We are in the month of February 2022 and in a month’s time, the financial year would also end. So, now is the perfect time to plan your tax for this financial year 2021-22.
Income Tax is a compulsory payment that every individual has to pay whether they like it or not. But, if you are simply not paying the taxes it is called tax evasion and that’s illegal to do. But, there is something called tax planning and if done properly you can save a lot of money in income tax. Here we have a complete list of ways how to save income tax in India that are legally allowed.
What is Income Tax?
As we discussed above a tax is a compulsory payment made to the Government. Since the tax is called Income Tax, it is a tax on the income of persons. There are seven categories of persons listed in the Income Tax Act 1961 which are:
- HUF (Hindu Undivided Family)
- association of persons/body of individuals
- local authority
- every corporate body
So, all these persons are required to pay income tax in India. Here we are talking about the Individuals only for whom the tax is charged on a slab basis. The Income Tax slabs for an individual are as follows:
- 0-2,50,000 – No Tax
- 2,50,000-5,00,000 – 5% Tax
- 5,00,000-10,00,000 – 10% Tax
- above 10,00,000 – 30% Tax
And, these slabs are for your Total Income, not the income that you make.
What is Total Income?
The income earned by a person is divided into five categories viz. Income From Salary, Income from House Property, Profits or gains of Business or Profession, Capital Gains, and income from other sources. So, based on how you earn money you are supposed to divide it among these sources. Then this income added together after reducing the exemptions under section 10 is called Gross Total Income. From the Gross Total Income, there are certain deductions under chapter 6A that can be subtracted further which brings you down to the Total Income.
So, the total income is the net income as per the Income Tax Act after adjusting all the exemptions and deductions. And, this total income is taxed according to the slab you are falling in.
Exemptions vs Deductions
Here, two things are reduced from your income one is a deduction and the exemption. Both are not taxed in the Income-tax but there is a difference. Firstly, exemptions fall under section 10 of the Act while Deductions are mentioned under Chapter 6A of the Act.
The exemption means that a particular income is totally exempt from taxation and is not included in one’s taxable income. But, deductions are included in your income and finally, the Act is giving a deduction from the income. All in all, both these things are not taxed under the Income Tax Act as of now and we have to bring down our Total Income below 5,00,000.
Rebate u/s 87A
If your Total Income is less than Rs 5,00,000 then you will get a rebate under section 87A of up to Rs 12,500 which means that you will not get any tax liability. If your total income is Rs 5,00,000 which should be taxed as per the slabs and the tax would be exactly Rs 12,500 (5% of 2,50,000).
So, the aim is to bring down your total income under Rs 5,00,000 so that you get the rebate to make your tax liability as Nil.
Exemptions/Deductions from Salary Income
The first and foremost thing that you can claim as an exemption from your salary income is House Rent Allowance. There are three amounts that you need to calculate for the HRA Exemption out of which a lower amount can be claimed as exemption. These three amounts are :
- HRA Received
- 50/40% OF Salary based on location
- Rent Paid – 10% of Salary
The least of these amounts is allowed as an exemption and here the word Salary includes Basic Salary and DA and for some people, it can be Commission as well but it should form part in your retirement also. 50% is for places like Mumbai, Delhi, Kolkata, Chennai, and otherwise, it is 40%.
2. Standard Deduction
A standard Deduction of Rs 50,000 is allowed from the Salary Income as there are no other expenditures that are deductible. So, once you calculate your Salary Income an amount of this standard deduction can be claimed.
3. Professional Tax Paid
The amount of Professional Tax paid during the year can be also claimed as a deduction from your salary income. In a financial year, you can pay a maximum of Rs 2,500 (200 per month except 300 for the month of February) as professional tax which can be claimed.
4. Other exemptions from salary
- Entertainment allowance of up to Rs 5,000 only for Government Employee
- A transport allowance of up to Rs 1600 per month for travel between place of residence and place of employment. This amount is allowed as Rs 3,200 for a handicapped person.
