The ultimate guide to tax saving options in India (for individuals)

Taxes can take a significant chunk of your income, but with the right planning and strategy, you can reduce your tax burden. In India, there are various tax saving options available to individuals, ranging from investments in tax-saving instruments to tax exemptions on various expenses. This comprehensive guide aims to provide an overview of the tax-saving options available in India and help you make informed decisions to optimise your tax savings. From traditional options like Public Provident Fund (PPF) and National Pension System (NPS) to newer options like Equity-linked Schemes, this guide covers all the popular tax-saving options and their respective benefits.  

Tax saving option 1: Life insurance
 

Life insurance is one of the most preferable and easy methods to keep loved ones financially stable in case of an untimely death. The government is doing its bit to encourage people to purchase life insurance by offering tax benefits on it. An individual can avail deduction from taxable income under Section 80C of the Income Tax Act for the life insurance premium paid. The maximum deduction you can avail of in a financial year is the amount paid as the premium or Rs 1,50,000, whichever is lower. You can avail of the tax benefit for life insurance premiums paid for yourself, your spouse, and your children.

Purchasing a term life insurance policy is advisable as you can purchase a big cover at a lower premium. Moreover, the earlier in life you purchase a life insurance policy, the longer you will be able to lock in the low premiums.

It is important to ensure that the coverage amount is adequate for your financial goals and loans in your absence.

IDFC FIRST Bank offers need-based insurance solutions. Our expert suggest curated products based on individual requirements, at affordable premiums. You can also choose from personalised products with multiple add-ons.

Also read: https://www.idfcfirstbank.com/finfirst-blogs/finance/advantages-of-getting-life-insurance-in-your-20s

Tax saving option 2: Health insurance

Once you have secured your life, the next step is to buy health insurance for yourself and your entire family. Section 80D of the Income Tax Act allows you to avail of a deduction from taxable income for health insurance premiums paid for self, spouse, and dependent children. The maximum deduction allowed in a financial year is the premium amount or Rs 25,000, whichever is lower. If you or your spouse (or both) are senior citizens, the maximum deduction allowed is Rs 50,000 in a financial year. 

You can also avail of a separate deduction for the health insurance premium paid for your parents. The maximum deduction allowed in a financial year is the premium amount or Rs 25,000, whichever is lower. If one or both of your parents are senior citizens, the maximum deduction allowed is Rs 50,000 in a financial year.

To avail of the tax deduction, the health insurance premium must be made in any mode other than cash, like credit card, debit card, internet banking, wallet, UPI, etc. You can also avail of the Section 80D deduction benefit for an amount paid towards a preventive health check-up for yourself and/or family members. The maximum deduction allowed is Rs 5000 and it is a part of the overall limit of Rs 25,000/50,000 allowed. For a preventive health check-up, you can pay through any mode, including cash.

When selecting a health insurance plan, you have the option of going for an individual health insurance plan or a family floater health insurance plan. As the name suggests, the individual health insurance plan provides cover for a single individual. On the other hand, with a family floater health insurance plan, you can cover all the family members with a single plan. It is recommended that you choose a family floater plan rather than purchasing individual plans for each family member as if allows for a better coverage in less premium. 

In the case of employed individuals, the employer may cover them under a group health insurance plan. While it is good to have health cover from the employer, it is always better to purchase your own individual or family floater health insurance plan. At any time, the employer can reduce or withdraw the cover. Also, when you change your job, the new employer may or may not provide health insurance cover. Even if they provide it, the amount may not be adequate to meet your requirement.

IDFC FIRST Bank offers comprehensive health insurance solutions to take care of your entire family’s health needs. You can choose from a range of plans that offer cashless hospitalisation across network hospitals.

Also read: https://www.idfcfirstbank.com/finfirst-blogs/finance/5-steps-for-easy-cashless-health-insurance-claim

OR

https://www.idfcfirstbank.com/finfirst-blogs/finance/6-reason-why-new-couples-should-consider-the-health-insurance

Tax saving option 3: ELSS for wealth creation

The next step is to plan for your financial goals. The Equity Linked Savings Scheme (ELSS) is one of the best income tax saving options. It is a high-risk, high-return potential equity scheme offered by mutual fund houses. You can plan for various financial goals such as building a fund for a child’s higher education and marriage, and your own retirement. An individual can avail of a deduction from taxable income under Section 80C of the Income Tax Act for investments made in ELSS. 

