How to Become Eligible for Income Tax Deductions - Get Money Rich

There is nothing more important in personal finance than income tax planning. In case one is not giving enough important to their income tax savings then I can say that it is a big-big mistake. Before you even start saving your money, one must do their tax planning. Income tax is money paid to the government by common people like us. But government themselves has allowed us to save some of your taxes, in turn encouraging us to save our money. So do not feel proud of yourself that you are doing great by paying maximum tax to government. Really you can contribute more to your countries economy by saving money wisely.? Plan your income tax and save unnecessary drainage of money.

One can save income tax by invest in both (1) debt linked options and (2) equity linked options. Lets look at some common income tax saving options available for common man as per rules.

Debt Linked Investment Options

In general you will always see that when it comes to income tax planning debt linked investment options are favorite of investors. We will list down some most effective debt linked income tax savings options.

Provident Fund: Under article 80C, almost all salaried class employees are obliged to save a portion of their earnings as contribution to the provident fund. One is eligible for income tax deduction of as high as Rupees one lakh under section 80C. Suppose you are contributing Rs 5,000 per month to your employees provided fund, then you will be eligible for income tax deduction of Rs 5,000?12 = Rs 60,000. Most likely your company will also contribute the same Rs 5,000 per month to your provident fund savings. This way one not only gets benefit of income tax saving but your savings also doubles each month. Not only this, the deposits to provident fund also earns you interest of more than 8% per annum.

National Savings Certificate: Investing in National Savings Certificate (NSC) can also earn interest of more than 8% per annum. All savings done in NSC is eligible for tax deduction under section 80C. But under section 80C the maximum cap is Rs 1.0 lakh. So if you are already making some savings in your provident fund (say Rs 60,000) then under NSC you cannot save more than Rs 40,0000.

Senior Citizen Savings Account: Senior citizens (aged above 60 years) can put their money in Senior Citizens Savings Account (SCSA). Senior citizens can open the account in Post Office, Nationalized Public Sector Banks and in ICICI Bank among private sector banks. The savings account with deposit period of 5 years. In this savings account one can make deposits in multiple of Rs 1,000 and savings cannot be withdrawn before one year. After one year one can withdraw the savings but with a penalty. The deposits can earn a massive interest of Rs 9.3% per annum and deposits are also tax deductible under section 80C.

Infrastructure Bonds: Apart from Section 80C (beyond Rs 1.0 lakhs), one can also make some additional income tax deductible savings under section 80CCF. Investment in infrastructure bonds are eligible for income tax deductions for a maximum of Rs 20,000 per annum.

Equity Linked Investment Options

ELSS: Equity linked savings scheme invest heavily in equity/stocks. This is not what we relate savings account with. Because customers who are savings money in banks wants complete surety that their in only growing and not getting eroded. So all our money in traditional savings account (if at all invested) are invested only in most safe debt linked options. But in ELSS the exposure to equity can be as high as 95%. So needless to say that there is huge risk of money erosion. But Indian government wants people to encourage in equity, so they have give income tax advantage to ELSS. Money invested in ELSS is eligible for income tax deduction under section 80C.

ULIP: Similar to ELSS, unit linked insurance plans are encouraged by government to encourage insurance. Generally your insurance fund is always invested in most safe debt linked options, but in order to increase the returns of insurance, the concept of ULIP has been brought forward. But a big negative of ULIP is its entry fees which are very costly.

Other Options

Home Loan: These days you can take home loan and save income tax. Both the principal and interest portion of your EMI can allow you to save income tax. The principal portion of your EMI is eligible for income tax deduction under section 80C. But you cannot sell your property within first five year, otherwise the tax benefit (under principal head) shall be reimbursed back to Indian government. ?Your interest portion can make your eligible for income tax deduction upto Rs 1.5 lakhs.

Life Insurance: The annual premium that one pays for their insurance policy is eligible for income tax deduction under section 80C.

Health Insurance: Your health insurance can make your eligible for more income tax deductions apart from section 80C. The maximum deduction is subjected to a cap of Rs 15,000 under section 80D. If you are buying a health insurance for your parents the income tax deduction can be increased to Rs 20,000

Tution Fees: To promote education of children in India, tution fees paid for two children is eligible for income tax deduction under section 80C. Even an education loan for self, spouse or for children is eligible (principal portion) for income tax deduction. You may not believe this but there is no cap and under section 80E all your principal portion is tax deductible.

Medical Expense: Supposing you are expending some money on family member for their treatment from cancer, kidney failure, AIDS, neurological disorder, blood disorder etc can make you eligible for income tax deduction upto Rs 40,000 under section 80DDB. If any of your dependent are medically disabled, then you can straight away claim income tax deduction of Rs 50,000 under section 80U.

Donation from Income: You can make a donation of 10% of your income to a recognized charitable trust and be eligible for income tax deduction (can be as high as 100%) under section 80G. You can make donation to scientific research and rural development and get 100% deductions under section 80GGA.

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