It’s been a long time since I published my last post and this post is one of a gem, I promise. There are hundreds of requests for me when it comes to taxes and explaining each of them manually is a bit of a task and therefore I compiled everything about how to save taxes in this article.
Before we get started, let me tell you that anyone with whatever income they have can file their taxes through the Income Tax Return.
Overall population of India is around 138 crores and only about 1% of them file their returns.
Whenever they hear the word taxes, everyone tends to get scared. But hey, this isn’t scary at all instead it helps you save money which eventually will be deducted from you in the name of other things like, TDS (Tax Deducted At Source).
Why Do We Pay Taxes As A Citizen? How To Save Taxes In India?
We pay taxes as a citizen. It’s our responsibility. Without taxes, Government will fail and they won’t be able to operate any civil operations in the country at all. For the Indian Government, Income Tax is one of the biggest sources of Income. Yet, only about 1% of us pay taxes to them.
The reason why we pay taxes is simply that we are helping the government in establishing hospitals, developing health care systems, education systems and roads, highways, etc. and the list goes on and on. Since India is a developing country, we should understand that there will always be corruption in politics but still we are developing just because of the taxes we pay.
Now let me tell you another interesting thing, 90% of all Indians with stable jobs fall under the 10 LPA (Lakhs Per Annum) slab.
And the best thing is, you don’t pay a single penny of taxes to the government even if your CTC is 10 Lakhs Per Annum let alone below 10LPA CTC’s.
We will discuss how further in the article.
Tax Slabs in India
We have 2 tax regimes in India. The older one allows you to get deductions given below and the new one doesn’t allow you to get deductions but offers lower tax slabs.
In the above table, you can clearly see that the older tax regime has higher tax slabs compared to the newer tax regime. However, in older tax regimes, we can claim many deductions.
You can easily calculate your taxes with the new tax regime and look at how much taxes you pay and then you can check with the old tax regime. You can know on which tax regime you’ll pay fewer taxes.
In this article, we will look at both tax regime examples. Read further.
How Exactly We Can Save Tax By Filing Income Tax?
To be honest, there are many workarounds to save taxes by reducing your taxable income with various investments.
These workarounds are listed as follows:
- Deduction on Home Rent Allowance (HRA)
- Section 80C (Deductions on Investments upto 1.5L)
- NPS (National Pension System) Contribution
- Deduction on Home Loan Interests (If Any)
- Contribution to Charity
- Paying Your Health Insurance Premium
- Tax Rebate for incomes exceeding 5LPA
Saving Taxes In India With Old Tax Regime
I hope you understood the basic deductions we can avail of to reduce our taxable incomes. Now with the help of an example, I will further clarify this topic.
Let us take an example of myself. I am currently an employee of an MNC and my CTC (Cost To Company) is 8LPA.
I will now go ahead and break down this Rs 8,00,000 and see what’s my actual taxable income.
- Gross Earning From Salary: Rs 8,00,000
- House Rent Allowance (HRA): Rs 1,20,000
- Leave Travel Allowance (LTA): Rs 40,000
- Reimbursements: Rs 20,000
As you can see from the breakdown of my CTC above, the three things in red are completely Tax-Free and are exempted from my CTC.
Therefore, my Net Taxable Income is Rs 6,20,000
I will now apply deductions to reduce my taxable income further since I’m filing my Income Tax Return with OLD TAX REGIME.
Here are the deductions, I will take these deductions
- 80C Deductions (ELSS Funds + NPS): Rs 1,50,000
You can pick any ELSS fund, but for me, I pick Sundaram Long Term MicroCap Fund which is risky but is free of bank, insurance & alcohol companies. I invest in this fund via SIP of Rs 8333 per month making it Rs 1,00,000 annually.
Now, rest of the 50,000 per year goes to NPS (Nation Pension Scheme). You can skip interest part if you’re not allowed to take but can keep principle amount whatsoever.
- Family Health Insurance (Me + Parents): Rs 20,000
Instead of paying taxes, I can opt for the health insurance.
- Standard Deduction: Rs 50,000
The above are the basic deductions. After this deduction, the total taxable income is Rs 4,00,000
Now that my taxable income is Rs 4,00,000 now we will apply the tax slab to this income.
As per the table above, we know that income up to Rs 2,50,000 is Tax-Free or Zero.
Therefore, our taxable income is now further reduced to Rs 1,50,000
On this Rs 1,50,000, we have to pay 5% tax as per the old tax regime’s tax slab
i.e, 5% of 1,50,000 = Rs 7500
The total Tax we have to pay is Rs 7500
But wait a minute, this doesn’t end here. Now as our total net taxable income is under 5 Lakh, therefore, we can apply for Tax Rebate under section 87A.
Once we apply this Tax Rebate, we now don’t even need to pay Rs 7500 and overall, we pay ZERO as taxes with a CTC of 8LPA.
I know you still have some kind of doubts and issues in understanding the above concept, to clarify it, even more, I prepared a simple table that explains to you everything I just explained in the steps above.
Saving Taxes In India With New Tax Regime
Now, let’s take an example of the same income but with the New Tax Regime. Do note that, you can opt for any one of these as per your ease.
The New Tax Regime is pretty simple as it involves no deductions, therefore, minus all the hassles.
As you know, my Gross Total Salary is Rs 8,00,000.
As per the table above, below is the taxes I have to pay.
Since I cannot claim any deductions, I have to pay income tax on my income as per the lower tax slab rates in the new tax regime.
However, if you’re the guy not willing to pay taxes but can benefit yourself with other means such as investments, insurance, etc. instead of paying taxes then Old Tax Regime will help you avoid taxes. It also means that you get to keep much less amount compared to the salary you get but this amount, however, is kept as investment and can be compounded in long run.
I hope this article taught you how to avoid taxes and I would be grateful if you can share this with your friends and family and let them know too how to save taxes.
Hope you get an idea of how to save taxes in India. Saving Taxes in India is not scary at all. If you don’t want to pay taxes then you need to be smart enough to claim deductions and pay zero taxes. Rich people pay fewer taxes, well, this is true because they claim such deductions via loopholes or companies and pay fewer or no taxes at all.
While the middle class has no idea about saving taxes and end up paying huge amounts in taxes to the government. That’s it for today and see you around in the next posts.
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