The component of your income that goes towards tax is termed income tax. Income tax planning can be described as reducing or minimizing tax liability within the legal framework. You can choose to invest in an array of investment schemes prescribed by the Income Tax Act to save on your income tax.
Basic Tax Exemption Limit
It is necessary to understand that while it is an essential source of revenue for the Government, not everyone is supposed to pay taxes. You will have to pay an income tax only if you fall within either tax slabs, which means you have to pay income tax only if your income exceeds the basic exemption limit.
The basic exemption limit is the threshold beyond which your income is classed as taxable income. For instance, if the basic exemption limit is INR 2,50,000 for the current financial year and your annual income is INR 2,00,000, you are not liable to pay any income tax.
The income tax department has divided the entire pool of taxpayers into three categories with different exemption limits –
|Taxpayer Category||Basic Exemption Limit (per Annum)|
|Resident and non-resident individuals below the age of 60||INR 2,50,000|
|Resident individuals above the age of 60 but less than 80 years of age||INR 3,00,000|
|Resident individuals above the age of 80||INR 5,00,000|
The Indian income tax setup charges tax from individual taxpayers based on a tier-wise slab system. According to this system, individuals pay tax as per their annual income. In this system, the tax rates keep increasing with the increase of the taxpayer’s income. That helps the Indian income tax code to be progressive and fair. The slabs of the income tax system are changed in the budget presented by the finance minister.
Following are the tax slabs to help with your income tax planning-
|Annual Income||Tax Liability|
|Up to INR 2,50,000||–|
|INR 2,50,000 – INR 5,00,000||5%|
|INR 5,00,000 – INR 7,50,000||10%|
|INR 7,50,000 – INR 10,00,000||15%|
|INR 10,00,000 – INR 12,50,000||20%|
|INR 12,50,000 – INR 15,00,000||25%|
The income tax code in India allows deductions to the taxpayers to reduce their taxable incomes. These deductions are legal claims against various investments and expenses incurred by the taxpayers. You can use these deductions to reduce your overall tax liability. These claims help you reduce the amount of your income that falls under the purview of ‘Subject to tax.’ These deductions help you increase your net income. Following are some of the allowed deductions which you need to bear in mind when doing income tax planning –
- Public Provident Fund
- Life insurance premium
- National savings certificate
- Investment in Mutual Funds
- Home Loan EMIs
- Stamp Duty and Registration Charges for a Home
- Tuition Fees
- Charitable Contribution
Exemptions are yet another way for you to reduce your tax liability. Exemptions help taxpayers to save large portions of their income. These provisions are put in place to cultivate saving and investing in the taxpayers. Apart from the basic exemptions that the Indian tax code provides to all the tax filing citizens, these exemptions are issued.
The most common tax exemptions used by individuals during income tax planning are –
House Rent Allowance
If you pay house rent, you can claim it as an exemption.
Leave Travel Allowance
The amount you spent on your vacation is exempted from income tax if you present bills that show proof of expenditure during travel and leave.
Children Education Allowance
An exemption of INR 100 per child per month is approved for up to 2 children.
Advantages of Income Tax Planning
If you do not plan your tax, you will pay more than you need to and have less money at your disposal. While paying taxes is integral to nation-building, the Government provides individuals the tools for tax relief.
- To Plan Events: Investments should be reviewed from time to time so that you know when is the best time to enter an investment scheme and when is the right time to realize a capital gain.
- To Earn Tax-Free Returns: When you can save a little more on tax, then why pay unnecessary?
- To Reduce Tax Liabilities: The Income Tax Act, 1961 lays down provisions to save on your tax liabilities. It is said that the Government benefits more if you make use of instruments to save on your tax legally.
How to Reduce Tax Liabilities
If you want to lower your tax liabilities, the Income Tax Act, 1961 is your savior. Of the various sections of the Act that offer tax relief tools, Section 80D is the most popular. The most commonly used exemption when income tax planning, is your House Rent Allowance (HRA). It is advisable to do your income tax planning for the year ahead rather than lining up your investments in haste.
Section 80D of The Income Tax Act
The part of the Income Tax Act that deals with exemptions on premiums paid towards your health insurance plans, be it for yourself or on behalf of your loved ones, is Section 80D.
The following amounts can be claimed as deductions under Section 80D by you-
- Up to INR 25,000 on the health insurance premium paid for self, spouse, and children.
- If you have your parents covered under the health insurance policy, a maximum deduction of INR 50,000 can be available.
- If either of your parents is a senior citizen, then you can have your tax liability reduced by a maximum of INR 75,000.
Vital has the best health insurance plans at the most competitive premiums which you must use as part of your income tax planning. Visit Vital’s website to know more.
Paying your share of income tax is the easiest way you can contribute towards the growth of your nation and the welfare of your citizens. While you must pay your share, it is also essential for a hard-working individual to have disposable income to meet their expenses and lead a comfortable life. This is what makes individual income tax planning indispensable and why the Government has tax exemptions and deductions in place. Plan and enjoy a hassle-free year ahead financially.