Do you really need to make tax-saving investments?
It is that time of the year again when you start gearing up to make tax saving investments. It sometimes comes as surprise to some people that they may actually not need to make these investments. Here’s why::
Tax saving investments reduce your taxable income
Tax saving investments help if you have large taxable income. Usually, this starts to matter when your CTC is Rs 4 lakhs or more per year.
Not all of your salary is taxable
Many of your CTC components are not counted as taxable.
- Medical allowance: Upto Rs 15,000 per year provided it is actually spent.
- Transport allowance: Upto Rs 19,200 per year
- Food coupons: Upto Rs 26,400 per year
- House Rent Allowance: Some rules apply but typically 90% of the rent you pay
- Leave Travel Allowance: Domestic air travel, or A.C first rail travel, by the shortest route, are exempt from taxes, once in 2 years provided it is actually spent (rules apply)
And other components of your salary will help you get a tax break
Your contribution to EPF (listed as a deduction in your salary slip) is counted towards the Sec 80C deduction of Rs 1.5 lakh per year
You may have some existing commitments that will reduce your taxable income
- Education loan repayment: You get a tax exemption on the interest paid.
- Home loan principal repayment: Up to Rs 100,000 of principal repaid is counted towards Sec 80C limit of Rs 150,000.
- Home loan interest payments: Up to Rs 200,000 can be reduced from your taxable income
- Children’s school fees: Up to Rs 1200 per child (maximum of 2 children) can be reduced from your taxable income
- Life Insurance premium: Whatever you pay will count towards Sec 80C limit of Rs 150,000.
- Medical Insurance premium: Up to Rs 25,000 of premium paid ends up being reduced from your taxable income:
- Charitable contributions: Either all or 50% of your donation (depending on the entity) can be reduced from your taxable income. For the entities that qualify you for 50% tax, the taxable limit is capped at 10% of your gross total income.
(Note: You cannot claim the deduction if the amount donated in cash exceeds Rs.10,000.)
Is your income still taxable?
Only after taking all of the above into account (and there are a few other breaks that we haven’t listed above) would you need to start tax planning and making additional investments.
Take advice from a tax consultant or try our tax saving calculator here to see if you need to make tax saving investments.