Income tax is that portion of the money that is charged by the government of a country from its citizens. The government collects taxes from the citizens and uses them for the welfare of the citizens, the development, and the Security of the country. And it is mandatory for every citizen who is earning more than a specified limit set by the government.
How to save money while filing Income tax return?
In this blog we will discuss about how a salaried person can save money while filing Income tax return. And for that one should know how income tax works.
In case of salaried employee, The employer is liable to deduct the tax, if his salary is more than 2,50,000 then the employer will deduct the tax amount first from employee’s salary according to the tax slabs and then credit the balance to his account.
For example, If your salary is 7,00,000 per annum, the employer will deduct the (according to tax slab Rs 15,000 + 10% of total salary for income group of Rs. 6,00,000 to Rs. 900,000)
Under the new tax regime introduced in the Union Budget for the Financial Year 2020-21, individuals can choose between the old tax regime, which offers various exemptions and deductions, and the new tax regime with lower tax rates but without any exemptions and deductions.
A salaried employee earning 15 lakhs per annum in India can avail the highest tax exemption depending on the regime chosen.
Under the old income tax regime:
Deduction
Deductions in income tax refer to specific expenses, investments, or contributions that are allowed to be subtracted from an individual’s total income. These deductions help reduce the taxable income, resulting in a lower tax liability. By claiming eligible deductions, individuals can effectively reduce the amount of income that is subject to tax.
Standard Deduction:
A fixed deduction of Rs. 50,000 can be claimed without providing any bills or receipts.
Deductions under Sections 80C, 80CCC, and 80CCD(1):
Contribution towards various tax-saving instruments can yield exemptions up to Rs. 1.5 lakhs.
National Pension System (NPS) under Section 80CCD(1B):
Additional Rs. 50,000 can be claimed by contributing to the NPS.
Home Loan:
Deduction under Section 80C for principal repayment up to Rs. 1.5 lakhs and under Section 24(b) for interest payments up to Rs. 2 lakhs.
Education Loan:
Interest paid on an education loan gets a tax deduction under Section 80E, without an upper limit.
Health Insurance Premium :
Deduction under Section 80D for insurance premiums paid for self, spouse, children, and parents, subject to age and amount limits.
House Rent Allowance (HRA), Leave Travel Allowance (LTA), and Conveyance Allowance:
Exemptions can be claimed against actual expenses and receipts.
Donations under Section 80G and medical expense deductions under Sections 80DD, 80DDB, and 80U can be claimed, subject to conditions and limits.
By utilizing these exemptions and deductions optimally, a salaried employee can significantly reduce their taxable income and tax liability. Proper documentation and planning, along with guidance from a tax professional, can help in maximizing these benefits.
A salaried employee needs to weigh the options under both the tax regimes to understand which one would be more beneficial based on their individual financial situation, investments, and expenses. It may be advisable to consult a tax expert or a financial advisor in choosing the most appropriate tax regime to minimize the tax liability while meeting financial goals.
| Deduction/Exemption | Section | Limit/Conditions |
|---|---|---|
| Standard Deduction | – | Rs. 50,000 |
| Deductions under Sections 80C, 80CCC, 80CCD(1) | 80C, 80CCC, 80CCD(1) | Rs. 1.5 lakhs |
| National Pension System (NPS) | 80CCD(1B) | Rs. 50,000 |
| Home Loan | 80C, 24(b) | Principal repayment: Rs. 1.5 lakhs; Interest payment: Rs. 2 lakhs |
| Education Loan | 80E | No upper limit |
| Health Insurance Premium | 80D | Subject to age and amount limits |
| House Rent Allowance (HRA), LTA, Conveyance Allowance | – | Exemptions can be claimed against actual expenses and receipts |
| Donations | 80G | Subject to conditions and limits |
| Medical expense deductions | 80DD, 80DDB, 80U | Subject to conditions and limits |
Investment in tax saving instruments: How to save tax by investing?
Under the new income tax regime:
The new tax regime provides lower tax slabs for various income ranges but does not provide any exemptions or deductions, except for the NPS contribution by the employer (Section 80CCD(2)) and the EPF contributions (Section 80C). Therefore, employees opting for the new tax regime cannot claim any of the exemptions and deductions provided under the old tax regime, which may result in a lower tax benefit.
Below
Under section 80 C, a person can avail tax exemption of upto₹150000 lakh by investing into an ELSS mutual fund, Fixed deposit for a tenure of 5 years or more, Home Loan Repayments & Stamp Duty, SukanyaSmriddhiYojana (SSY), National Savings Certificate (NSC), premium paid towards life insurance policy of self, spouse, children, parents.
Under section 80CCC of the Income tax act, a person can claim exemption upto₹150000 lakh annually for investments made into PPF, EPF, and Life Insurance.
80CCD1 of the Income-tax Act, a person can also claim exemption upto₹150000 lakh annually for investments in the National Pension Scheme (NPS), Atal Pension Yojna(APY)
• Under section 80 DD of Income tax, tax deduction can be availed by the person for a dependent who is differently abled and utterly reliant on the person for support and maintenance. The deduction limit permitted is up to ₹75,000 in cases of disability up to 40%. For a person with a disability up to 80% or more, the tax filers can avail deduction up to ₹125000 per annum.
• Under Section 24 of the Income Tax Act , homeowner can claim a deduction of up to ₹200000 on their home loan interest if the owner or his family reside in the house property. The entire interest is waived off as a deduction when the house is on rent.
• LIC maturity amount is fully tax-exempt under Section 10(10D) unless the premium exceeds 10% (20% in case of policies issued after April 1, 2003) of the sum assured.
• Under Section 80D of Income tax act a person can claim a deduction of total income for medical insurance premiums paid or top-up in health plans. A person below the age of 60 can avail tax exemption of ₹25000 and a person above 60 can avail ₹50000.
• Under section 80E of Income tax act a person can avail deduction on interest paid on an education loan. Deduction on interest can be availed for the period of max 8 years or when the loan tenure is over.
• Under the 80G of the Income tax act a person can claim a deduction while donating to a charitable trust. A person can claim a deduction from 50% to 100%, providing that the donation is made to eligible trusts and institutions.
| Investment/Deduction | Section | Limit/Conditions |
|---|---|---|
| ELSS Mutual Fund | 80C | Up to ₹1,50,000 |
| Fixed Deposit (5 years or more) | 80C | Up to ₹1,50,000 |
| Home Loan Repayments & Stamp Duty | 80C | Up to ₹1,50,000 |
| Sukanya Samriddhi Yojana (SSY) | 80C | Up to ₹1,50,000 |
| National Savings Certificate (NSC) | 80C | Up to ₹1,50,000 |
| Premium paid towards Life Insurance | 80C | Up to ₹1,50,000 |
| PPF, EPF, Life Insurance | 80CCC | Up to ₹1,50,000 |
| National Pension Scheme (NPS), Atal Pension Yojna (APY) | 80CCD(1) | Up to ₹1,50,000 |
| Deduction for Disabled Dependents | 80DD | Disability up to 40%: Up to ₹75,000; Disability above 80%: Up to ₹1,25,000 |
| Home Loan Interest | 24 | Up to ₹2,00,000 |
| LIC Maturity Amount | 10(10D) | Fully tax-exempt unless premium exceeds specified limits |
| Medical Insurance Premiums | 80D | Below 60 years: Up to ₹25,000; Above 60 years: Up to ₹50,000 |
| Education Loan Interest | 80E | Deduction for the interest paid on education loan |
| Donations to Charitable Trusts | 80G | Deduction based on the percentage specified for eligible trusts and institutions |
