Ways to save taxes without putting your money in tax-saving investments

Ruchi Gandhi

13 Sep, 2022

Filing income tax returns (ITRs) may be a time-consuming process for individuals. Not only must one guarantee that their taxes are paid on time, but they must also ensure that their tax-saving investments are completed. If a person does not claim all of their qualifying deductions, they probably end up paying more in taxes than they might have otherwise saved.

Claiming of deductions without tax-saving investments

It should be emphasized that beginning in the fiscal year 2020-21, taxpayers will have the option of paying taxes under the new, more lenient tax system. If the taxpayer chooses the new tax regime, he or she will lose most tax breaks and exemptions. In other situations, the taxpayer may choose to stay with the current tax scheme, but due to financial concerns, particularly in light of the Covid-19 outbreak, he may be unable to make additional tax-saving investments. Such taxpayers should not be discouraged though, because some expenses are also tax-deductible. The deductions available to a taxpayer must be claimed from the gross total income, thus lowering taxable income and, as a result, the tax liability.

Hence, the widely held belief that one must invest in tax-saving investments in order to save tax is not always correct. Whether a taxpayer is experiencing financial challenges or chooses not to engage in new tax-saving investments for any other reason, it is feasible to save tax with no investment for the upcoming fiscal year. Here are a few alternatives for people to save money on taxes without investing in new instruments for the fiscal year 2021-22.

Children’s Tuition Fees, Education Allowance and Hostel Allowance

Any allowance (up to specified limitations) for children’s education and hostel expenses (usually referred to as Children Education Allowance & Hostel Allowance^[1]) provided to an employee by his or her employer is accepted as an exemption under Section 10 (sub-section 14) of the Act.

Section 10 (sub-section 14) of the Income Tax Act of 1961 exempts any special allowance paid by an employer to an employee for the education of the employee’s children (up to a maximum of two), as well as hostel expenses. This exemption for the children’s education allowance is limited to Rs. 100 per month, while the hostel expense is limited to Rs. 300 per month.

Furthermore, tuition expenses for full-time education of up to two children of the employee paid to any educational institution in India by their employer are eligible for a deduction of up to Rs. 1.5 lakh under Section 80-C of the Income Tax Act.

Any individual assessee (salaried or non-salaried) can claim this deduction if he or she pays the tuition amount indicated above for his or her children. The sum permitted as tuition fees, however, would not include payments in the form of development fees, donations, capitation fees, or other payments of a similar character. Furthermore, if payment is made to a foreign educational institution, the deduction is not available.

It is also worth noting that children’s education allowance is not the same as tuition expenses. Children’s education allowances are deductible only if they are part of the taxpayer’s salary structure and he has actually spent costs for his children’s education. The quantum of allowances that can be deducted is Rs. 1,200 per kid each year, up to a maximum of two children. Tuition fees, on the other hand, are permissible under section 80C of the Act on the basis of actual expenditure paid for the education of children up to Rs. 1.5 lakhs, even though they do not form part of the taxpayer’s salary component.

Deduction in respect of payments for home loans – Alternative to tax-saving investments

A separate provision has been put in place for persons purchasing a property for residential purposes for the first time, giving a deduction for interest paid on home loans. Home loan EMIs are made up of two parts: the principle and the interest. Individual assessees can claim a deduction of up to Rs. 50,000 on the interest component of their EMI payments under section 80EE of the Income Tax Act. The loan amount, however, should not exceed Rs. 35 lakhs and the value of the residential property should not exceed Rs. 50 lakhs.

Additionally, under section 80C of the Income Tax Act, the principal component of the EMIs can be claimed as a deduction too, with a total maximum of Rs. 1.5 lakh.

House Rent

House Rent Allowance (or HRA) deductions are available to self-employed and salaried persons who work in areas where they do not own residential properties. In the case of House Rent Allowance (HRA), Section 10(13A) of the Income Tax Act exempts the least of the following amounts based on the rent an individual pays:

• 40 to 50% of the amount the individual receives as salary (50% in the case where the employee is living in a metropolitan city)
• The actual amount received as allowance
• The amount of the rent that exceeds 10 percent of the individual’s salary

To claim the tax advantage, the taxpayer must furnish the employer with the rent receipts, as well as other information, so that the exemption amount may be calculated.

