Unlike VAT or Service tax which we often see on the various bills we receive, Income tax is not a straight forward rate we pay on our total income, rather it is a slab based tax and works depending on the income level. Below is an example to explain how it works.
- E.g. If we earn an Annual Income of Rs. 14,00,000 (inclusive of all heads of income) and we obtain a 2,00,000 lakh deduction under sec 80's. Then Our Income tax would be as follows:-
- Gross Income = 14,00,000
- Deduction u/s 80 = 2,00,000
- Taxable Income = 12,00,000
- Slab 0-2,50,000 = Nil Nil
- Slab 2.5L to 5L = @5% 12,500 (250000*5%)
- Slab 5L to 10L = @20% 1,00,000 (5,00,000*20%)
- Slab 10L above = @30% 60,000 (2,00,000*30%)
- Total Tax Payable = 1,72,500 +4% of such tax as education cess.
Utilizing Section 80C
Section 80C offers a maximum deduction of up to Rs. 1, 50,000 and an additional deduction of 50,000 over and above section 80C by investing to NPS(Section 80CCD(1)). Utilize this section to the fullest by investing in any of the available investment options. A few of the options are as follows.
- Public Provident Fund
- Life Insurance Premium
- National Savings Certificate
- Equity Linked Savings Scheme
- 5 year FD (Fixed Deposit) with banks and post office.
Options beyond 80C
If you have exhausted your limit of one lakh under section 80C, here are a few more options.
- Section 80D– Deduction of Rs. 25,000 formedical insurance of self, Rs. 50,000 for medical insurance of parents above 60 years.
- Section 80CCF (currently not available)-Deduction of Rs 20,000, in addition to the Rs 1 lakh under 80C, for investments in notified infrastructure bonds.
- Section 80G- Donations to specified funds or charitable institutions.
House Rent Allowance
Are you paying rent, yet not receiving any HRA from your company? The least of the following could be claimed under Section 80GG.
- 25% of the total income or,
- Rs 2,000 per month or,
- Excess of rent paid over 10% of total income
- This deduction will however not be allowed, if you, your spouse or minor child owns a residential accommodation in the location where you reside or perform office duties.
- If HRA forms part of your salary, then the minimum of the following three is available as exemption.
- The actual HRA received from your employer
- The actual rent paid by you for the house, minus 10% of your salary (this includes basic + dearness allowance, if any)
- 50% of your basic salary (for a metro) or 40% of your basic salary (for non-metro).
Tax Saving from Home Loans
Use your home loan efficiently to save more tax. The principal component of your loan, is included under Section 80c, offering a deduction up to Rs. 1, 50,000. The interest portion offers a deduction up to Rs. 2, 00,000 separately under Section 24.
Leave Travel Allowance
Use your Leave Travel Allowance for your holidays, which is available twice in a block of four years. In case you have been unable to claim the benefit in a particular 4 year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.
Tax on Bonus
A bonus from your employer is fully taxable in the year in which you receive it. However request your employer for the following.
- If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year.
- Produce your tax investment details well before, to prevent your employer from deducting tax on bonus before handing it over.
Being a Fresher in any office is always a puzzling experience. There are so many questions to ask and many more queries and doubts. This segment looks to help the Fresher understand some common terms, procedures and also offer few tips and tricks that help reduce tax liabilities.