Deductions under Chapter 6A
- Payment of life insurance premium, deferred annuity, contributions to the provident fund (PF), subscription to certain equity shares or debentures, etc u/s 80C up to Rs 1,50,000
- Contribution towards pension fund u/s 80CCC up to Rs 1,50,000
- Contribution to the Pension Scheme of Central Government u/s 80CCD(1) uptp Rs 1,50,000
- Contribution to the NPS u/s 80CCD(1B) up to Rs 50,000
- Deduction u/s 80CCD(2) to the pension scheme
- Payment of Health Insurance Premium up to Rs 25,000 u/s 80D. This limit is Rs 50,000 for the senior citizens with an overall limit of Rs 1,00,000
- Expenditure incurred on the maintenance of medical treatment of a dependent u/s 80DD up to Rs 75,000
- expenditure up to Rs 40,000 on medical treatment of specified disease from a neurologist, an oncologist, a urologist, a hematologist, an immunologist, or such other specialist, as may be prescribed.
- Payment of Interest on Loan taken for the higher education u/s 80E
- Payment of interest on loan taken for residential house property up to Rs 50,000 u/s 80EE
- Payment of interest on loan taken for a house under affordable housing up to Rs 1,50,000 u/s 80 EEA
- Payment of interest on loan taken for the purchase of electrical vehicle u/s 80EEB up to Rs 1,50,000
- Under section 80GG, a deduction towards payment of rent of up to Rs 5,000 or 25% of the salary for non-salaried persons.
- Various Donations made u/s 80G, 80GGA, 80GGB, 80GGC etc.
- Interest Earned from Savings Bank Account u/s 80TTA up to Rs 10,000
- Interest Income from deposits of up to Rs 50,000 u/s 80TTB for senior citizens
- Deduction in case of a person with a disability u/s 80U up to Rs 1,25,000 depending upon the disability.
Note – The total deduction that can be claimed u/s 80C, 80CCC, 80CCD(1) is also Rs 1,50,000 in total
Example of Tax Planning
Mr. Professor staying in Mumbai is earning a salary income of Rs 75,000/month. The salary slip of the Professor shows the breakup as follows:
Apart from the salary he has received interest from his savings bank account of Rs 8,000. He has paid a LIC premium of Rs 5,000/month for himself and Rs 4,500/month for his wife. A health insurance premium of Rs 18,000 in total. He pays a monthly rent of 20,000. Also, there is a monthly EMI of Rs 10,000 towards the Education Loan taken for his MBA which includes total interest of Rs 48,000 during the year. Calculate his tax liability as per the Income Tax Act 1961.
Calculation of Income Tax Liability of Mr. Professor
|Salary Received (75000×12)||9,00,000|
|Less – Exemptions|
|HRA Received (15000×12)||1,80,000|
|50% of Salary (30000×50%x12)||1,80,000|
|Rent Paid – 10% of Salary [(20000 – 3,000)x12]||2,04,000|
|Therefore HRA exemption available||(1,80,000)|
|Less – Standard Deduction||50,000|
|Income from Other Sources|
|GROSS TOTAL INCOME||6,75,500|
|Less – Deductions under Chapter 6A|
|1. Contribution to LIC (9500×12) u/s 80C||1,14,000|
|2. Contribustion to PF (3600×12) u/s 80C||43,200|
|Total deduction u/s 80C||1,57,200|
|3. Contribution to health insurance u/s 80D||(18,000)|
|4. Payment of Interest on Education Loan u/s 80E||(48,000)|
|5. Interest earned from Savings a/c u/s 80TTA||(8,000)|
|Therefore TOTAL INCOME||4,51,500|
|Less – Rebate u/s 87A||(10,075)|
|Therefore Tax Payable||Nil|
In this example, a person earning Rs 9,00,000/year ends up paying zero tax because of tax planning. So plan your tax accordingly.
These are all the deductions possible from your income. So, you can plan your Tax accordingly for the next financial year. For the year 2021-22, there is a time of almost two months now which can help you plan for this year as well.