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Albert Einstein once said, “the hardest thing in the world to understand is the income tax.”
Saving income on taxes is a cumbersome activity that is not possible for everyone to understand. It is expected that more than paying taxes, individuals want to use their brains to earn money. No matter how hard you try to avoid it, as the year end approaches, things like vacation, income tax, and new year resolutions fill your mind. Well vacation and new year resolutions fall in the frame of voluntary aspect. Income tax is a mandatory ritual that not one but everyone has to comply with.
When talking of income tax then the tax saving strategy takes the lead. Income tax is the portion of income that you need to pay to the government of India. The tax is paid to avail the infrastructural facilities like healthcare, roads, transportation,etc in our country. Both the salaried as well as business professionals have to pay income tax. However, there are ways to reduce their tax liabilities as applicable under different sections of the Income Tax Act, 1961.
If you are interested to know how you can save income tax further. In case you have not bothered to understand the tax-saving strategies, you can now make up your mind now because, in the end, it is about your hard-earned money.
Why do you need to protect your income from taxes?
You need to protect your income from taxes as it:
- Is a saving that you make for your own good to achieve future goals.
- Helps you to accumulate funds and invest further to generate income from savings.
Let us now look at the top strategies to protect your income from taxes.
Top 7 Strategies to Protect Your Income From Taxes.
Here are the top and most preferred tax-saving strategies in which you can protect your income from taxes:
1. Buy a health insurance policy
Section 80D of the Income Tax Act, 1961 allows you to claim tax deductions for your health insurance policy premium. So you can pay the premium for yourself, your spouse, dependent children and dependent parents. Apart from the tax benefit, a health insurance policy will be a saviour to arrange for funds for a medical emergency. You can also claim deductions up to Rs.5,000/- if you go for a preventive health check-up.
The limit of the total amount of deduction allowed under a health insurance policy if you pay a premium for yourself is Rs.25,000/-. The limit is the same if you pay a premium for your spouse. But if you pay the premium for your dependent parents, then the limit for income tax deduction will be Rs.50,000/-.
2. Invest in a life insurance policy
Life insurance policies are eligible for tax deductions under Section 80C. Therefore, you can buy a tax saving insurance policy as per your preference and requirement. For example, if you want to have financial security for your family, you can buy term insurance. A term plan is the purest form of life insurance policy which comes at an affordable premium rate of Rs. 22/- per day.
If you want to save for your retirement, buying a pension plan will be a wise choice. Often young married couples pick policies like child plans when they know that the child’s responsibility is immense. The child plan enables the team to collect money for their child’s future needs.
3. Invest in ULIP
Unit Linked Insurance Plan is a life insurance policy that provides double benefits. ULIP gives you life cover as well as options of investment. The portion of the premium you pay for a ULIP is invested into funds (equity, debt, or combined), and another bit of it goes for a life cover. ULIP plans give freedom to individuals to select the funds in which they want to invest their money.
ULIP are a long term investment tool that can help you build a corpus of wealth in the long run. The tax benefit under ULIP can be availed under Section 80C of the Income Tax Act, 1961.
4. Apply for a Home Loan
Apply for a housing loan to save taxes on income. You can get deductions up to Rs.1.5 lakhs on a home loan when you repay the principal amount. The tax savings up to Rs.2 lakhs can be made on interest repayment under Section 24B. In the recent development, depending on the property you have purchased, the amount you have borrowed, and the year of loan sanction, you will be eligible for a further tax deduction of Rs.50,000/- under Section 80EEE.
If your home loan is purchased between 1st April 2019 to 31st March 2022, you can claim the deduction for one more year as confirmed in Union Budget 2021.
5. Save tax on children’s tuition fees
Expenses for your children’s schooling take up a significant percentage of your income. Section 80C allows parents to claim a tax deduction of up to Rs 1.5 lakh for tuition fees paid for their children’s education. This benefit is valid for any full-time education programme delivered at any licenced institution, including schools, colleges, and even pre-schools and nurseries. This applies to tuition fees paid for up to two children per taxpayer.
It implies that if both are individual taxpayers in a couple, each can avail this benefit for up to 4 children. Also, this benefit only applies to tuition fees; it does not apply to other fees such as development fees, late payment fees, and so on. Additionally, if your employer gives a children’s education allowance or a dormitory expenses allowance, you can get a tax break on these allowances up to Rs 1,200 per year and Rs 3,600 per year, respectively, for up to two children.
6. Education Loan
People can save their income from taxes under Section 80E of the Income Tax Act. It allows people to save tax on education loans applied for spouses or children. In addition, they can claim a deduction on the amount they have spent for paying interest on the loan amount. Luckily, there is no maximum tax deduction limit on the amount of education loans.
7. Long Term Capital Gains
Another way you can stick to saving tax is through long term capital gains. The capital gains are from investments earned from 1 and 3 years. The amount earned is gained from selling any long term capital asset, which is the asset that the individual owns for over 3 years.
Conclusion:
Picking a tax-saving strategy that saves you more pennies is an art. There are multiple ways, most of which are expected, like buying term insurance. But one shoe doesn’t fit all sizes; that is why you cannot blindly pick one type of life insurance. Instead, you need to explore options that suffice your purpose of earning and tax saving at the same time.
