Income Tax Saving Schemes (2023 Guide)

We all want to create a financially secure future where we can cover all our expenses without having a regular source of income. Savings are a given for the success of any financial plan. But paying income tax on your entire taxable income can lower your savings and leave you with less money to invest in the future. In this article, we will look at income tax saving schemes.

Which scheme is best for tax saving?

PUBLIC PROVIDENT FUND:

The Public Provident Fund (PPF) is to mobilize small savings in the form of investments and earn interest on them. It is a savings and tax-saving investment vehicle that qualifies you to save on annual fees and form a retirement savings body.

A PPF is a government scheme that makes investments that are not bound by the market. Indian citizens who want to save tax and earn an income should have a PPF account.

 Taxpayers may claim a Section 80C credit for income tax purposes on the amount invested during the financial year. PPFs fall into the tax-exempt category where interest and maturity amounts are tax-exempt. PPF accounts have a lock-in of 15 years giving the taxpayer an option.

They are as follows:

Payment of earnings from existing accounts

Continue for an additional 5 years

2. NATIONAL PENSION SYSTEM:

The National Pension Plan (NPS) is another pension plan that provides a stable income after retirement. The Pension Fund Regulatory and Development Authority regulates NPS (PRAN). NPS is an option for both government and private sector employees.

The depositor invests money in a variety of equity market-based schemes. Tier-1 and Tier-2 NPS accounts exist, with Tier-1 falling under Sections 80 CCD (1) and 80CCD(1B), and Tier-2 being voluntary.

3. SUKANYA SAMRIDDHI YOJANA:

Sukanya Samridddhi Yojana is a program initiated by Prime Minister Narendra Modi as part of the Beti Bachao Beti Padhao campaign.

The main purpose of this program is to secure the future of the girl’s child by investing in marriage and education and by proving the age proof of the investor’s daughter.  The scheme falls under Section 80C of the Income Tax Act, 1961, and provides tax benefits of up to INR 1.5 lakh.

4. SENIOR CITIZEN SAVING SCHEME:

This program is to give seniors over the age of 60 a reliable source of income. The scheme allows early withdrawals through various security features by offering long-term savings options.

This scheme falls under Section 80C of the Income Tax Act 1961.

The maximum amount that an individual can invest is Rs 1.5 lakh per annum.

Currently, the annual interest rate is 7.4%.

5. LIFE INSURANCE:

Life insurance is a basic requirement to financially secure the lives of loved ones.

This falls under Sections 80C and 10D of the Income Tax Act and entitles you to life insurance benefits.

This exemption applies only to investments in Unit-Linked Insurance Plans (ULIPs). Tax exemption does not apply to premiums subject to ULIP exceeding the limit of Rs 2.5 lakh. The lock period is 5 years long and includes both insurance and investments.

6. TAX SAVING FD:

The Tax Saving FD authorizes investments to save tax under Section 80C of the Income Tax Act of 1961. The duration of this tax-saving scheme is five years, and a maximum of about 1.5 lakhs is exempt.

In case of a joint account, the primary owner may receive a tax credit when calculating taxable income. 

Early withdrawal is not possible for tax-saving fixed deposits. Depending on the bank, early withdrawals are available to investors once the 5-year lock-in period ends.

7. EQUITY-LINKED SAVING SCHEME:

Equity-linked savings plans are open-ended equity funds that offer higher returns and tax benefits. Tax incentives are under Section 80C of the Income Tax Act if the majority of the capital is invested in mutual funds.

Individuals in the early stages of their careers can invest in ELSS with a lower investment threshold. The only mutual fund that offers tax exemptions of up to INR 1.5 lakh per year and returns of INR 1 lakh per year is tax exempt. It has a three-year lock-in period, which makes it superior to other savings investment options.

8. NATIONAL SAVING CERTIFICATE:

National Saving Certificate is an investment scheme initiated by the Government of India. The National Saving Certificate is a fixed-income investment scheme launched by the Indian government.

In essence, this is a savings bond that encourages small to middle-income investors to invest while reducing their taxable income. The maturity period is five years. This type of savings bond is eligible for a tax break under section 80C of the Income Tax Act and accepts investments up to Rs 1.5 lakh.

9. SCHOOL TUITION FEES:

School fees and tuition are tax-exempt. Taxpayers can claim deductions of up to INR 1.5 lakh by claiming various eligibility criteria based on their payments.

Section 80C of the Income Tax Act governs tax deductions for tuition and other educational costs that parents pay for their children’s education.

