Are You a Salaried Person? All You Need to Know About How to Save Income Tax For 2021
There are many people who are working, paying taxes but are not aware of how income tax is calculated or save income tax. Form 16 is confusing to many employees. Tax planning is one of the ways that can help you save on taxes and increase your income. The income tax act provides deductions for different investments, savings, and expenditures incurred by the taxpayer in the financial year.
The common questions that hover in the mind include why TDS is so much? Why the HR asks for a declaration at the beginning of the year? Tax is calculated on what basis or on what basis you can save tax? First of all, you need to understand the difference between financial year and assessment year. Yes, there is a difference. For example, if the financial year is 1st April 2021-31st March 2020, then the assessment year would be 1st April 2022 to 31st March 2023. It is very important to understand as many people think that the financial year and assessment year are the same.
Income Tax Slab Rates in India
· Up to 2.5 Lakh- Nil
· 2.5 Lakh- 5 Lakh- 5% of total income exceeding 2.5 lakh
· 5 lakh- 10 lakh- 20% of total income over and above 5 lakh + 12,500
· Above 10 lakh- 30% of the total income over and above 10 lakh + 1,25,00
Health and education cess at 4% of the total tax payable is levied. A surcharge of 10% of the total income also has to be paid by people who are earning more than 50 lakh annually. Such cess rises to 15% when the income is more than 1 crore.
How to read the salary slip?
Before you understand income tax, it is important to understand salary break up. Your salary is made of 3-4 components.
Basic salary: This is usually 30-35% of the total salary.
HRA: House rent allowance
LTA: Leave travel allowance
These make your gross salary. After that comes deduction. So, what are deductions? What is the limit? That is the basis of your income tax savings. The way you plan your deductions becomes the basis for the calculations of your income tax. The basic formula is gross salary- deductions= taxable income
Which deductions can you apply?
Deduction 1: HRA or rent you pay for your house
The amount which is lesser than the below mentioned will be deducted from your HRA amount.
40% of basic (non-metro city)
50% of basic (metro city)
Rent- 10% basic
For example, if you live in a non-metro city and your salary is 20000/month, HRA is 5,000, special allowance is 5,000 and rent is 3,500, then from your HRA which is 5,000, 40% of basic which is 4,000 and rent-10% basic which is 2,500, the lowest amount is 2,500. So, on 2,500 you can save tax and you need to pay tax for the rest 2,500.
Here is a quick look at how you can save tax by using different deductions allowed under the Income-tax Act. This provides multiple deductions which you can take out of your total income, and reduce your taxable income as much as possible. This is the best way to save your tax.
Section: 80 C: It allows for a deduction of up to 1,50,000 every year from taxable income. It includes:
ELSS-equity linked saving scheme-lock-in for 3 years
Tax saving FD- lock-in for 5 years
Home loan- principal amount
National saving certificate
Section 80CCC: It includes your life insurance premium which you can claim as a deduction.
Section 80TTA: It allows deduction on saving accounts deposit up to 10,000.
This is the interest you earn from your savings bank. It is important to know that it cannot be the interest on FD, RD, or any corporate bond. It is just normal interest on a savings account.
Section 80GG: Provides tax reprieve to those who don’t avail of HRA.
Section 80E: Provides deduction who have taken an education loan and are in their 20s. Up to 8 years, whatever interest you pay on your education loan annually, all of that can be deducted from your total income to reduce your taxable income. Usually, interest on an education loan is quite low if you take it from a nationalized bank. Therefore, you can get a full claim as it reduces your income significantly especially if you have a huge loan. The 8-year limit is quite a long limit, most of the loans are paid off during that period, so it is a great way to save taxes.
Section 80 D: provides a deduction for the premium that you pay towards medical insurance for yourself, your spouse, and your children. You can apply for a deduction of up to 25,000. If you add your parents, who are under the age of 60, then you can add 25,000 and if your parents are above 60 years then you can add 50,000.
Section 80DDB: If you have any medical expenditure in a year, then beyond the insurance claim and the reimbursement that you have got, you can claim and deduct from your total income. If you are below 60, then you can take a deduction up to 40,000 and if you are above 60, then this deduction goes up to up to 1,00,000.
Section 80 U: If you are a physically disabled individual, then you can claim a deduction at the end of the year. If the disability is medium level, then 75,000 and if the disability is severe then 1,25,000.
Section 80 G: If you have donated to the charitable institution, then you can claim 100% or 50% of that amount as a deduction. When you contribute to funds like emergency funds, PM fund, Indian disaster relief fund, then whatever amount you contribute, it deducts from your total income and reduces your taxable income.
Section 87A: If your taxable income is less than 5,00,000, then you can get a rebate on the tax of up to 2,000. In this way, the deduction will be 2,000 or 100% of the salary, whichever is smaller.
All these are deductions, but they should be dealt with in a very disciplined way. Whenever the company asks for declarations means they try to understand that from all the deductions, what do you think how much money would you be able to claim and get deducted from the total income. You can claim it all, put all the deductions and use it to the maximum, which is okay, but there is a catch.
Based on this, your company will calculate your tax and it could be that you have claimed all deductions and thus the taxable income is less. Every month, you need to pay a minimal amount, but as the year-end approaches, the company will ask you to submit the proof of the declarations, then your tax is recalculated and if you haven’t gone for all the declaration, then you need to pay more money as tax. Whatever you declare, you need to do it in a disciplined way, understand everything and carry on with it.
How to calculate tax?
In India, there is two tax regime. One is the old tax regime, which says that if you are taking a deduction then your taxable income reduces, and then on that taxable income, you will have to pay more tax.
A new tax regime was introduced, which says you do not claim any deduction, nothing at all, then your tax will be less. Now, this becomes a mathematical formula. There are different tools avail le online and the best one is the website of the income tax department. It is not that sophisticated, but it is quite clear. There are other tools too such as Clear Tax, scripbox, and so on.
Don’t pay tax blindly as you can save a lot of money. All the points which are mentioned above will substantially reduce your total taxable income for the stipulated financial year. It will also help you understand the different government-mandate provisions. Ensure you submit the income tax return form and Form 16 provided by your employer.