Top tips on how to save tax

You can reduce the taxable component of your income by making the right investments. We present three tax saving tips.

Making an income is a necessary part of every person’s life – after all, you need money for food, clothing and other necessities! However, you do not get to retain every rupee earned through your salary or your business income. Some part of it is always lost to taxation every year.

While some amount of your income will go towards paying taxes every year, it is possible to reduce the taxable component in your income to a large extent. Knowing how to do this is key. It is possible to save tax by investing in the right instruments, which are known as ‘tax saving plans’. It is also important to start investing early to reap the maximum benefits of these plans.

These are three ways in which you can save tax:

Invest in ELSS: An Equity Linked Savings Scheme (ELSS) is an excellent tax saving plan that also gives good returns on the initial investment. The investment gives returns after a lock-in period of three years, and there are tax benefits under Sec 80C. Also, if you do not have a large fund of money to invest in the ELSS, you may take the SIP (Systematic Investment Plan) route to purchasing the mutual fund. Your fund manager can best advise you on which equities to park your funds in.

Take a home loan: Your dream of buying your own home can also give you tax rebates. Home loan interest provides for gives tax benefits under Sec 24(B) of the Income Tax Act, 1961. Alternatively, if you live in a house registered in your parents’ name, you can make a registered rent agreement with your parent and furnish rent receipts to claim HRA (House Rent Allowance). You are liable for tax benefits also for the rental accommodation you live in, provided your landlord provides you with rent receipts every month.

Invest in PPF: The Public Provident Fund (PPF) is a very good tax saving plan which gives good returns on maturity. You can invest as little as Rs 500 or as much as Rs 1,00,000 per year in your PPF account. Naturally, the more you pay, the higher will be the pay-out on maturity of the fund. There is a lock-in period of seven years till you can withdraw partial funds against the account.