10. HEALTH INSURANCE PREMIUM UNDER SECTION 80D:

Section 80D of the Income Tax Act of 1961 allows taxpayers to take a tax credit from the total health insurance premiums paid during the financial year. This is a system that allows you to pay regular health insurance premiums for the Augmentation Plan and Critical Plan.

The Section 80D deduction is up to Rs 25,000 per financial year. If both parents are elderly, the maximum refund for one fiscal year is Rs 50,000.

How can I reduce my taxable income?

You can reduce your taxable income in the following ways.

Income from interest on a savings account: Interest on savings accounts is essentially tax-free, up to a maximum of Rs 10,000. This total represents the sum of all savings accounts. For the elderly, this limit is Rs. 50,000 under Section 80TTB.

 Education scholarship: Scholarships given to deserving students to assist with educational costs are exempt from income tax under section 10(16) of the Income Tax Act.

Wedding gifts: All types of wedding gifts received from immediate family are exempt from taxation under the Income Tax Act. The maximum amount for gifts from non-friends and relatives is Rs.50,000. Gifts over this amount are taxable.

Agricultural Income: Agricultural income is exempt from income tax. But Income Tax Act introduced an indirect tax law on such income. Incomes from agriculture and other sources are partially integrated. It intends to raise taxes on non-agricultural income.

Hindu Undivided Family (HUF) and additional income: HUF is a separate taxable entity and each member is entitled to separate tax exemption and basic tax exemption of Rs 2.5 lakh regardless of HUF residency status.

Inheritance Amount: India does not levy inheritance tax, so money received as a testamentary or legal heir is completely tax-free. 

Tax savings for entrepreneurs: To avoid paying taxes, business owners may deduct travel expenses as part of their operating expenses.

Charitable donation: Donations to certain relief funds and charitable organizations are entitled to deductions under section 80G of the Income Tax Act. However, not all donations are tax-deductible under Section 80G. Only donations to certain funds are tax deductible.

How can I save my income tax except for 80C?

Income tax saving other than 80C are under the following acts:

1. Interest income from deposits in a savings account

Section – 80TTA 

Limit – Rs. 10,000

Section 80TTA allows you to deduct the total interest income earned on savings account deposits. However, such a deduction from taxable income is only INR 10,000 per year. 

If you have multiple savings accounts with different banks, the total accumulated interest is taxable under income from other sources. If such interest income exceeds 10,000 in the financial year, only the excess over the cap is subject to tax at rates based on gross annual income.

2. Interest Portion of an Education Loan

Section – 80E

Limit – No limit

Income used to pay the interest portion of an education loan is tax-exempt. Such education loans can be available unsecured or secured. However, such exemptions are only available for the first eight years of loan repayment. Income beyond this period to settle the interest burden is taxable.

Such deductible education loans must be in an individual’s name and can be used to pay for college expenses for you, your spouse, or your children. 80C is another popular tax-saving program.

3. Payment of Health Insurance Premiums

Section – 80D

Limit – Subject to certain conditions

Eligibility

Health insurance for you and your family (spouse and dependent children): ₹25,000

Yourself and your family and parents: ₹25,000 + ₹25,000) = ₹50,000

You and your family (under 60 years old) and parents over 60 years old: ₹25,000 + ₹50,000 = ₹75,000

You and your family (members over 60 years old) and senior citizen parents: ₹50,000 + ₹50,000) = ₹1,00,000

Section 80D tax breaks are now available for health check-up expenses as well. Tax exemption can be up to a maximum of INR 5,000 each on such expenses.

This exemption includes a rebate of ₹25,000 on health insurance eligible for a 20,000 premium charge rebate.

4. Interest Portion Paid on Home Loans

Section – 24(b)

Limit – ₹2 Lakh

Home loan interest payments may be exempt from the income tax calculation in this section. If the house is purchased for residential use, up to INR 2 lakh can be claimed as an interest tax refund if the construction is completed within 5 years of the loan term. If you decide to rent out the acquired property, the interest portion of the home loan will be tax-free accordingly.

5. Interest Portion Paid on Home Loans for First-Time Home-Buyers

Section – 80EEA

Limit – ₹50,000 above benefits from Section 24(b)

A first-time homebuyer may claim an additional INR 50,000 interest benefit through Section 24(b) for EMI on a home loan if the house value is less than INR 45 lakh. This effectively creates tax savings of up to INR 2.5 lakh outside Section 80C. However, to be eligible for a tax refund on gross income spent paying EMI under Section 80 EEA, the applicant must not have the previous property registered in the applicant’s name while availing home loan.

