How to save tax
We get tax laws reformed every year during the budget. Some of them are favoring us and some are not. Understanding these tax laws is very important to help us save on our taxes.
In India, taxes are applied on the basis of income slabs and there are various brackets where one could invest to save his taxes further.
Let’s see how the taxes are calculated in India for the year 2019 and how one can save on them under various brackets.
Some part of your salary is already exempted from taxes. Hence before planning your further investments to save taxes, one must know how much of his salary comes into a taxable bracket for which he or she may be liable to pay taxes otherwise.
For all male and female individuals who are below the age of 60 years and HUF, below tax slabs may apply
- For incomes below 2,50,000, there is no tax applicable.
- For income which exceeds 2,50,000 but is below 5,00,000 a tax rate of 5% will be applicable to the amount by which income exceeds the amount of 2,50,000.
- For income which exceeds 5,00,000 but is below 10,00,000, a tax rate of 20% shall be applicable to the amount by which the income exceeds the amount of 5 lacs.
- For income which exceeds 10 lacs, a tax rate of 30% will be applicable on the amount by which the income exceeds 10 lacs.
For senior citizens who are above the age of 60 years, below tax slabs are applicable —
- No income tax for income below 3 lacs
- A tax rate of 5% on the amount by which their income exceeds 3 lacs but is lower than 5 lacs.
- A tax rate of 20% on the amount by which their income exceeds 5 lacs but is below 10 lacs.
- A tax rate of 30% on the amount by which their income exceeds 10 lacs.
For super-senior citizens who are above the age of 80 years, below tax slabs are applicable —
- No income tax is applicable if the income is below 5 lacs.
- A tax rate of 20% applicable on the income which exceeds the amount of 5 lacs but is below 10 lacs.
- A tax rate PF 30% is applicable for the amount by which income exceeds the amount of 10 lacs.
Understanding your salary
The income of a person comes under 5 heads in India, that is —
- Income from salary
- Income from house property
- Profits from a business or profession
- Capital Gains
- Income from other sources
Here salary income is complex and is important to understand various components of it. It consists of components like basic salary, fees, commission and bonus, allowances.
The components which are fully taxable are dearness allowance, city compensatory allowance, overtime allowance, and deputation allowance.
The components which are partially taxable are HRA (House Rent Allowance), Entertainment allowance, special allowance for uniforms, travel and research and others to meet personal expenses like children education, etc.
The components which are fully exempted are foreign allowance, allowance of the high court and supreme court judges and UNO employees’ allowances.
E-E-E Category of Investments
The first component to make tax savings is to save under E-E-E category heads. That are investments where the invested amount and maturity amount and interest so earned all is exempted from taxes.
These categories come in below headers and an individual can claim a tax savings of INR 1,50,000/- by investing this amount into these areas
- PPF Accounts
- 5 Years Tax Savings Fixed Deposits
- Equity Oriented Mutual Fund
- Pension Plans
- Contribution to Employee Provident Fund
- Life Insurance Policy
- National Savings Certificate
There is also a provision started in the year 2015 to have an extra deduction INR 50,000/- by investing into NPS or National Pension Scheme.
So, an individual could make further savings of almost INR 2,00,000 here from his taxable salary above INR 2,50,000 here.
These investments must be further understood in terms of their returns and likely lock-in period.
Some of these are preferably low-risk investments which give a good return as compared to your usual savings account and fixed deposits but lesser than other investments which are available in dynamic markets like equities and mutual funds.
Another majorly popular header for savings on taxes is by obtaining a home loan. One is not only saving on is taxes on the principal amount of his home loan but is also allowed to save on his taxes on the interest paid on his home loan amount.
An individual can save up to INR 2,00,000 on his taxes through a home loan principal and interest.
Invest into a medical insurance
Next popular header to save taxes is on buying medical insurance for self and spouse and parents. There are various headers under which one could claim tax savings under this scheme.
One can save taxes not only for himself and his spouse and children, but tax law allows one to claim tax benefits on buying medical insurance for his dependent parents as well.
Also, in case you have a handicapped dependent then also you can save taxes on the same or for treatment of specific disease under section 80DDB.
You can also claim tax savings on interest being paid for any kind of educational loans for your own further studies or any kind of educational loan you have opted for your children.
Save Tax on Capital Gains Arising from Sale of Property
One can save taxes on any kind of capital gains so obtained by selling his or her property by re-investing it into specified instruments.
Make Donations to save taxes
Last provisions of savings taxes are by making donations. If you don’t want to pay your tax amount to the government then you can pay it to a charitable trust rather.
Here we have only highlighted some of the tax saving instruments. There are various other ways to save your taxes. In case required, one must consult a financial advisor to help them manage and save their taxes.