45 Legal ways to Save Income Tax in India Other than 80C
The sign board by Morgan Stanley once said, “You must pay taxes but there’s no law that says you gotta leave a tip”.
Paying taxes is the duty of every citizen but it ought to be minimized with legal tax planning.
Many people whether businessmen or salaried are poor at tax planning and as a result their pockets are burnt by heavy taxes.
They only know one way to save tax and i.e. the great section 80C. If you ask some random person advice on saving tax, he will say take insurance, provident fund etc. etc. So, instead of asking any random person about tax planning ask a Chartered Accountant.
If you are clueless about how to save income tax on your salary income or business income or any other income, then this article is for you.
This article discusses different legal ways to save income tax in India other than 80C. For easy navigation, article is divided into different parts on the basis of nature of income.
If you are salaried person, check out Salary Income section. If you are a businessman, check out Business Income Section. If you have made capital gains, then check Capital Gains section. If you have earned rent income or own a house property, check out Income from House Property section. If you have other sources, then check out Income from Other Sources section. If you are one of the rare species who earns income from multiple sources, then check out entire article.
- How to save income tax on Salary Income
- How to save income tax on business income
- #10. Claim depreciation
- #11. Additional depreciation on new plant and machinery
- #12. Incorporate a Private Limited Company
- #13. Amount paid for scientific research
- #14. Pre-commencement expenses [section 35D]
- #15. Keyman Insurance Policy [section 37(1)]
- #16. Health Insurance of employees
- #17. Employer’s Contribution towards recognised provident fund
- #18. Bad debts
- #19. Interest paid on VAT/GST
- #20. General Deductions [section 37(1)]
- #21. Set-off of losses of earlier years
- #22. Presumptive taxation scheme
- #23. Create an Hindu Undivided Family (HUF)
- How to Save Income Tax on House Property Income
- How to save Income Tax on Capital Gains
- #27. Take benefit of Indexation
- #28. Cost of Improvement to the Asset
- #29. Expenses paid in connection with sale of asset
- #30. Sale long-term asset instead of short-term
- #31. Long-term capital gains on stocks
- #32. Save income tax on Sale of long-term residential housing property [section 54]
- #33. Save income tax by investing in bonds [section 54EC]
- #34. Transfer of long-term asset other than house property [section 54F]
- #35. Depositing in Capital Gains Scheme
- How to save Income tax on interest and other income
- Other types of deductions
How to save income tax on Salary Income
#1. House Rent Allowance
If you are living on rental accommodation and get House rent allowance as a part of your salary, then you can claim full or partial exemption from HRA. The amount of exemption will be least of the following :
a. Actual HRA received
b. Rent paid minus 10% of Salary
c. 40% of Salary (50% in case you are living in Delhi, Mumbai, Kolkata or Chennai)
To learn more about House Rent Allowance (HRA), please read this post.
#2. Leave Travel Concession
Leave Travel Concession (LTC) or Leave Travel Allowance (LTA) is an assistance given by employer to employee for travelling anywhere in India along with his/her family. If you have incurred expenses on domestic travel either alone or with your family, you can utilize this allowance to reduce your taxable salary. You can claim exemption in respect of air fare or rail fare only.
LTA exemption can be claimed twice in the block of 4 calendar years. If you have not availed this exemption on one or two journeys during any of the four year block period, you can carry forward the exemption to the next block period, provided that exemption should be claimed in the first calender year of the next block (in respect of one journey only). This is known as Carry-over Concession.
Read more about Leave Travel Allowance here.
#3. Employer’s Contribution to Recognized Provident Fund
Employer’s Contribution to Recognized Provident Fund is exempt up to 12% of the Salary (Basic+DA). If your employer is contributing less than 12% of Salary to any recognized provident fund, then you must ask your employer to increase it to 12% to lower the taxable income. Further, interest income is exempt to the extent of 9.50% per annum.
#4. Food Coupons
Food coupons are one of the best way to save tax. As per income tax law, lunch, dinner or refreshment provided by the employer free of cost is taxable in excess of ₹ 50 per meal. This means you can claim exemption upto ₹ 100 per working day. Many companies issue food coupons like Sodexo, Ticket Restaurant etc in denomination of ₹ 100, ₹50, ₹30, ₹20, ₹10 and ₹5. These coupons are accepted by major brands and restaurants for payment. You can easily reduce your taxable income upto ₹ 31,200 (i.e. 2600 per month) by taking more salary in Food Coupons.
