5 Lesser-Known Tax Saving Tricks You Should Know About

Everyone is aware of popular tax-saving methods like investing in Public Provident Fund (PPF), ELSS (Equity Linked Savings Schemes), or National Savings Certificates (NSC) under Section 80C. However, there are several lesser-known tax-saving strategies that can help you minimize your tax liability and optimize your investments. These tricks can be easily leveraged, provided you understand their implications. Let’s dive into five lesser-known yet effective tax-saving tips that can help reduce your tax burden:

1. Claiming Deduction on Home Loan Prepayment

Home Loan Prepayment can also help you save taxes, but it’s a lesser-known strategy. If you prepay your home loan, the interest you pay can still be claimed as a deduction under Section 24(b). However, if you decide to repay the principal amount early, the principal repayment amount can also be used to claim deductions under Section 80C.

• Interest Deduction (Section 24): You can claim tax deductions up to ₹2 lakh per year on the interest paid on home loans. This deduction applies even if you decide to prepay your loan.

• Principal Deduction (Section 80C): Prepayments made towards the principal of a home loan can still be included within the ₹1.5 lakh limit under Section 80C.

Why it Works:

Many people miss out on this tax-saving opportunity when they prepay their loans but don't track the principal repayment for tax deductions. By keeping records of both principal and interest paid during the year, you can maximize your tax savings.

2. Tax Benefits of Investing in Rural Development Bonds

Under Section 80CCF, you can claim a deduction of up to ₹20,000 by investing in Rural Development Bonds. This is an often-overlooked investment option that can not only help you save taxes but also contribute to the development of rural infrastructure.

• These bonds have a fixed tenure, usually 3 to 5 years, and interest rates are generally around 6% to 7%.

• The tax benefit is over and above the ₹1.5 lakh limit under Section 80C.

Why it Works:

Rural Development Bonds are a great way to diversify your investment portfolio and reduce your taxable income without competing with the standard tax-saving schemes. For high-income earners, this is a smart way to reduce your overall tax liability.

3. Investing in National Pension Scheme (NPS) for Additional Tax Saving

Many people are aware of the tax benefits under Section 80C for NPS contributions, but few realize that Section 80CCD(1B) offers an additional tax deduction of up to ₹50,000 specifically for NPS contributions. This is over and above the ₹1.5 lakh limit under Section 80C.

• Section 80C: You can claim deductions for contributions to the NPS up to ₹1.5 lakh (inclusive of all eligible investments under 80C).

• Section 80CCD(1B): This allows for an additional ₹50,000 deduction for contributions made to NPS, bringing your total tax-saving potential from NPS to ₹2 lakh in a financial year.

Why it Works:

NPS is a great retirement planning tool that offers higher returns compared to traditional savings instruments. Plus, the tax benefits are extremely attractive, especially when coupled with the additional ₹50,000 deduction under Section 80CCD(1B).

4. Set Off or Carry Forward Losses to Save Tax

If you have incurred capital losses (either short-term or long-term) from the sale of assets like stocks, mutual funds, or property, these losses can be used to offset capital gains.

• Short-term Capital Loss (STCL): You can set off short-term losses against both short-term and long-term capital gains.

• Long-term Capital Loss (LTCL): LTCL can only be set off against long-term capital gains.

Any unused capital losses can be carried forward to offset future gains. You can carry forward capital losses for up to 8 years.

Why it Works:

This strategy is highly effective if you’ve incurred losses during a market downturn and want to reduce your tax burden in the future. By carrying forward the losses, you can reduce taxable capital gains in future years when the market recovers.

5. Donating to Charity – A Little-Known Tax Saving Option

Many people are unaware that donations to charity can be a powerful tax-saving tool. Under Section 80G, you can claim deductions for donations made to specified charitable organizations. Depending on the nature of the charity and the amount donated, the deduction can be:

• 100% Deduction: Donations to certain organizations or causes such as the Prime Minister’s Relief Fund, National Defence Fund, or National Foundation for Communal Harmony are eligible for a 100% deduction.

• 50% Deduction: Donations to other eligible organizations are eligible for a 50% deduction.

Why it Works:

Charitable donations not only help you contribute to a cause you care about but also reduce your taxable income. Many taxpayers forget that their philanthropic contributions can be used as a legitimate tax-saving tool. If you make donations to eligible charities, be sure to ask for receipts to avail of the tax benefits.

Conclusion: Maximize Tax Savings with These Lesser-Known Strategies

While most people are familiar with popular tax-saving options such as PPF, ELSS, and NSC, the above-listed lesser-known tricks can be game-changers in your tax planning. Whether it’s using home loan prepayments, investing in NPS or rural development bonds, carrying forward capital losses, or donating to charity, these lesser-known deductions can significantly reduce your taxable income.

By utilizing a combination of these tax-saving options, you can not only reduce your current tax liability but also secure your financial future in a more tax-efficient manner.

Tip for the Tax-Savvy:

Always consult with a tax advisor to ensure that you're leveraging all available deductions and exemptions in the most efficient way. With the right planning, you can keep your hard-earned money working for you, rather than giving it away in taxes.

By incorporating these lesser-known strategies into your financial planning, you can unlock hidden tax savings and make the most out of your income.