the amount of tax liability by not allowing for the amount invested in being eligible for taxation.

• Tax credits: Tax credits can simply be described as coupons that the government gives you that you can later avail yourself of to reduce your taxable income. 

Elements That Will Help You In Save Tax In India

Many people have a problem with inertia, i.e., resistance to starting, when it comes to an understanding of the elements that will help them save taxes. Various tax-saving investments and instruments can create substantial tax benefits in the form of tax credits or tax exemptions. However, if we can overcome the problem of inertia, our Income Tax returns (ITR) can induce mental satisfaction and even monetary benefits. If applied to perfection, the following avenues will help you to save taxes in India.

The winning triumvirate: Section 80C, Section 80D, and Section 80E

• Section 80C

To encourage investments and savings within the nation, the Union government, on 1ts April 2006, brought Section 80C into effect. Under Section 80C, many tax saving investments and expenditures are exempt from tax, and the exemption amount can go up to 1.5 lakh per annum (LPA). Under the old tax regime, you can still avail of the deduction on various tax saving investments and expenditures such as National Pension Scheme , Public Provident Fund , Equity Linked Saving Scheme, Fixed Deposits, etc.

• Section 80D

Under the provision of this section, you can claim tax benefits for the premium amounts you pay for health and medical insurance. Therefore, buying medical insurance will provide you double the benefits of a health safety net and tax benefits. You can avail of tax benefits for medical insurance for yourself and your immediate family and friends. You can claim a deduction of Rs. 25,000 for medical insurance premium paid for yourself, spouse and dependent children. Further, another deduction of Rs. 25,000 can be claimed for health insurance premium paid for your parents. On top of that, if any of the persons mentioned above is a senior citizen (i.e., aged 60 years or above and resident in India), then the deduction limit gets enhanced to Rs. 50,000.

• Section 80E

To boost your education prospects, the union government has provided for tax exemption on the interest levied on payments for education loans. This section applies to education loans taken for your children, spouse, and other immediate family members. 

• Long term capital gains

Capital gains tax is the tax charged at the profit margins an individual makes from the transaction of any asset such as stocks, bonds, certificate deposits, real estate, business assets etc. The amount of long term capital tax you pay depends on your income levels and the duration of time you have to hold onto the asset. If you are a good investor and are making significant margins on the sale of your investments, you surely would not want to pay a large portion of the margin to the government as tax. Long term capital tax gains are the way you can save that taxable amount. The only way, however, is to invest the profits you earn from the sale of long-term capital assets in other investment instruments, such as stocks and bonds.

• Donations/Charity

According to government guidelines, charitable contributions to a non-profit organisation or a society are exempt from tax liability. Realising the importance of a sustainable environment and a better society, the government has encouraged people to donate more to organisations that are working for a non-profit cause. Under Section 80G of the Income-tax Act, the amount of money donated to a charitable trust is exempt from tax to a certain percentage. Usually, 50% to 100% of income tax exemption is eligible on the amount donated, depending on various other factors such as the charitable foundation, cause, frequency of donation etc. Further, donations made to political parties or electoral trusts are also allowed as a deduction under Sections 80GGB and 80GGC for companies and non-corporate persons, respectively. Here, there is no limit as to the amount of donations that can be claimed from political parties and electoral trusts. However, it should be ensured that the donations are made in ways other than cash.

• House rent allowance (HRA)

Everyone living in a rented apartment must have wondered about the HRA allowance on the payslip sheet that your company includes in the monthly salary. This HRA or House Rent Allowance is exempt from tax since you are already paying your taxes in the form of house tax or water tax in your rent payments. The government introduced this exemption to avoid double taxing its citizens on certain fronts. The HRA can either be decided by the mutual agreement of the employer and the employee or can be predefined in various cases. 

• Leave Travel Allowance(LTA)

As the name suggests, a Leave Travel Allowance (LTA) is the monetary amount paid by the employer to the employee to cover the expenses incurred by the employee and the immediate family while on leave. International travel expenses are not covered under LTA, and the claimant must keep a perfect record of their itinerary. 

• Home loan interest deduction

If you have taken a home loan, then you can claim a deduction for the interest payments as well as the principal repayments. Under section 24(b) of the Income Tax Act of 1961, a person can claim a deduction for the interest paid on home loans. Further, the principal component of the EMIs can be claimed as a deduction under section 80C. Therefore, home loans act as a great savior for taxes.

Conclusion

By now, it is clear that tax-saving investments are the best way to save taxes in India. The government also offers numerous tax advantages to institutions and people, both residents and non-residents. Therefore, it is preferable to utilize all of your possibilities rather than whine about them. If you know what your rights are in India, you can cut your tax bill by a lot.

In India, taxes cannot be avoided. The best strategy to reduce your tax burden is to invest in mutual funds, equities, and bonds. Capital gains and mortgage interest are included in the tax-saving category. However, preserving a tax isn’t that simple; it requires the saver to put in time and effort.

And Kuvera’s platform is the best way to gauge the best investment instruments that you can invest in to save taxes. The platform contains stocks, bonds, and mutual funds and gives you the analytical tools and data to analyze the options and choose the best investment for yourself. an investment that matches your needs and aspirations and is customizable at the same time. As a result, you can reap the benefits of both investments and tax savings from a single instrument. All you need to do is visit the Kuvera platform and start investing.

Frequently Asked Questions

• I am a salaried person. Last year, I opted for the new tax regime. Can I migrate back to the old regime again?

Yes. Salaried people are allowed to shift from the old regime to the new regime and vice-versa a certain number of times.

• What are the tax rates applicable under the new taxation regime?

 Under the new taxation regime, the following tax rates shall be applicable:

• Can I set off my business loss against my salary income to save taxes?

No. Business losses are prohibited from being set off against the salary income.

• I have won the lottery. How can I save taxes on my lottery income?

No deductions are allowed against income from lottery winnings. Therefore, you will have to pay tax on your lottery income.

• What are the deductions that I can claim as a business person to save taxes?

Apart from the above deductions, all the expenses associated with your business can be claimed as deductions from your total turnover. Once you deduct all your business expenses, you arrive at your net profits, from which you can claim deductions for investments made in various tax-deductible avenues.

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