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Business News/ Brand Stories / How To Maximise Tax Savings: A Comprehensive Guide for Every Income Source
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How To Maximise Tax Savings: A Comprehensive Guide for Every Income Source

This guide aims to equip readers with the insights and strategies needed to make informed decisions and achieve their financial goals while staying compliant with Indian tax laws

Taxes, though often viewed as a burden, are in fact a realm of potential savings and investment opportunities waiting to be unlocked.Premium
Taxes, though often viewed as a burden, are in fact a realm of potential savings and investment opportunities waiting to be unlocked.

Every year, tax season descends upon us like an inevitable storm, bringing with it a whirlwind of forms, deductions, and deadlines. Yet, amidst the chaos lies a golden opportunity for financial empowerment. Understanding the nuances of tax-saving strategies is not just a matter of financial prudence; it's a pathway to securing your financial future.

Taxes, though often viewed as a burden, are in fact a realm of potential savings and investment opportunities waiting to be unlocked. From the humble salaried worker to the seasoned entrepreneur, each taxpayer holds the key to maximising their tax benefits and minimising their liabilities.

Armed with the right knowledge and guidance, individuals can harness the available resources to their advantage and pave the way for greater financial security and prosperity. In this comprehensive guide, we delve into various income sources prevalent in India and explore actionable strategies to maximise tax savings effectively. From exploring deductions and exemptions to understanding investment avenues and tax planning tools, this guide aims to equip readers with the insights and strategies needed to make informed decisions and achieve their financial goals while staying compliant with Indian tax laws.

Tax-Saving Options Across Different Categories

1. Salaried Individuals

Tax season can be a daunting time for salaried individuals, filled with confusion and uncertainty. However, with the right approach, navigating the complexities of tax savings can become much simpler. Here's how:

  • Section 80C: Section 80C stands as a cornerstone of India's tax-saving landscape, offering individuals and Hindu Undivided Families (HUFs) a pathway to substantial deductions. With a cap of Rs. 1.5 lakh per fiscal year, this section presents a plethora of investment and expenditure avenues.

Its primary objective is to foster a culture of savings and investments, incentivizing taxpayers through exemptions on interest paid or credited for lending within India. Under Section 80 of the Income Tax Act 1961, individuals can avail a deduction of up to 10% on the total interest payable, subject to fulfilling specific conditions.

Here's a breakdown of some investment options under Section 80C, offering insights into how to optimise tax-saving strategies:

- Unit Linked Insurance Plan (ULIP): Varies with the chosen plan, with a lock-in period of 5 years.

- Sukanya Samriddhi Yojana (SSY): Offers an attractive return of 8.00%, with no lock-in period.

- Senior Citizen Savings Scheme (SCSS): Provides a competitive return of 8.20% over a 5-year lock-in period.

- Public Provident Fund (PPF): Offers a stable return of 7.1% over a 15-year tenure.

- National Savings Certificate: Provides a fixed return of 7.7% over a 5-year lock-in period.

- National Pension System (NPS): Offers returns ranging from 9% to 12%, with investments locked in until retirement.

- ELSS Funds: Potential returns ranging from 15% to 18%, with a manageable lock-in period of 3 years.

- 5-Year Bank Fixed Deposit: Offers returns between 6% and 7%, with a lock-in period of 5 years.

  • HRA Exemption: Salaried individuals staying at rented accommodations and benefiting from House Rent Allowance (HRA) can claim HRA exemption under Section 10(13A) to alleviate their tax burden.
  • Section 80CCD(1): NPS contribution (up to 1.5 lakh).
  • Section 80D: Medical insurance premiums (up to 25,000 for self and family, up to 50,000 for parents aged 60 years or above).
  • Section 80E: Interest on higher education loans.
  • Section 80EE: Interest on home loans for first-time homeowners (up to 50,000).
  • Section 80EEB: Interest on loans for electric vehicles (up to 1,50,000).
  • Section 80G: Donations to charitable institutions.
  • Section 80TTA: Interest on savings bank accounts (up to 10,000).
  • Section 80TTB: Interest on deposits for senior citizens (up to 50,000).

