When it comes to an income tax, salaried people become more tensed because of lack of awareness towards a tax saving ways or lack of knowledge on a tax saving slabs. There are many products in the financial market which can help a salaried person to save a huge chunk of an income tax at the same time he/she can earn some benefits. The first thing is to understand your tax slab and what each of your salary breakup components means. This will help you to figure out potential savings on taxes.
Understand Income Tax Slab for Individual below 60 Years
|1st Option||2nd Option|
|Old Income Tax Slab Regime||New Income Tax Slab Regime|
|Up to Rs. 2, 50, 000||NIL||Up to Rs. 2, 50, 000||NIL|
|Rs. 2,50,000 to Rs. 5,00,000||5%|
|Rs. 2,50,000 to Rs. 5,00,000||5%||Rs. 5,00,001 to Rs. 7,00,000||10%|
|Rs. 7,00,001 to Rs. 10,00,000||15%|
|Rs. 5,00,001 to Rs. 10,00,000||20%||Rs. 10,00,001 to Rs. 12,50,000||20%|
|Rs. 12,50,001 to Rs. 15,00,000||25%|
|Above Rs. 10,00,000||30%||Above Rs. 15,00,000||30%|
Understand Your Salary Slip – It is important that you should know how your salary slip is made i.e. basic salary, house rent allowance, leave travel allowance, Bonus, employee contribution to provident fund, standard deduction and professional tax etc. Also, you need to understand the difference between the take home salary and CTC. Apart from salary the benefits you get in your job are part of the cost to the company.
1 Save Rs. 1.5 Lakh under Section 80C – Some products/investment options provide you ease to save rs. 1.5 lakh of income tax and same time it will give you investment option such as,
(a) Tax-Saver FD – You can save up to Rs. 1 .5 lakh under 5 year tax-saver FD however the interest on these FDs is taxable.
(b) PPF (Public Provident Fund) – PPF is a government established savings scheme with a tenure of 15 years available with most banks and post offices and the interest earned on PPF is tax-free.
( c ) ELSS Fund – These are mutual funds which invest a minimum of 80% of their assets in equity. They have a lock-in period of 3 years. The return on ELSS funds is subject to long term capital gains tax at 10% over and above an exemption limit of Rs. 1 lakh.
(d) NSC (National Saving Certificate) – A National saving certificate has tenure of 5 years and has fixed interest rate. The interest on NSC is automatically counted towards Rs. 1.5 lakh under 80C limit and is tax-deductible if you have no other investment.
(e) Life Insurance Premium – Premiums for different policies such as ULIP, term insurance and endowment plan are tax-deductible up to Rs. 1.5 lakh however the insurance cover must be at least 10 times the annual premium.
(f) Home Loan Repayment – Your home loan repayment of principal amount is tax-deductible up to Rs. 1.5 lakh per annum.
(g) Payment of Tuition Fees – Tuition Fees of your children is tax-deductible up to Rs. 1.5 lakh per annum.
(h) EPF (Employee Provident Fund) – Under the EPF Act. 12% of the pay of employees in the organized sector is deducted towards the Employees Provident Fund. This deduction counts towards the Rs 1.5 lakh limit under Section 80C.
(i) Senior Citizen Saving Schemes – If you are a senior citizen, contributing towards SCSS is tax-deductible up to Rs. 1.5 lakh. It has tenure of 5 years and is available to those above 60.
(j) Sukanya Samriddhi Yojana – Parents of girl child below age 10 years can get tax-deduction by investing in Sukanya Samriddhi Yojana. The interest on this is tax-free.
2 Medical Expenses under Section 80D – You can save tax on the amount you have spent on medical treatments. By providing medical bills, one can save tax. Maximum amount you can claim using medical bills in a year is Rs. 15000. The Tax Act allows deductions under Section 80D, Section 80DD. The deduction amount may vary depending on your insurance policy which you have purchased. The income which you have spent for insuring yourself and relative’s health is deductible under Section 80DDB.
3 Education Loan under Section 80E – If you have opted for education loan for higher education for your children or even for you or for your spouse then Section 80E of the Income Tax Act allows you to claim deduction on the amount they have spent for paying the loan interest and this has no maximum limit on the amount of deductions they can claim. This section allows only individuals to claim deduction.
4 National Pension System Under 80CCD – This deduction is available under Section 80CCD up to Rs. 50000 for contributions to NPS. The NPS allows you to invest in equity and debt pension funds and build a retirement corpus. You can withdraw it at the age of 60.
5 Share and Mutual Funds Investment under Section 80CCG – If you are one of the citizens who earn below 12 lakhs annually and invest their money in shares of certain companies and some specified mutual funds. The deduction is provided under Rajiv Gandhi Equity Savings Scheme and is available only to first time investors.
6 Donation/Charity under Section 80G – By donating or doing some charity will certainly help you to save tax under Section 80G. There is no upper limit, but different rules restrict the tax deduction amount available on your charitable contributions. For most donations to NGOs, the limit is 50% of the donated amount and up to 10% of your adjusted total income. NGOs under this section are required to have an 80G certificate for you to be able to claim this deduction.
First you should understand your income tax slab and then understand your salary slip which will help you to identify which section of income tax will help you to save some chunk of tax.