The maximum deduction allowed in a financial year is the amount invested or Rs 1,50,000, whichever is lower. You can invest in ELSS either as a lump sum or through a systematic investment plan (SIP). The scheme has a lock-in period of 3 years, which is one of the lowest among various tax saving schemes. If you are investing through a SIP, each instalment has a lock-in period of 3 years starting from the date of investment. The scheme has the potential to give inflation-beating high returns and create wealth in the long run. However, equities are volatile, so invest in them only if you have a high appetite for risk.

IDFC FIRST Bank’s Financial Advisor can help you with goal-based planning taking into account the amount you need to accumulate, the investment time horizon, and your risk appetite.

Also read: https://www.idfcfirstbank.com/finfirst-blogs/finance/what-is-elss

Tax saving option 4: Debt products like PPF, Fixed Deposit, NSC

If  you have a conservative risk profile, you can look at other investment options such as PPF, fixed deposits, NSC, etc. Let’s discuss each of them.

a) Public Provident Fund (PPF)
 

PPF is a part of the small savings schemes offered by the Central Government. It is a debt product with a long-term tenure of 15 years. An investor can open a PPF account with a post office or a bank with a minimum deposit of Rs 500. The maximum deposit allowed in a financial year is Rs 1,50,000. You need to deposit a minimum of Rs 500 every year in the PPF account, or else it will be treated as discontinued. 

You can avail of a deduction for the PPF contribution under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the amount deposited or Rs 1,50,000, whichever is lower. Furthermore, the interest earned on a PPF account is and the maturity proceeds are tax-free. Hence, the PPF is one of the most tax-friendly investment products.

The interest payable on PPF is declared by the government every quarter. For example, the interest rate applicable for the quarter from January 1 to March 31 is declared before January 1. The interest rate stays fixed for that quarter. However, as the interest rate is declared by the government on a quarterly basis, the PPF is a floating-rate product.

An individual can take a loan against their PPF balance or make partial withdrawals, subject to certain terms and conditions. On maturity after 15 years, the depositor can either decide to close the account or extend it in a block of 5 years at a time. The extension can be with or without future contributions.

PPF account is suitable for investors with a conservative to moderate risk profile. The money is secured by the government. Since PPF accounts have a sovereign guarantee, a long tenure, decent interest rates, and also offer tax benefits, they are one of the most favoured tax saving investment options in India.

b) National Savings Certificate (NSC)

NSC is a fixed-income financial product offered by the Government of India as part of the small savings schemes. You can purchase these certificates by making a lump sum investment. The minimum investment required to purchase a single certificate is Rs 1000. There is no maximum limit on the amount you can invest in NSC. However, you can avail of tax benefits under Section 80C up to a maximum of Rs 1,50,000 in a financial year.

The NSC has a fixed tenure of 5 years. Just as with PPF, the interest rate payable on NSC is announced by the government every quarter. However, once you purchase an NSC certificate at a specified interest rate, it remains fixed for the entire tenure of that certificate. You can take a loan against NSC by offering the certificate as collateral. 

c) 5-Year tax saving fixed deposit

Fixed deposits are one of the most favoured tax saving investment options in India. While fixed deposits come with varying tenures, you can get tax benefits on specific 5-year tax-saving fixed deposits. You can open the tax saving fixed deposit with a bank or a post office. The minimum amount for opening this fixed deposit varies from bank to bank. There is no maximum limit on the amount you can invest. However, the maximum deduction you can avail of in a financial year under Section 80C is the amount invested or Rs 1,50,000, whichever is lower. 

The interest rate payable on the fixed deposit is decided by the respective bank from time to time. The interest payment frequency can be monthly, quarterly, half-yearly, yearly, or on maturity and the interest amount is taxable. The interest is added to the investor’s overall income and taxed as per the investor’s slab and tax rate. You cannot make partial withdrawals from this fixed deposit and neither take a loan against this fixed deposit. Even with its limitations, the 5-year tax saving fixed deposit is one of the most popular tax saving schemes among people who have a conservative risk profile.

You can open a 5-year tax saving fixed deposit with IDFC FIRST Bank and avail of competitive interest rates. Senior citizens are offered an additional 0.5% interest.