Let's delve into the practical benefits of tax-saving deductions for a salaried individual using a hypothetical example. Meet Sushant, who earns a handsome salary of 12 lakh per annum. We'll explore three scenarios to illustrate the impact of tax-saving deductions on his overall tax liability:

Scenario 1: Leveraging Deductions

With careful tax planning and utilisation of available deductions under Section 80C, HRA exemption, Section 80D, and others, Sushant significantly reduces his taxable income to 5 lakh. Given the tax slab, this ensures that he pays zero tax, effectively leveraging total deductions of 7 lahks to retain all of his hard-earned income.

Scenario 2: Tax Payment Without Deductions

In this scenario, the absence of tax-saving investments and exemptions leads to a higher taxable income, resulting in a larger tax burden for Sushant. The following table clearly explains the difference between these two scenarios:

Tax Payment Without Deductions
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Tax Payment Without Deductions

Scenario 3: Exploring the New Tax Regime

Under the new tax regime, Sushant needs to lower his income to 7 lakh after availing a standard deduction of 50,000. While perks like HRA and LTA are no longer applicable, he can still benefit from deductions such as the interest paid on housing loans, up to 2 lakh.

2. Navigating Tax Savings for Business Owners and Self-Employed Individuals: For entrepreneurs and self-employed professionals, maximising tax savings is essential for bolstering financial stability and business growth. Understanding the array of deductions available under various sections of the Income Tax Act can significantly impact the bottom line. Here's a breakdown of the key deductions:

  • General Deductions under Section 37(1).
  • Depreciation (Section 32): Depreciation on tangible and intangible assets used for the purpose of the business or profession.
  • Deductions on Bad Debts (Section 36(1)(vii)): Provision for bad and doubtful debts for banks and financial institutions.
  • Investment in New Plant and Machinery (Section 32AD): Investment in new plant and machinery in notified backward areas in certain states.
  • Special Provisions for Specified Businesses (Sections 35AD, 33AB, etc.): Deductions for specific businesses like cold chain facilities, warehousing for agricultural produce, affordable housing projects, etc.

3. Hindu Undivided Family: Income earned by individuals and Hindu Undivided Families (HUFs) falls under comparable tax brackets to those applicable to salaried individuals in India. However, leveraging the unique advantages and tailored strategies available to HUFs can optimise tax savings while filing taxes both as an individual and under a HUF.

Let's look at how a HUF is taxed with an example—after Sushant's father passed away, he decided to form a HUF with his wife, son, and daughter as members. As Sushant's father had no siblings, the property he owned was transferred to the HUF. This property earns an annual rent of 7.5 lakhs. Sushant, with a salary income of 20 lakhs, can save tax by creating a HUF, as shown below.

How a HUF is taxed (1)
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How a HUF is taxed (1)
How a HUF is taxed (2)
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How a HUF is taxed (2)

Thanks to this tax arrangement, Sushant saved Rs. 1,54,500 in taxes. Both Sushant's HUF and Sushant (along with other HUF members) can claim deductions under Section 80C. Additionally, any income earned by the HUF can be invested by the HUF itself and will be taxed in the hands of the HUF.

However, forming a HUF also comes with its disadvantages, which include:

  • Equal rights of members: In a HUF, all members have equal rights to property, and common property cannot be sold without the consent of all the members. As the family grows through births or marriages, new members automatically join the HUF and gain equal rights, potentially making it difficult to manage as it expands.
  •  Continued assessment: Once formed, a HUF must continue filing tax returns until partition occurs, and income from partitioned property is taxed individually. But partitions involve dividing assets among members, often resulting in legal disputes!

Therefore, it's crucial for individuals to carefully weigh the advantages and disadvantages of establishing a HUF for tax-saving purposes.

Empowering Financial Futures with StockGro

Therefore, grasping tax-saving strategies is crucial. According to Ajay Lakhotia, Founder & CEO of StockGro, “Utilising various Income Tax incentives effectively is essential for every Indian to achieve their long-term goals faster." Positioned at the crossroads of finance and education, StockGro simplifies complex financial topics to help individuals achieve financial freedom in life. If you wish to further strengthen your understanding of tax laws, download StockGro & begin your financial independence journey risk-free today!

Disclaimer: This article has been produced on behalf of StockGro by HT Brand Studio. The content is for information purposes only and doesn't constitute financial advice.

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Published: 29 Mar 2024, 02:42 PM IST
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