Taxes! Seem familiar but why would a KGPian gossiping at tikka or catching up on the new season of GOT be concerned about it, right? Forward the timeline a bit and imagine some 20% of your salary being deducted from your hard earned income. And yes, the percentage increasing with the moolah you rake in. Sad, isn’t it?
Some financial knowledge about how to save your taxes wouldn’t hurt in the long run. Out of the various taxes you pay in your daily life, some like VAT, service tax or Octroi can’t be ignored in any way but there are certain exemptions available on your income tax and CGT (Capital Gains Tax) before the government eats into your income. So what are exemptions? They are amounts that are deducted from your income “virtually” that give you your “taxable income”.
The first step to understand the workings of Income Tax in India is to be aware of the taxation slabs released each financial year by the Indian Government. The taxation slabs for the financial year 2014-15 for General tax payers and Women, below 60 years of age are:
| Slab | Income Slab (Rs.) | Income Tax Rate |
|---|---|---|
| 0 | 0 to 2,50,000 | NIL |
| I | 2,50,001 to 5,00,000 | 10% |
| II | 5,00,001 to 10,00,000 | 20% |
| III | 10,00,001 and above | 30% |
Say for example, Mr. Mehra earns 14 lakhs p.a.( Slab III). The first 2.5 lakhs are tax free while on the rest of the amount, the tax is calculated as follows:-
Income tax for income in Slab III
= 10% of Slab I + 20% of Slab II + 30% of Slab III
= 0.1*2,50,000 + 0.2*5,00,000 + 0.3*(14,00,000 – 10,00,000)
= 2,45,000
A whopping 17.5% of your salary goes to the government!
As you can see, a few exemptions here and there can be of great importance.
Some exemptions that can be availed on your income tax are:
Utilising Section 80C
Sec 80C of the Income Tax Act is the section that deals with these tax breaks. It states that qualifying investments, up to a maximum of Rs. 1.50 Lakhs , are deductible from your income. This means that your taxable income gets reduced by this investment amount (up to Rs. 1.50 Lakhs), and you end up paying no tax on it at all! Some of the qualifying investments are:
- Provident Fund
- Home Loan Principal
- Life Insurance Premiums
- Voluntary Provident Fund (VPF)
- Public Provident Fund (PPF)
- Equity Linked Savings Scheme (ELSS)
Section 80G
Donations to specified funds and charitable institutions are counted under exemptions under this section.
Tax on Bonus
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 and request your employer for the same so as to reduce your tax on the bonus.
Some simple salary restructuring
- Opt for food coupons instead of lunch allowances, as they are exempt from tax up to Rs. 50 per meal
- Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred for these allowances to reduce tax
- Opt for the company car instead of using your own car, to reduce high prerequisite taxation.
Fixed deposit v/s Savings account
Though interest incurred is higher in a FD account but investing in a savings account could be more profitable. No tax is deducted on interest and no tax is levied in savings account along with an allowable deduction of ₹10,000
So for Mr.Mehra earning ₹14,00,00 per year , the calculations(after exemptions) would proceed as:
| Different Heads | Amount |
|---|---|
| A) Income | 14,00,000 |
| B) 80C deduction | 1,50,000 |
| C) Home loan interest | 1,50,000 |
| D) Medical insurance premium | 15,000 |
| E) Total exemption(B+C+D) | 3,15,000 |
| F) Any other exemptions (Education loan, donations, saving banks interest upto 10k) | 15,000 |
| G) Taxable Income[A-(E+F)] | 10,70,000 |
| Tax calculation | 0.1 x 2,50,000 + 0.2 x 5,00,000 + 0.3 x (G-10,00,000) |
| Income Tax | 1,46,000 |
| Income tax(without exemptions) | 2,45,000 |
A major saving of ₹99,000!!
People in the lower income groups do not need to invest or delve into a lot to seek the options available. The majorly affected is the upper income class which may want to invest more to save its taxes. Harnessing the power of equities is highly recommended by some experts while a FD account could be the calling for someone’s short term financial goals.
Those of you interested in trading in the stock market would be happy to know that dividends earned from domestic companies are tax free too.
A knowledge of these exemptions and the nitty gritties of investments could craft a major alteration in your lifetime savings!