With IDFC FIRST Bank, you can grow your money in a safe and risk-free manner along with enjoying tax benefits.

Also read: https://www.idfcfirstbank.com/finfirst-blogs/finance/tax-saving-fixed-deposit-for-sec-80c-deductions

Tax saving option 5: National Pension Scheme (NPS)

Two major financial goals that most individuals have include building a fund for a child’s higher education and one’s own retirement. Among various financial products, the National Pension Scheme (NPS) is one of the best products you can consider for retirement planning.

Under NPS, you can open an account and keep contributing to it till your retirement. On retirement, you can use the accumulated corpus for purchasing an annuity that can give you a regular income during your retirement years. Before purchasing the annuity, you have the option to withdraw a certain percentage of the accumulated amount in lump sum, subject to certain terms and conditions.

You can get the following tax benefits on NPS at the time of investment:
 

a) Section 80CCD(1)
 

An individual can contribute to the NPS and avail of a deduction from taxable income under Section 80CCD(1) of the Income Tax Act. The maximum deduction allowed for a salaried individual is 10% of their salary and for a self-employed individual it is 20% of their gross total income. The maximum deduction that can be availed of in a financial year is the amount contributed or Rs 1,50,000, whichever is lower.

b) Section 80CCD(1B)
 

An individual can contribute to NPS and avail of a deduction from taxable income under Section 80CCD(1B) of the Income Tax Act. The maximum deduction allowed is the amount contributed or Rs 50,000, whichever is lower. The deduction of Rs 50,000 is an additional deduction over and above the Rs 1,50,000 deduction allowed under Section 80CCD(1). However, an individual cannot claim a double deduction for the same Rs 50,000 under Section 80CCD(1) as well as Section 80CCD(1B).

c) Section 80CCD(2)
 

An employee can claim a deduction under Section 80CCD(2) for the contribution made by their employer in the employee’s NPS account. The deduction that can be claimed is subject to the following:

·     14% of the salary for Central and State Government employees

·     10% of the salary for other employees

Thus, the total deduction that an individual can claim for NPS includes a sum of:

·     Up to Rs 1,50,000 under Section 80CCD(1)

·     Up to Rs 50,000 under Section 80CCD(1B) 

·     Up to a specified percentage of salary for employer’s contribution under Section 80CCD(2)

Considering the deductions that you can avail for NPS contributions under Section 80CCD of the Income Tax Act, it is one of the best tax saving options available.

Also read: https://www.idfcfirstbank.com/finfirst-blogs/finance/about-national-pension-system-nps

Tax saving option 6: Home loan

Along with financial products, loans can also help avail tax deductions. The most popular of them is the home loan. Every home loan EMI that you pay has a principal component as well as the interest component. Both these components can get you tax deductions separately.

a) Principal repayment
 

Under Section 80C of the Income Tax Act, you can avail of a deduction for the principal repayment of the home loan. The maximum deduction allowed in a financial year is the principal amount repaid or Rs 1,50,000, whichever is lower. An important point to note is that you have to hold the property for 5 years to avail of the tax benefit. If you sell the property within 5 years, any tax deductions availed by you for principal repayment will be treated as your income for those years and taxed accordingly.

Under Section 80C, you can also avail of a deduction for stamp duty, registration fee, and specified expenses paid for the purchase of a house property. However, as mentioned earlier, the maximum deduction that can be availed of under Section 80C in a financial year is limited to Rs 1,50,000.

b) Interest payment
 

Under Section 24 of the Income Tax Act, you can avail of a deduction for the interest paid on a home loan. The maximum deduction that can be availed of in a financial year is the interest amount paid or Rs 2,00,000, whichever is lower. To avail of the tax deduction, the acquisition or construction of the house property should be completed within 5 years of taking the home loan.

Many people take a home loan for an under-construction property. While the construction of the property is still not complete, they pay interest on the home loan amount. The deduction for such interest paid during the construction period can be availed of separately. The deduction for this interest amount can be claimed after the construction is completed, over 5 years, in equal instalments (20% every year).

You can avail of tailor-made home loans IDFC FIRST Bank. They come with attractive interest rates, require minimal documentation, offer reasonable processing fees, and you can apply for a home loan online from the comfort of your home.

