Answer By law4u team
In India, taxpayers can legally reduce their tax liabilities by utilizing provisions available under the Income Tax Act. These provisions include exemptions, deductions, rebates, and credits that allow individuals and businesses to optimize their tax payments while staying compliant with the law. Understanding these legal methods is essential for effective tax planning and savings.
Legal Ways to Reduce Tax Liability in India
Utilizing Deductions Under Section 80C: Section 80C provides deductions for various investments and expenses. Taxpayers can claim a maximum deduction of up to ₹1.5 lakh per year under this section.
Eligible Instruments:
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- National Savings Certificates (NSC)
- Tax-saving Fixed Deposits
- Life Insurance Premiums
- Tuition Fees for children
Section 80D – Deduction for Health Insurance Premiums: Taxpayers can claim deductions for premiums paid on health insurance policies under Section 80D. This includes premiums paid for the taxpayer, their spouse, children, and parents.
Deduction Limits:
- ₹25,000 for individuals below 60 years of age (for self and family).
- ₹50,000 for senior citizens (for self and family).
- An additional ₹25,000 for insurance of parents (₹50,000 for senior citizen parents).
Section 24(b) – Deduction on Home Loan Interest: Individuals can claim a deduction of up to ₹2 lakh per year on interest paid on home loans under Section 24(b) of the Income Tax Act. This applies to loans taken for purchasing or constructing a residential property.
Section 10(14) – House Rent Allowance (HRA): Salaried individuals who live in rented accommodation can claim a deduction on the House Rent Allowance (HRA) received. The deduction is based on the rent paid, the salary received, and the place of residence, subject to certain conditions.
Section 80E – Deduction for Interest on Education Loans: Under Section 80E, taxpayers can claim a deduction on the interest paid on loans taken for higher education. This deduction is available for a maximum of 8 years or until the interest is fully paid, whichever is earlier.
Section 80G – Donations to Charitable Institutions: Donations made to eligible charitable organizations or funds can be claimed as deductions under Section 80G. The deduction amount depends on the organization and the type of donation.
Eligible Donations:
- Donations to registered charities, trusts, or political parties.
- 100% or 50% of the donation is deductible, with or without restriction depending on the charity.
Section 80TTA – Deduction on Interest from Savings Accounts: Individuals can claim a deduction of up to ₹10,000 on interest earned from savings accounts under Section 80TTA. This deduction is available for both senior and non-senior citizens.
National Pension Scheme (NPS) – Section 80CCD(1B): Contributions made to the National Pension Scheme (NPS) are eligible for an additional deduction of up to ₹50,000 under Section 80CCD(1B), over and above the ₹1.5 lakh limit under Section 80C.
Capital Gains Tax Exemption (Section 54 & Section 54EC): Taxpayers can claim exemptions on capital gains from the sale of property by reinvesting in a residential property or specified bonds.
Section 54: Exemption for long-term capital gains from the sale of a residential property if the proceeds are invested in another residential property.
Section 54EC: Exemption for long-term capital gains on the sale of property if the gains are reinvested in specified bonds within 6 months of the sale.
Section 80GG – Deduction for Rent Paid (for Self-employed Individuals): Self-employed individuals or those who do not receive HRA can claim a deduction under Section 80GG for rent paid, subject to certain conditions. The maximum deduction is ₹5,000 per month.
Tax Rebate Under Section 87A: Taxpayers with a net taxable income of less than ₹5 lakh can avail of a tax rebate of up to ₹12,500 under Section 87A. This helps reduce the tax liability for individuals in the lower income group.
Taxation of Agricultural Income: Agricultural income is exempt from income tax under Section 10(1). Farmers or individuals with agricultural income do not need to pay tax on earnings derived from farming activities.
Tax Exemption on Gratuity and Retirement Benefits:
- Gratuity: The amount received as gratuity by employees on retirement is partially exempt under Section 10(10) based on specific conditions.
- Provident Fund (PF): Contributions to Provident Funds (EPF, PPF) are eligible for tax exemptions, both for the employee and employer's contributions.
Clubbing Provisions for Minor’s Income: If a minor earns income, the income is generally clubbed with the parent’s income for taxation purposes. However, there are exemptions for specific types of income such as income from child’s own work or investments made by the minor.
Tax Benefits for Small Businesses and Startups: Small businesses and startups can benefit from tax exemptions and deductions under various provisions:
- Section 80-IA: Deductions for businesses in the manufacturing and infrastructure sectors.
- Startups: Eligible startups can benefit from a 3-year tax holiday under the Startup India Scheme.
Example:
An individual with an annual income of ₹8,00,000 can legally reduce their tax liability by investing ₹1,50,000 in PPF (under Section 80C), paying ₹20,000 as health insurance premium (under Section 80D), and contributing ₹50,000 to NPS (under Section 80CCD). Additionally, by utilizing the ₹2 lakh deduction for home loan interest (under Section 24), their taxable income reduces significantly, thereby reducing their tax burden.
Conclusion:
There are various legal ways to reduce tax liability in India, ranging from exemptions, deductions, and rebates to strategic investments in tax-saving instruments. By utilizing these provisions, individuals and businesses can minimize their tax burden, optimize their financial planning, and remain compliant with tax laws.