6. Maturity benefits of life insurance

Section – 10(10D) 

Limit – Total maturity amount

All benefits paid upon maturity or early death of the insured are eligible for a tax refund under Section 10(10D).

However, if the claim is made after April 1, 2012, and the total premium is less than the sum insured, the death benefit will not be taxable. 

To qualify for the Section 10(10D) exemption, if insurance was claimed before April 1, 2012, the premium cost must be less than 20% of the insured’s total amount.

7. House Rent Allowance as part of Salary Break-Up

Section – 10(13A)

Limit – Specific conditions

This section of the Income Tax Code provides tax benefits under the Home Rent Allowance (HRA) if the pay split includes his HRA portion.

The total amount of exemptions granted under this program is equal to the minimum amount of

Annual HRA actually paid

50% of annual salary

Annual rent – ​​10% of basic income

8. House Rent Allowance Portion not as part of Salary Break-Up

Section – 80GG

Limit – Specific conditions

If your employer does not include the HRA component in your salary breakdown, you can claim Section 80GG exemptions on your total taxable income. Tax-saving investments other than such 80C subsidies are exempt up to the lowest of the parameters listed.

₹5,000 per month. 

25% of the total annual income. 

Annual rent – 10% of the annual basic income.

9. Donations to Charitable Organisations

Section – 80G

Limit – No limit

All income donated to charity is fully exempt from tax calculation under Section 80G. No restrictions are imposable on such tax exemption if the transfer is through a bank. All cash donations up to INR 2,000 are tax-exempt.

10. Donations for Scientific Research and Rural Development

Section – 80GGA 

Limit – No limit

Tax exemptions on donations made for scientific research and rural development are claimed under Section 80GGA. If a transaction was through a bank account and was properly documented, 100% of the income spent is allowable deductions.

11. Contributions to Political Parties

Section – 80GGC 

Limit – No limit

Donations to political parties are tax deductible. If paid by wire transfer, the entire contribution is exempt from tax calculation. Political parties to which such contributions are made must be registered under Section 29A of the Representation of People Act (RPA) of 1951. 

12. Expenditure for treatment of a disabled person

Section – 80DD

Limit:

₹75,000 for 40% to 80% disability

₹1,25,000 for disability higher than 80% 

Section 80DD permits individuals and Hindu Undivided Families (HUF) to claim exemptions on the total amount of income used to pay for the care and well-being of a disabled family member.

Compensation limits are determined based on the percentage of disability and persons with 40 to 80% disability can claim a maximum deduction of INR 75,000.

Families who house a person with a disability of more than 80% can claim up to Rs.1.25 lakh, which includes all related expenses. Such rights are available only to such dependents.

13. Disability-Related Tax Benefits for Individuals

Section – 80U

Limit:

₹75,000 for 40% to 80% disability

₹1,25,000 for disability higher than 80% 

Disabled persons may claim compensation in the form of Section 80U exemption. Such disabilities must be certified by a registered medical institution as having at least 40% disability.

Persons with Disabilities Persons with 40-80% of disabilities can claim up to  Rs.75,000 and persons with over 80% disabilities can claim up to Rs.1.25 lakhs through tax incentives.

14. Expenditure on medical care for people with certain diseases or disabilities.

Section – 80DDB

Limit – ₹40,000 (₹1,00,000 for senior citizens)

Individuals who sponsor the treatment of dependents diagnosed with certain medical conditions may apply for tax exemption on income paid later. In this case, up to INR 40,000 will be paid to persons under the age of 60.

Such exemptions can be obtained for the treatment of serious medical conditions such as neurological disorders (causing more than 40% of her disability), malignant cancers, AIDS, chronic kidney disease, and blood disorders.

Frequently Asked Questions (FAQ)

Which scheme has the highest interest?

Sukanya Samriddhi Yojana Scheme (SSYS) has an highest interest rate of 7.6 percent. 

Does sip give tax benefits?

Yes, SIP offers tax benefits. Section 80(C) of the Income Tax Act of 1961 allows you to deduct up to Rs. 1.5 lakh from your taxable income for investing in ELSS through SIPs.

Wrapping Up

There are several ways to save tax. These opportunities can be broadly divided into two categories: spending and investing. Expenses such as children’s tuition, rent, mortgage payments, and medical expenses can significantly reduce your total taxable income in the end. The second category refers to specially-strategized tax-saving investments in markets that are highly efficient in reducing total tax liability.

Recommended Articles

Section 112 of Income Tax Act (Quick Guide)

Section 154 of Income Tax Act (2023 Guide)