#5. Restructure your Salary
Not many know that you can save income tax just by restructuring your Salary. There are allowances which are fully or partially exempt and including those as a part of your salary will reduce the tax burden. For instance, you can restructure your salary to include Children Education allowance (if you have school going children) which is exempt up to ₹ 100 per month per child up to a maximum of 2 children.
Further, you can also include Hostel Expenditure Allowance which is exempt Up to ₹ 300 per month per child up to a maximum of 2 children.
To know about taxability of Allowances, check this.
#6. Leave Salary
You may have unused leave accumulated to the credit of the employee during the course of your employment. Encashment of the leave by surrendering the leave standing to one's credit is known as 'leave salary'. If you are government employee, leave salary is fully exempt but if you are non-government employee, then there is partial exemption.
To know more about taxability of leave salary, read this post on Chartered Club..
#7. Contribution to NPS [Section 80CCD(1B)]
You can claim additional deduction up to ₹ 50,000 under section 80CCD(1B) in respect of contribution to National Pension System (NPS). This is in addition to the ₹ 1,50,000 limit. Furthermore, this can be claimed even if you are not salaried person.
#8. Voluntary Retirement Scheme
Any amount received by way of Voluntary Retirement Scheme will be treated as follows:
Least of the following is exempt from tax:
a) Actual amount received as per the guidelines i.e. least of the following:
- 3 months salary for each completed year of service
- Salary at the time of retirement x No. of months of services left for retirement; or
b) Rs. 5,00,000
#9. Standard Deduction
From Assessment Year 2019-20 i.e. financial year 2018-19 standard deduction of ₹ 40,000 from salary income will be allowed. This is the flat deduction irrespective of any expenditure incurred and also you don’t have to submit any bills or voucher as evidence to claim it. This deduction has been brought by replacing exemption of transport allowance and medical reimbursement. So, from A.Y. 2019-20, no exemption will be available on transport allowance and medical reimbursement but you can claim standard deduction of ₹ 40,000.
How to save income tax on business income
#10. Claim depreciation
You can claim depreciation on assets used for business and most importantly you can also claim depreciation on assets used for business even if it it is not in your name. There are different rates specified for different type of assets broadly classified under Building, Furniture and Fittings and Plant and Machinery.
You should keep in mind that assets which are put to use after 1st October of the financial year are depreciated at half the specified rate.
#11. Additional depreciation on new plant and machinery
In addition to depreciation on existing assets, you can claim additional depreciation at the rate of 20% of the actual cost of the asset if the asset is new plant and machinery. If the business is located in the backward area notified by Central Government in the states of Andhra Pradesh, Bihar, Telangna and West Bengal, the rate of additional depreciation is 35%.
Note: This additional depreciation is only available for new plant and machinery and only in the first year of acquisition.
#12. Incorporate a Private Limited Company
You can save income tax upto 5% by Incorporating a domestic company. As per Budget of 2018, 25% tax rate will be applicable for domestic companies whose turnover does not exceed ₹ 250 crore during the financial year. This is one hell of a good news for all the entrepreneurs out there.
#13. Amount paid for scientific research
You can claim deduction upto 175% of amount paid to any research association or to a university, college or other institution which carry out scientific research even if it is not related to your business. For more information on scientific research deduction check out section 35 of the Income Tax Act, 1961.
#14. Pre-commencement expenses [section 35D]
Before starting the business, if you have incurred expenditure on market research, feasibility studies, engineering services, legal charges for registration a company etc. then you can its deduction in five equal annual installments. Check out section 35D of the Income Tax Act,1961 for more information.
#15. Keyman Insurance Policy [section 37(1)]
Any insurance premium paid for insuring the life of an important person (Keyman) of the business can be claimed as expenditure. For example, in case of partnership firm, premium paid by the firm on Keyman Insurance Policy of the partner to safeguard the firm against the disruption of the business will be allowed as deduction.
However, amount received on maturity will not be exempt under section 10(10D) of the Income Tax Act, 1961.
#16. Health Insurance of employees
Premium amount paid for health insurance of the employees under the scheme approved by Central Government or IRDA can also be claimed as deduction from business income. The deduction will not be available if the premium amount is paid in cash.
#17. Employer’s Contribution towards recognised provident fund
As an employer, you can claim deduction of contribution made towards recognised provident fund on behalf of employees. You can also claim deduction from business income on account of contribution made towards NPS and approved gratuity fund on behalf of employees.
#18. Bad debts
Bad debts are inherent risk for operating any type of business. Thankfully, you don’t have to pay tax on irrecoverable amount of debts. Bad debts can be claimed as deduction from business income.
