A common understanding about tax-saving is at times confusing and complex to many. Most of them know the familiar tax saving options like PPF, ELSS, HRA, or home loan interest, etc. But there are numerous lesser-known strategies that can also significantly reduce your tax burden.
Today, we shall delve into five tax-saving tips that exceed the basics. They are for salaried employees and for business owners and freelancers wanting the chance to save more on their taxes.
In this article, we’ll uncover these hidden tax saving gems, detail how they work and how you can use them to your advantage. Whether you are running your own business, freelancing or just looking to make the most of your tax savings, these tips will help you navigate the tax landscape much more effectively.
Tax Saving Tip #5: Section 80GG
Overview: For all those who are paying rent but are not receiving HRA, the section 80GG offers the individual tax relief. This section allows an exemption even for self-employed and others who do not receive HRA, on the rent paid.
Terms and Conditions for Deduction:
- Rent Lower Than 10% of Total Income: Here, you can claim an exemption equal to the rent paid minus 10% of your total income.
- Total: Is fixed at ₹5,000 per month.
- Percentage of Salary/Income: 25% of the total income.
Explanation:
- Annual Salary: ₹5 lakhs
- Monthly Rent: ₹10,000
- Condition1: ₹1,20,000 is paid in the form of annual rent or ₹50,000 being 10% of the total income.
- Condition2: ₹5,000 x 12 = ₹60,000
- Condition3: 25% of ₹5 lakhs is same as ₹1,25,000
The lowest among these three is ₹60,000. So, you can exempt up to ₹60,000 in Section 80GG.
Important Points:
- You will not be able to claim this exemption if you, your spouse, or minor child have a property through which you stay.
- You will not be able to claim this exemption if you have a home that is under your ownership.
Tax Saving Tip #4: Section 80D
Summary: Section 80D allows the deduction of medical insurance premium; however, there’s more many people tend to miss: preventive health check-ups.
Explanation for Deduction:
- Medical Insurance Premium: 1.1. Individuals below 60 years: The Deduction amount is ₹25,000 in a year. 1.2. Senior Citizens (Parents): Deduction amount is ₹50,000 in a year.
- Preventive Health Check-Up: Under the additional deduction for a full-body check-up, within ₹5,000.
Example Calculation:
- Insurance premium: ₹14,280
- Preventive Health Check-Up: ₹5,000
Total deduction possible = ₹14,280 (insurance premium) + ₹5,000 (check-up) = ₹19,280.
Note: The premium payments should be made through direct transfer to the bank account. A preventive health check-up can be paid in cash.
Tax Saving Tip #3: Section 80CCD (1B)
Overview: This section allows a deduction over and above ₹1.5 lakh under Section 80C, for the investment in the National Pension System.
Key Points:
- Additional Deduction: Contributions to NPS up to ₹50,000, but only for Tier 1 account.
- Eligibility: This is in addition to the ₹1.5 lakh limitation available under Section 80C.
Note: Only Tier 1 account means lock-in of money until the individual is 60 years old. It does not apply to Tier 2 accounts.
Tax Saving Tip #2: Tax Harvesting
Tax Harvesting: An exercise that helps one make the best use of the exemption limit for Long-term Capital Gains at ₹1 lakh.
How it Works:
- Realized Gains: Periodic sales of investment means that only those in excess of ₹1 lakh would be subject to tax. The ₹1 lakh exemption would get annually utilized.
- Example: Suppose you have an overall gain of ₹3 lakhs. If you liquidate all your investments and realize ₹1 lakh annually, you will have exhausted all the exempted value, so you will end up not paying taxes on the balance gains.
Important Note: Carry forward depends largely on proper planning and regular monitoring of investments to effectively carry out tax harvesting.
Tax Saving Tip #1: Carry Forward Losses
Overview: Where loss is suffered on investment and/or business activity, that loss may be carried forward and set off against future gains.
Key Points:
- Set-Off: Losses could be set off against profits in the same accounting year.
- Carry Forward: Unabsorbed losses would be allowed to be carried forward for eight years.
Example:
- Loss This Year: ₹1 Lakh
- Outgoings for Next Year: Assume that in the next year you have outgoings of ₹50,000. You can set this against the losses in the earlier period. The remaining loss of ₹50,000 can be forwarded.
Note: For carrying forward loss it is compulsory that income tax return is filed for the year of loss.
Conclusion
Explore some of the lesser-known tax-saving tips to maximize your benefits. While you reduce your overall tax liability, you explore such areas as 80GG, 80D, 80CCD (1B) will make sense. Perhaps there is a chance of making larger savings on taxes by reducing them through tax harvesting and loss-carrying forward.
Just remember that even though these tips have been helpful, seeking one’s way to a tax advisor will always be wise to mold related strategies in the light of your financial circumstances and tax laws prevailing during the year.
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