Income Tax Benefits on Different Financial Products

Highlights

  • Want to know how you can make the most of income tax deductions/exemptions?
  • Read this post that tells you income tax benefits on investments, loans and insurance

One earns his salary after working hard for a month. And at the time of salary payout you realize that the in-hand income is quite shorter than the gross income. As EPF and other statutory deductions are made from the same. When taxes are applied, the in-hand income reduces further. This can make it challenging for many who are already struggling amidst increasing inflation. However, tax exemptions/deductions applicable under different sections of the Income Tax Act can reduce your tax liability. These income tax benefits apply to numerous investments and loans. 

Let’s Talk About the Investments First

Income tax benefits apply to several investments such as:

  • Equity-linked Savings Scheme (ELSS)
  • Public Provident Fund (PPF)
  • Tax-saver bank fixed deposit
  • National savings certificate (NSC) etc.

One can get tax deductions up to INR 1.5 lakh in a financial year investing in any of these products under Section 80C. However, the other thing that remains the same between these products is that there is a lock-in period that does not allow you to withdraw money. Apart from ELSS, every investment product has a lock-in period of 5 years whereas ELSS has a 3-year lock-in period.

Who Should Invest in What?

The decision to choose the investment will depend on the kind of investor you are.

ELSS is the one to invest in if you have a high-risk appetite and are eyeing an inflation-adjusted corpus.

  • It doesn’t have any investment limit like the way its competing tax-saver investments have wherein you can’t invest more than INR 1.5 lakh a year.
  • However, the rate of return here is not certain and is highly impacted by the movement of the stock market and the economy in general.

Bank Fixed Deposits are the ones to invest in if you are an investor with a low-risk appetite.

  • Bank FD rates are now down to 3%-5% on average.
  • The government recently cut the interest rate on PPF and NSC to 7.10% and 6.80%, respectively
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Let’s Discuss Income Tax Benefits on Loans

As far as tax benefits on loans are concerned, it’s home loan borrowers that make the most of it. Taxes benefits are there on the interest that you pay on your loan, especially home loans. Section 80E of the IT Act allows a tax deduction on interest payments made towards an education loan. However, the benefits apply for only 8 years from the time you start repaying the education loan, which can be given for a maximum of 15 years.

While there is no limit for tax benefit on education loans on the interest that you pay for the financial year, the limit for tax benefit on a home loan is INR 50,000, along with certain conditions. Principal repayments of the home loan enable individuals a tax deduction of up to INR 1.5 lakh a year under Section 80C. Whereas, tax deductions on interest repayments are capped to INR 2 lakh a year under Section 24. There’s no maximum tax deduction limit on interest payments if the property is let out. Additional tax deductions of INR 1.5 Lakh will be given on affordable housing projects having stamp value within INR 45 lakh as per Section 80EEA.

ConditionTax Benefits
Interest Paid on Home LoanUp to INR 50,000
On Principal Repayment AmountsUp to INR 1.5 Lac
Interest RepaymentsUp to INR 2 Lac
Interest Payment If the Property is Let OutNo Limit
Projects with stamp value within INR 45 LacUp to INR 1.5 Lac

The deduction is over and above INR 1.5 lakh deduction on interest payments that you get under Section 24. If you take a home loan to renovate your home and you get a tax deduction on interest up to INR 30,000 on a self-occupied property. Whereas, there’s no maximum limit of tax deductions on interest if the property is rented. You can use a home loan tax benefit calculator to calculate the tax benefits that you are eligible for according to the various tax benefits schemes.

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Sukanya Samriddhi Yojana Tax Benefit

The government launched a special tax benefit scheme called the Sukanya Samriddhi Yojana Tax Benefit. The scheme mainly focuses upon the education of the girl child. This scheme helps the parents build a better relationship with their girl child because the parents can cover the expense of higher education and marriage of their girl child. Moreover, any investment made under this scheme is qualified for tax deduction under section 80C of the Income Tax Act. However, to be eligible to claim a tax benefit under this scheme you need to make a deposit worth INR 1.5 Lac.

Tax Benefits on Insurance Products

The section 80C of the IT Act provides various tax benefits on insurance products. You can get tax deductions on insurance such as life and health insurance products. Premiums payable on life insurance gives you tax deductions upto INR 1.5 lakh under Section 80C. However, to get the tax deduction under Section 80C, the premium paid must not be more than 10% of the sum assured if the policy is issued after April 1, 2012. For policies issued before April 1, 2012, the premium paid must not be more than 20% of the sum assured. Tax exemptions are given on the maturity amount if the premium paid does not exceed 10% and 20% of the sum assured for policies issued after and before April 1, 2012, respectively. This tax benefit is provided under Section 10(10D) of the IT Act.

When it comes to Health Insurance

  • Tax deductions up to INR 25,000.
  • These tax deductions can be on the insurance of self, spouse, and kids.
  • Additional deductions of up to INR 25,000 for the insurance of parents below 60 years of age.
  • Moreover, if the parents are above 60 years of age, the additional deduction can be up to INR 50,000.
  • And when the taxpayer and his parents are above the age of 60 years. The maximum deduction limit goes up to INR 1 lakh. 
  • However, these benefits are provided under Section 80D.
  • This section also offers income tax benefits to individuals opting for single premium health insurance policies.
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Tax Benefits on Donation

Tax Benefits on donation come under section 80G of the Income-tax Act which provides a 50% exemption. Moreover, the benefit is at the time of paying tax on donations that were maid such organizations under this act. Section 80G offers tax deductions on donations made to only specific funds or charitable organizations with a qualifying limit of 10% of the adjusted gross total amount. The amount that you are donating can be claim as a deduction under section 80G, when you are filing income tax returns. Because tax exemptions on donations under section 80G uplift the vulnerable section of the society by providing an incentive for the public to give to such organizations that work towards the development of society.

How Do These Tax Benefits Work Out?

  • The eligible tax deductions are from your annual gross income.
  • Therefore, making the taxable income lesser and hence lowering the tax liability.
  • And you just need to show proof of tax-saving investment.
  • However, proof can be anything like insurance premium payments, or a home loan/education loan if any. 

Just when a financial year is about to end, your company may give you an investment declaration and form wherein you can submit the details appropriately. Proof of investment, loan, or insurance will be there with that form. If the details are found genuine, tax deductions are made and would help you reduce your tax liability.

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