#19. Interest paid on VAT/GST
Interest paid on late payment of GST or VAT can be also claimed as expenditure from business income. On the contrary, late fees or penalty paid are not allowable as deduction from business income.
#20. General Deductions [section 37(1)]
Any expenditure incurred wholly and exclusively for the purposes of business can be claimed as deduction. However, any illegal payment which is prohibited by law will not be allowed as deduction.
#21. Set-off of losses of earlier years
Most business runs on losses during their initial years of operation. These losses can be blessings in disguise because you can set off these business losses or earlier years from business profit of current year or future years.
But keep in mind that to carry forward losses of initial years, you must file your income tax return (yes, even if you have losses).
#22. Presumptive taxation scheme
Small business who have annual turnover less than ₹ 2 crores (₹ 50 Lakhs for professional) can opt for presumptive taxation scheme framed under section 44AD, 44ADA and 44AE. Under these scheme profit for the year is presumed at 8% of turnover (50 % in case of professional) tax is paid on this income. The major benefit of this scheme is that business owners don’t have to maintain any records.
To learn more about presumptive taxation, read this post.
#23. Create an Hindu Undivided Family (HUF)
The concept of Hindu Undivided Family popularly referred as HUF has been there since very long time but still most people have not taken advantage of HUF in tax planning.
HUF can be formed only by Hindu, Jain and Sikh families in India. HUF is alloted different PAN and can open separate bank account. Income Tax Slab rates for HUF are same as that of individual and you get an added benefit of basic exemption limit. In this way income upto ₹ 2,50,000 if freed and no income tax has to be paid
Read more about the concept of HUF here.
How to Save Income Tax on House Property Income
#24. Interest on Home loan
Interest on home loan upto ₹ 2,00,000 can be claimed as a deduction if the house property is used for self-occupation purposes or is vacant. If you have rented out the property, then whole amount of interest can be claimed as deduction. The principal repayment amount of loan is deductible under section 80C (upto ₹ 1,50,000).
#25. Municipal Taxes
If you are earning rent income from house property, then you can claim deduction of municipal tax from the gross annual value (GAV) which is generally the rental income. However, municipal tax deduction is only allowable if the same is borne and paid by the owner.
#26. Standard Deduction @ 30%
The income tax law provides standard deduction of 30% of Net annual value (NAV). The net annual value is derived after deducting municipal tax from the total rent received. This deduction help the owner of the property to cover for expenses incurred for maintenance of house property.
How to save Income Tax on Capital Gains
#27. Take benefit of Indexation
When you sell a capital asset after holding it for more than 24 months it is referred as long term asset (for equity shares period is 12 months). On sale of long-term asset you get the benefit of inflation on original cost of acquisition of that asset. The logic here is that value of rupee today is not same as that of yesterday and will not be same as that of tomorrow because of rising prices. So what you purchased 3-4 years back for ₹ 1,00,000 may cost ₹ 1,20,000 today as per inflation. Income Tax law has provided with the cost inflation index of every year starting from F.Y. 2001-02 as base year.
Read this post to understand about Indexed Cost of Acquisition
#28. Cost of Improvement to the Asset
If you have done any incurred any expenditure on the asset which substantially increases its value then such expenditure can also be deducted from sale value. Further, for long-term asset, indexation on cost of improvement is also available.
#29. Expenses paid in connection with sale of asset
Any type of expenditure such as brokerage, stamp duty, registration charges, travelling expenses, legal expenses which are incurred in connection with sale of asset are deductible from the sale consideration.
#30. Sale long-term asset instead of short-term
Long-term capital asset bears lower rates of tax than short-term capital asset. So, you should always plan to hold asset at least for more than 24 months as will lower your tax liability. Also long-term capital assets enjoy more investment based exemption over short-term asset [section 54, 54F, 54EC].
#31. Long-term capital gains on stocks
Long term capital gain on sale of equity shares were fully exempt from income tax till A.Y. 2018-19. Now, from A.Y. 2019-20 they are taxable in excess of ₹ 1,00,000 at the rate of 10%. So, you can still save tax on long-term gains on stocks upto ₹ 1,00,000.
Please note that shares are considered as long-term capital asset if holding period is more than 12 months.
To understand the taxability of long-term capital gains on equity shares, please read this post.
#32. Save income tax on Sale of long-term residential housing property [section 54]
You can save income tax by reinvesting the capital gains on sale of house property into buying another house property. This exemption is available only to individual and HUF holding long-term residential house property. The new property can be purchased either one year before or two years after the date of sale of property. Further, the gains can also be used for construction of house property but the construction has to be completed within 3 years from the date of sale of property.
