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Top 5 Ways to Save Income Tax In 2020

Feb 05, 2020 | 2 months ago | Read Time: 4 minutes | By iKnowledge Team
Top 5 Ways to Save Income Tax In 2020

Many people end up paying a large amount of income tax at the end of every fiscal year due to a lack of financial planning. The Income Tax Act (ITA) allows for specific deductions which can be claimed when filing your returns. With the right investments, you can save on income tax significantly. Here are the top 5 ways to reduce your income tax in 2020.

Start Saving for Retirement

It’s never too soon to start retirement planning. Pension plans are eligible for deductions under Section 80C. However, payouts received as lump sums or annuities are fully or partially taxable. Traditional plans are savings-oriented. However, pension schemes come in a range of options.

There are also Unit-Linked Insurance Plans (ULIPs) that offer the dual advantage of investing a part of the monthly premiums in assets of your choice while saving the rest for retirement. You save paying any tax on the money invested in ULIPs, provided the premiums do not cross ₹1.5 lakhs. With higher risk, ULIPs might simultaneously yield more profitable returns than traditional saving plans. Hence, they are attractive to investors looking to save.

Get Insured

Reduce income tax on the amount of money you invest with a life insurance policy. Section 80C of the ITA permits tax deductions on premiums and payouts of life or term insurance plans. Premiums paid towards your life insurance will not be taxed if they are under a total of ₹1.5 lakhs. Section 10(10D) of the ITA allows any payouts received under a life insurance policy to be exempt from tax.

For instance, Aegon Life’s term insurance offers three separate plans to give you flexibility in your choice. It offers extensive protection with the option of life coverage until the policyholder reaches the ripe age of 100 years. The tax benefits mentioned above apply.

Take a Loan (or Save) for Education

Besides, retirement-saving, life insurance or term insurance, taking loans for your spouse, your own, or your children’s education is also a tax-deductible investment. Education loans are eligible for tax deduction under section 80E of the ITA.

Premiums are subject to tax benefits over and above the deduction claims of ₹1.5 lakhs. There is no maximum limit under Section 80E for which deduction claims can be filed. Individual taxpayers are eligible for this benefit. However, it is not open to Hindu Undivided Families (HUFs).

Young parents can alternatively opt for child plans that require monthly or annual premiums. The plan accumulates a corpus by the time your child reaches the college-going age of 17 or 18. The money saved may be used to fund your child’s education at a top university. Most child plans- like ULIPs or traditional savings plans- fall under traditional life insurance policies, thereby offering similar tax benefits.

Use Market-Linked Instruments

Equity-Linked Saving Schemes (ELSS), National Pension Scheme(NPS), and Mutual Funds (MFs), and ULIPs are all examples of market-linked instruments. ELSS, NPS, ULIPs, and certain MFs are exempt from taxation under Section 80C the Income Tax Act of 1961.

For ELSS and ULIPs, if you invest premiums below ₹1.5 lakhs, with a lock-in period of 3 years, no income tax is added. Fixed instruments like fixed deposits or recurring deposits become taxable when the amount reaches maturity. However, market-linked instruments offer tax-benefits on one’s capital gains as well.

Opt for Home Loans

Healthy financial planning may not involve taking out loans but house loans might actually save you some money. Tax planning through taking home loans is incredibly useful as a deduction can be claimed under more than one section of the ITA. If you have opted for a home loan, you can claim a tax deduction on the principal amount payable under Section 80C. You can also claim deductions on the interest you pay for home loans under Section 24.

From financial year 2020-21 onward, many of the existing deductions and exemptions shall be removed from the Income Tax Act in keeping with the new tax regime presented by finance minister Nirmala Sitharaman as a part of the Union Budget 2020. According to this new system of taxation, around 70 of the existing 100 deductions are to be removed in an effort to simplify the tax laws. The upside is that the new tax system offers the option to enjoy reduced tax rates, as tabulated here.

Income slab Tax rate as per the new system
Up to Rs. 5 lakhs Exempt
Rs. 5 lakhs to Rs. 7.5 lakhs 10%
Rs. 7.5 lakhs to Rs. 10 lakhs 15%
Rs. 10 lakhs to Rs. 12.5 lakhs 20%
Rs. 12.5 lakhs to Rs. 15 lakhs 25%
Above Rs. 15 lakhs 30%

Taxpayers are free to choose between the old scheme and the new one, depending on which tax system reduces their tax liabilities to the maximum extent. Assesses can also switch between the new and the old systems each successive financial year if necessary, in order to minimize their tax burden.

In conclusion, if you are planning to reduce your tax with smart investing in 2020, do keep a note of some important dates. You must submit your investment documents latest by January 31st. Additionally, you can make your tax-deductible investments in any beneficial policy like life or term insurance latest by March 31st. Finally, all claims must be filed by July 31st, or the tax-benefits may not accrue.


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