Also read: https://www.idfcfirstbank.com/finfirst-blogs/home-loan/6-tips-to-save-money-on-home-loan-repayment

OR

https://www.idfcfirstbank.com/finfirst-blogs/home-loan/types-of-home-loans

Tax saving option 7: Education loan and electric vehicle loan

a) Education loan
 

Under Section 80E of the Income Tax Act, you can avail of a deduction from taxable income for interest paid on an education loan taken for higher education. The entire interest amount paid in a financial year can be availed of as a deduction and this can be availed for a maximum of 8 years.

The loan can be taken from any financial institution or approved charitable institution. An individual can take such a loan for their own higher education or that of a relative. For the purpose of the loan, higher education means a course that can be pursued after passing the Senior Secondary Examination (SSE) from any government-recognised school, board, or university.

IDFC FIRST Bank Education Loans come with attractive interest rates and you can get collateral-free loans of up to Rs 75 lakh. The application process is seamless, which results in faster loan disbursal. With IDFC FIRST Bank by your side, you can confidently sign up for that dream course and give wings to your career.

While Section 80E allows you a deduction on interest paid on a higher education loan, Section 80C lets you avail of deduction from taxable income for tuition fees paid for the full-time education of two children. The fee can be paid to any school, college, university, or other educational institution situated in India. The deduction is allowed only for tuition fees and doesn’t include any donation or development fees. 

b) Electric vehicle loan
 

Recently, electric vehicles have become quite popular. One of the reasons for this includes low operating costs compared to vehicles running on fossil fuels such as petrol and diesel, and they are also environmentally friendly. The government is encouraging people to adopt electric vehicles by offering income tax benefits.

Under Section 80EEB of the Income Tax Act, you can avail of a deduction from taxable income for interest paid on a vehicle loan taken for the purchase of an electric vehicle. The maximum deduction allowed in a financial year is the interest paid or Rs 1,50,000, whichever is lower. Considering the benefits, it makes sense for tax payers to buy an electric vehicle on loan.

Tax saving option 8: Interest income – Section 80TTA and 80TTB

a) Interest on savings account: Section 80TTA
 

While investing towards your financial goals, you save money through a savings account. The interest earned on a savings account is eligible for deduction from taxable income under Section 80TTA of the Income Tax Act. The maximum deduction that can be availed of in a financial year is the interest earned or Rs 10,000, whichever is lower.

The deduction can be availed of for interest earned on a savings account that is maintained either with a bank or a post office. The maximum deduction of Rs 10,000 in a financial year is applicable across all savings accounts maintained with multiple banks and post offices. The deduction under Section 80TTA is not applicable for senior citizens as there is a separate Section 80TTB applicable for them.

IDFC FIRST Bank Savings Account offers an interest rate of up to 6.25% p.a. The interest is credited monthly instead of quarterly, providing more liquidity and a higher rate of compounding. The account offers free and unlimited ATM transactions, higher POS limits, and a whole host of other benefits.

b) Interest on deposits for senior citizens: Section TTB
 

Many senior citizens have a conservative risk profile and are dependent on the interest from fixed-income instruments for a living. However, the interest earned on bank deposits is taxable. Hence, to ease their burden to some extent, the government has provided some tax relief to senior citizens for interest earned on deposits such as savings accounts, recurring deposits, and fixed deposits maintained with banks or post offices.

So, under Section 80TTB of the Income Tax Act, senior citizens can avail of a deduction from taxable income for the interest earned from deposits. The maximum deduction that can be availed of in a financial year is the interest earned or Rs 50,000, whichever is lower.

Interest earned from corporate fixed deposits, NCDs, etc. are not eligible for deduction under Section 80TTB. For the purpose of Section 80TTB, a senior citizen must be a resident in India whose age is 60 years or more.

How to maximise tax benefits

Here is a quick summary of the various sections of the Income Tax Act that have been discussed and how you can maximise your tax benefits:

Plan your taxes at the beginning of the financial year

Many people wake up to tax planning only in the last quarter of the financial year (January to March) when they get reminders from the finance team to submit the investment proofs. While it is convenient, it is not the right approach to tax planning. Starting your tax planning right at the beginning of the financial year will help you stay disciplined, break down your investments in parts, and give you enough time to decide where and how much you want to invest. This approach will give you much-needed peace of mind and ensure that you maximise your tax benefits with proper planning using the right tax saving options.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.