#33. Save income tax by investing in bonds [section 54EC]
You can also invest in government bonds under section 54C if you don’t intend to buy another house property to save income tax. Section 54EC exemption can be claimed if you invest the gains from any long-term capital asset up to ₹ 50 lakhs into bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). You need to invest into bonds within 6 months from the date of sale of asset.
#34. Transfer of long-term asset other than house property [section 54F]
If you have sold long-term asset other than house property, then exemption from capital gains tax can be claimed in section 54F. To claim exemption you have to invest entire net sale consideration not just the capital gains into buying a new residential house property. The new property can be purchased either one year before or two years after the date of sale of property. Further, the gains can also be used for construction of house property but the construction has to be completed within 3 years from the date of sale of property.
#35. Depositing in Capital Gains Scheme
Finding a suitable investment opportunity is a time consuming process. If amount of capital gains is not invested till the due date of filing of return i.e. 31st July of the financial year in which asset is sold, then you can deposit the amount in PSU bank as per Capital Gains Account Scheme, 1988. However, this amount has to be utilised for purchase of asset before the specified period. Otherwise, the un-utilised amount will be taxable as long term capital gain.
How to save Income tax on interest and other income
#36. Deduction of Interest Income under section 80TTA
Interest income upto ₹ 10,000 from saving bank account ot post office saving account is exempt from income tax under section 80TTA. This deduction is available to individual and HUF and is deductible from gross taxable income. This deduction is not available on interest earned on term deposits.
#37. Submitting Form 15G/15H
If your total income is below the basic exemption limit, you can avoid TDS on fixed deposits by submitting Form 15G/15H to the bank. These forms are declaration that your total income is not chargeable to tax and requesting bank to not deduct TDS. Form 15H is for senior citizen and Form 15G is for all other persons.
#38. Gift received under different circumstances
Normally gifts are taxable as Income from Other Sources but there are certain types of gifts which are not taxable. The most common types of gift which are tax free includes any receipt of money or property:
From any relative
From anyone on the occasion of marriage
Under a will or by way of inheritance
#39. Deduction under section 57
There are several expenses that you can deduct from income while computing income from other sources such as:
50% of interest received on compensation or enhanced compensation is deductible
Any type of expenditure (not being capital expenditure) incurred wholly and exclusively for earning such income
1/3rd of family pension subject to maximum of ₹ 15,000 can be deducted from Family pension income
If you are earning rental income through letting of plant, machinery or furniture, then expenses like taxes, insurance, repairs, depreciation are deductible
#40. Timing of Fixed Deposit
You can save TDS on Fixed deposits interest by timing your FD in such a way that interest in a financial year does not exceed ₹ 10,000. For instance, a 12 month Fixed Deposit of ₹ 2,00,000 at 7.75% interest rate could be started in september as financial year closes in March. As interest accrued for first 6 months will be less than ₹ 10,000, TDS will be avoided.
#41. Splitting the Fixed Deposit
You can save income tax by splitting your fixed deposit in different persons. For instance, you can open FD in the name of HUF or your spouse. This way you can effectively save tax on interest income and at the same time capital in your HUF will also appreciate.
Other types of deductions
#42. Deduction of Rent [section 80GG]
If you are living on rental accommodation, you can claim deduction of house rent upto ₹ 60,000 per annum provided that house rent deduction has not been claim under any other sections of Income Tax Act. This deduction is available to individual (salaried or self-employed) and HUF. If a salaried employee is receiving House Rent allowance, then deduction under this section is not available.
#43. Interest on Home Loan (section 80EE)
This deduction on interest on home loan is available to first time home buyers upto maximum of ₹ 50,000 per year. This deduction is available on purchase of your first residential property only and is over and above ₹ 2,00,000 deduction under section 24.
To know more about conditions of section 80EE, read this.
You can also save tax by doing charity. Section 80G provides deductions if donation is made to certain specified funds or charitable institutions. To claim deduction make sure that the charitable institution is registered and is having PAN.
#45. Deduction in respect of Medical Treatment [section 80DDB]
If you have incurred expenditure on medical treatment of certain specified disease, you can claim deduction upto ₹ 40,000 during the year. For senior citizen this limit is ₹ 60,000 and for super senior citizen this limit is ₹ 80,000 per year.
An individual taxpayer can claim deduction if expenses incurred is for own treatment or for dependent. An HUF taxpayer can claim deduction if expenses incurred for any member for HUF.