Understanding India’s income tax system is the first step towards prudent financial management. Knowing the income tax brackets and how to maximise the various exemptions and deductions saves you money and lowers your tax burden.
This guide will walk novices through the basics of saving money and decreasing taxes successfully.
Understanding income tax slabs in India
In India, income tax is charged by the progressive tax structure, where a higher income is charged a lower percentage of tax than a lower income. The government announces tax slabs in the Union Budget every year, and taxpayers are divided into certain income pockets.
Here’s a snapshot of the income tax slab under the new tax regime:
- Up to ₹3,00,000: No tax
- ₹3,00,001 to ₹6,00,000: 5%
- ₹6,00,001 to ₹9,00,000: 10%
- ₹9,00,001 to ₹12,00,000: 15%
- ₹12,00,001 to ₹15,00,000: 20%
- Above ₹15,00,000: 30%
The old tax regime which is still an option has several deductions and exemptions including section 80C, HRA and so on which advantageous to those who have correct investment and expense patterns.
Step 1: Decide between the old and new tax regime
The first planning decision is to decide whether to remain with the old Gen regime or switch to one of the new regimes. Here’s a quick comparison:
- Old Tax Regime: Provides deductions and exemptions but has the hikes of taxes. Ideal if one can offset several allowances, and/or under sections 80C, 80D, and so on.
- New Tax Regime: A small rate of tax with no allowances or exclusions. Most suitable for people with little or no assets and liabilities.
You should then compare your financial situation to decide which regime will reduce your amount of tax.
Step 2: Utilise section 80C for maximum savings
Section 80C allows deductions of up to ₹1.5 lakh annually, making it one of the most effective ways to save money and reduce taxes. Here are some common money saving schemes under this section:
- Public Provident Fund (PPF): An investment that would not only secure but would yield good returns for a long time and free from tax.
- Employees’ Provident Fund (EPF): Contributions to EPF are eligible for deductions under Section 80C.
- Equity-Linked Savings Scheme (ELSS): A mutual fund that links up with the market and offers tax exemptions and the potential for high returns.
- National Savings Certificate (NSC): A low-risk investment with attractive fixed return backed by the government.
- Tax-Saving Fixed Deposits: Even the Bank FDs with 5 years of lock-in period are also eligible for 80C deductions.
This way, apart from saving taxes, you get into the habit of saving and investing, while selecting these instruments.
Step 3: Save taxes using health insurance (Section 80D)
Section 80D of the Act allows you to claim deductions for health insurance premiums paid. Here’s how it works:
- For self, spouse, and children: Up to ₹25,000 per year.
- For parents (below 60 years): Additional ₹25,000.
- For senior citizen parents: Up to ₹50,000.
Health insurance provides financial security in case of a mishap while pay-as-you-earnn goes for tax advantage.
Step 4: Home loan benefits (Section 80C and 24b)
If you have a home loan, you can avail of tax benefits on both principal repayment and interest payment:
- Section 80C: Tax deductions of up to ₹ 1.5 lakh on principal repayment.
- Section 24b: Tax deductions of up to ₹2 lakh on interest payment on a self-occupied property.
For properties rented out, there’s no upper limit on interest deduction. Owning a home can be a strategic way to save taxes while building a long-term asset.
Step 5: Invest in national pension system (NPS)
The NPS is a government-sponsored retirement scheme that offers dual benefits:
- Tax Savings: The limit of deductions allowed under Section 80CCD(1B) is up to ₹50,000.
- Wealth Creation: NPS invests in equity and debt securities of companies giving better returns in the longer run.
Step 6: Leverage tax-free allowances
Certain components of your salary are tax-free, which can help lower your taxable income:
- House Rent Allowance (HRA): Based on your rent and basic salary you can apply the deduction.
- Leave Travel Allowance (LTA): More specifically, this policy provides for the transportation costs within India.
- Food Coupons: Exempt up to a certain level.
Discuss with your employer and try to organise your salary in a way that will make the most of tax advantages.
Step 7: Explore additional deductions
Apart from the above, consider these deductions:
- Education Loan Interest (Section 80E): Exemption on interest paid on borrowings for education at an advanced level.
- Donations (Section 80G): Charitable donations to charities that have been recognized by the Internal Revenue Service can be used for deductions.
- Savings Account Interest (Section 80TTA): Exemptions of up to ₹ 10,000 on Interest earned.
Knowing these less popular deductions can help reduce the amount of money you pay in taxes a great deal.
Step 8: Avoid penalties and late fees
Before going further let’s know about Section 234F of the Income Tax Act which states that, Failure to file a return of income shall lead to penalties as clarified below. Delays attract penalties of up to ₹5,000 and interest on the unpaid taxes as will be discussed below. It is recommended that you should file your ITR before the due date.
Step 9: Plan investments early
Pre-calculation in advance helps avoid making wrong choices of investments atae time when there is stiff competition for the limited available investment opportunities. Thus, it is necessary to allocate a period at the beginning of the financial year to look at your financial plan before choosing tax-saving instruments.
Ending note
Tax preparation is more than just saving money; it is about ensuring a secure financial future. You may efficiently manage your money by understanding income tax slab and taking advantage of the numerous deductions and exemptions available.
Start small, plan properly, and be consistent. A proactive strategy will allow you to save money while also achieving more financial freedom.
Remember, every rupee saved equals a rupee earned. Take advantage of tax-saving options and put your money to work for you.