As per income tax laws in India, all individuals with incomes exceeding the basic exemption limit must file their income tax returns (ITRs) annually. ITRs declare the annual incomes and tax liabilities of individuals. The Income Tax Act of 1961 offers various tax rebates and exemptions. Understanding these will enable you to manage your finances efficiently.
Read on to find out how you can save on income tax in 2022.
How to Reduce Tax and Improve Personal Finances
Here are ten ways to reduce your income tax and improve your personal finances:
1. Investment in tax-saving instruments
Section 80C of the Income Tax Act of 1961 offers certain tax deductions on amounts spent on some instruments. This is to encourage savings. Some of the common investment instruments for tax planning are given below.
- Employees’ provident fund (EPF)
- Fixed deposits (term of 5 years or more)
- Public provident fund (PPF)
- ELSS mutual funds
- Life insurance policies
- National pension scheme (NPS)
- Other pension plans.
Investing wisely in these instruments will help you plan your finances and save on taxes up to Rs 1.5 lakh per fiscal year.
2. Choose a suitable tax regime
The government of India offers two tax systems. The new income tax system offers lower rates without any exemptions or deductions. You can choose one of the two options when filing your ITR. Choosing a suitable tax regime is key to improving tax savings.
Choose the old tax regime if you wish to benefit from tax deductions under Section 80C of the Income Tax Act. Otherwise, opt for the new tax regime to reduce your income tax. The right choice will also help you manage your personal finances effectively.
You can use an online income tax calculator to find out which option is best for you.
3. Choose suitable components from the salary structure
If you are a salaried individual, assess your salary structure carefully. It is important to understand the key components of your salary. Your salary structure may include the following components:
- House rent allowance (HRA)
- Provident fund
- Retirement benefits
- Telephone and internet expenses
- Education allowance
- Medical reimbursement
- Food coupons.
Choose components that can maximize your tax benefits.
4. Increase contributions to retirement funds
Salaried individuals can contribute to the voluntary provident fund (VPF). Ensure that the asset limit is less than Rs. 1.5 lakh. This additional contribution is exempt from income tax, subject to certain conditions.
The employer’s contribution to the NPS will also be deducted from your salary. This contribution can be up to 10% of your basic salary.
Do keep in mind that your contribution to the EPF and VPF must not exceed Rs. 2.5 lakh in a fiscal year. Any amount exceeding this will be taxable. You can plan your personal finances based on these calculations.
5. Take advantage of home loan tax benefits
Do you have an existing home loan or business loan? You can get tax exemption for a loan from a reputed bank or a non-banking financial firm. The loan amount will not be considered part of your taxable income.
The maximum deduction allowed under this rule is Rs. 2 lakhs under section 24 of the Income Tax Act for home loan interest. Rs. 1.5 lakh is the maximum deduction allowed under the Income Tax Act for home loan principal.
6. Buy health insurance
You can reduce your tax liability by buying health insurance for yourself and your family. As per Section 80D of the Income Tax Act, you may deduct up to Rs. 25,000 for health insurance premiums for yourself, your spouse, and your children.
Senior citizens may also qualify for a tax deduction under this section of up to Rs. 50,000. If you are paying for your parent’s health insurance, you can save up to Rs. 50,000.
7. Make suitable deductions for tuition
In some cases, you may get tax benefits for some expenses. This includes Rs. 5,000 for health checkups, even if you don’t make any additional investment.
Section 80D includes the above health insurance premiums. It applies to the deduction for costs related to health checkups.
8. Make suitable deductions for health checkups
Do you have children attending school? You can deduct up to Rs. 1.5 lakh from your taxes for tuition fees. Section 80C offers an exemption of up to a maximum of Rs 1.5 lakh for tuition fees.
9. File Income Tax Return on Time
File your ITR by July 31st or by the date specified by the income tax unit. Failing to file an ITR by the due date may lead to costly fines.
ITR documents are needed for various financial transactions. It includes housing loans, high-value payments, and applications for immigration documents.
10. Choose a suitable tax regime
The government has put forward a new simplified income tax regime. It was launched in the fiscal year 2020-21.
You can pay your taxes at lower slab rates that are effective without some of the exemptions offered by the old regime. This is subject to certain conditions.
You can compare the taxes under the current and new tax regimes. Choose the regime that is more beneficial for you.
No documents are needed for e-filing an ITR. However, it is important to keep a record of documents for investments. This includes PF account statements, copies of insurance policies, passbooks, bank statements, and pension plans.
Tax exemptions aim to help people manage their personal finances well. Often, people rush to invest in tax-saving instruments at the end of the fiscal year to save money. However, this negates the main goal of such deductions.
The ideal time to make tax-saving decisions is at the start of each calendar or fiscal year. You can save taxes and build wealth by investing regularly in many tax-saving avenues. However, it is essential to understand all the investment options to save tax. Invest in options that are suitable for you.
You can visit the Piramal Finance website for more details about tax saving personal finance ideas. You can also explore their products and services to plan your finances.