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How To Reduce Income Tax In India?

Estimate taxable income:


The first step is to estimate the taxable income for the year. Based on this, you will be taxed as per the income tax slab you fall under. There are several ways to reduce taxable income. Certain incomes are not eligible for deductions, while some are eligible for exemptions and deductions. This is where tax planning comes into the picture. Tax planning is a process through which taxpayers can reduce their tax liability by claiming available tax exemptions, deductions and rebates.

2. Start tax planning early:


Investment is a year-long process, so is tax planning. Investment planning is necessary to optimize tax savings. There are some investments which should be made before a financial year ends, so that tax deductions and exemptions can be claimed. However, there are also investments which are eligible for tax benefits, even if made after a financial year ends but before filing income tax returns. Also, there are limits on exemptions and deductions. Knowing these in advance helps in sound tax planning.

3. Tax planning in line with investment objectives:

Section 80C is the most popular tax deduction. This section prescribes certain investments which allow taxpayers to claim a tax break of up to Rs 1.5 Lakhs a year. There are several investments which enjoy tax deductions under Section 80C, but remember that your investment objective should be to secure your future or to meet financial goals. Commit funds to investment avenues only after identifying financial goals.

Investments made with long-term goals have lock-in periods:

  • ELSS – 3 years

  • PPF – 15 years

  • Tax saver FD – 5 years


Investment planning should be done keeping in mind the following objectives:

  • Optimizing tax saving

  • Minimizing risks

  • Maintaining low investment costs

  • Earning expected returns based on financial goals


Based on financial goals, investment objectives can either be to generate income or to achieve capital appreciation.

4. Invest wisely, save income tax:

a. ELSS – Section 80C

Equity Linked Saving Schemes(ELSS)are mutual funds which invest heavily in equities. Investors willing to assume higher-risk can make the optimum use of ELSS. Investments made in ELSS through SIPs can be claimed under Section 80C. Further, with a lock-in period of 3 years, ELSS helps in wealth creation and saving taxes. On redemption, ELSS gains exceeding Rs 1 Lakh a year, attract long-term capital gains @10%.

b.  Insurance – Section 80C:

Section 80C also allows taxpayers to claim tax deductions towards payment of life insurance premiums. Taxpayers can also claim a deduction for paying premiums on annuity plans under Section 80CCC.

c.  Health Insurance – Section 80D:

Section 80D allows taxpayers to claim a deduction towards the payment of health insurance premiums. You can claim a deduction of Rs 25,000 for premiums paid for self, spouse and dependent children. If you are paying premiums for senior citizen parents, the limit increases to Rs 50,000. Additionally, taxpayers can also claim deduction up to Rs 5,000 on preventive health care.

d.  Loans – Section 80E, Section 80C, Section 24b:

  • Taxpayers can claim deductions on the interest paid on an Education Loan under Section 80E with no upper limit.

  • Principal repayment of Home Loan up to Rs 1,50,000 can be claimed as a deduction under Section 80C.

  • Interest payment of Home Loan up to Rs 2,00,000 a year can be claimed as a deduction under Section 24b.


e. Charity – Section 80G:

Charitable donations made to institutions prescribed in Section 80G are eligible for a tax deduction. Some donations qualify for 100% deductions and some others for 50% of the amount donated.

5. Consult tax advisors:

If you are a newbie to investments and tax filing, it is best to consult a tax advisor before you do tax planning.
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