Leave Travel Allowance

Section 10(5) of the Income Tax Act provides a deduction for leave travel allowance (commonly known as LTA) based on the submission of proof of travel and related expenses, subject to some specified requirements. This deduction is only available for a maximum of two travels within India in a four-year period (2018-2021).

However, due to pandemic-related travel limitations, many taxpayers were unable to make actual travels in the fiscal year 2020-21. Taking this into account, the government has implemented the ‘LTC Cash Voucher’ plan. Under this system, an employee can claim an exemption for cash allowances received in lieu of LTC only if certain prescribed requirements are met by the taxpayer.

Given the wide range of qualified products and services, salaried taxpayers & individuals may readily take advantage of such a system provided by the Government. It should be noted, however, that employees who have previously received the LTC exemption twice for their current block 2018-21 are ineligible to participate in this particular scheme. Furthermore, in the private sector, only those employees who have LTA as part of their salary structure are eligible for the plan provided that their firm gives this offer to them.

Employee Provident Fund

The Employees’ Provident Fund (commonly known as EPF) is one of the deductions made from an employee’s income that must be taken into account when computing tax deductions. This payment made by employees/ workers to a certified provident fund is permitted as a deduction under section 80C of the Income Tax Act, with a maximum limit of Rs. 1.5 lakh.

Education loans – Alternative to tax-saving investments

Section 80E allows for the deduction of interest paid on an education loan obtained from a financial institution or an approved charitable organization. The deduction can be claimed from the taxpayer’s gross total income, thereby lowering the taxable income.

Individual taxpayers who have taken an education loan for higher education, whether for themselves, their spouse, or their children, can claim a deduction for the interest paid on the loan under section 80E of the Income Tax Act. The deduction is not permitted on the principal component of the loan, and the time period for claiming this deduction is 8 years, beginning when the repayment term begins or ending when the interest amount is fully repaid. The education loan must have been used for the purpose of higher education, i.e., any course after completing the Senior Secondary Examination or its equivalent, in India or overseas.

Deduction for medical health check-ups – Alternative to tax-saving investments

Section 80D allows for a tax deduction for medical insurance premiums paid, preventative health check-up charges, and other medical expenses, subject to certain restrictions. Medical insurance premiums paid for the self, spouse or dependent children can be deducted up to Rs 25,000. A further deduction of up to Rs 25,000 can be claimed for medical insurance premiums paid for parents under the age of 60. The deduction is also possible if you purchase a Covid-specific health insurance coverage, such as Corona-Kavach.

Furthermore, the aforesaid deduction threshold is Rs 50,000 in circumstances when the insured is a senior citizen. Medical expenses for a senior person who does not have medical insurance can be claimed as a deduction under this clause, subject to a total maximum of Rs 50,000. The clause also provides for a Rs 5,000 deduction for preventative health check-up expenses. This expense is factored into the total limit, if applicable. The aforementioned expenses must be incurred via a method other than cash. Preventive health check-up costs, on the other hand, can be paid in cash. The deduction will be offered to senior citizens even if they incur medical expenses in cash.

Deduction for interest income

The taxpayers who earn an interest on savings accounts kept in a bank or post office are entitled to a deduction under section 80TTA of the Income-tax Act. The amount deducted shall be the lesser of the interest earned or Rs. 10,000. This limit is Rs. 50,000 for resident senior citizens under Section 80TTB of the Act. Moreover, senior citizens can also deduct interest income from fixed deposits, Senior Citizen Savings Schemes, and so on under Section 80TTB.

Claiming of the standard deduction

At the time of determining the tax liabilities of all the salaried employees, an employer takes into account a standard deduction of up to Rs. 50,000, which is available while filing the income tax returns with the tax department. Employees must also take the standard deduction into account when computing their overall tax obligation for the fiscal year 2021-22 and planning their taxes.

Conclusion

Taxpayers can opt not to invest in new tax-saving investments for a variety of reasons, but they can still save tax on some expenditures that are deductible. With a proper approach, taxpayers can claim deductions for the above-mentioned expenses and save tax while making no investment during the fiscal year.

Read our article:What are the Tax-Saving Investment options for Young Professionals?