If there was a completely legal way to go tax free on an income of up to Rs.10 lakh, wouldn’t you be interested to know how? That’s what this article is all about. This is not about tax evasion but about tax savings and investments that support the long-term prosperity of your family and yourself.
Every tax-conscious individual in India keeps track of the Union Budget that is announced every year. It is important to know if there are any changes in the tax rates, exemptions, or income tax slabs that could affect their tax returns. This may not be the case every year, but this year there were significant updates that would make a difference in the tax assessment.
Changes in tax rebates
In the Union Budget for the year 2019, there was good news for the salaried class with a full tax rebate for income up to Rs.5 lakh that is earned in the 2019-20 financial year. Earlier, the tax exemption was for the Rs.3.5 lakh income bracket. The tax rebate benefit which was earlier Rs.2,500 has now been raised to Rs.12,500 because of this.
Points to note
One important point to be noted is that the tax slabs have remained unchanged from 2018-19. The basic limit for tax exemption also remains the same at Rs.2.5 lakh per annum. While it is not required for those earning an income of up to Rs.2.5 lakh to pay any taxes, it is still beneficial for them to file their tax returns. This comes in handy when applying for a visa, loans, or government tenders.
Those with a taxable income that goes up to Rs.5 lakh will get a tax rebate. Another change is in the standard deduction which has been increased to Rs.50,000 from Rs.40,000.
Difference between total income and taxable income
There is a difference between the total income you earn in a year and the taxable income. This difference is important to understand if you want to know how to make your taxable income fully exempt from tax. Total income is simply the total income you earn from all sources, such as salary, rental income, etc. Now, certain investments are eligible for income tax exemptions under Section 80C of the Income Tax Act. By subtracting these deductions from the total income that you earn, you can get the taxable income that will be much less than your total income.
How to get a full tax rebate on taxable income
There are many ways that you can do this:
- File your income tax returns (this is the only way you can claim for any refunds later).
- Reduce the taxable income to Rs.5 lakh by making investments that give you tax deductions.
- Take out a home loan and pay interest of up to Rs.2 lakh on an annual basis. Tax exemptions are not applicable on the principal amount of the loan, but only on the interest amount.
- Make a contribution to your NPS (National Pension Scheme) that is more than the Rs.1.5 lakh limit for tax exemption under Section 80C. This would mean making a contribution of Rs.50,000 towards a Tier 1 account.
- Take health insurance for self and for dependents (parents or children). This will only be applicable if your parents do not file their own income tax returns. The premium payments for health insurance for self (can include spouse and/or children) should be up to Rs.25,000 per year and that of dependent parents should be Rs.25,000 per year.
- Investing the maximum in investments that give you tax exemptions under Section 80C of the Income Tax Act.
To understand this better, let’s break down the tax exemptions and deductions from a salary of Rs.10 lakh per year.
Your first deduction would be Rs.50,000. The maximum deduction you will get for investments that are exempt from income tax under Section 80C is Rs.1.5 lakh. Then comes your home loan interest of up to Rs.2 lakh. Your contribution towards NPS will get you another Rs.50,000 exemption. You will get another Rs.50,000 exemption for premium paid on health insurance. Now your taxable income has come down to Rs.5 lakh. Since Rs.2.5 lakh is the basic exemption limit for tax, you would subtract that from the Rs.5 lakh to give you Rs.2.5 lakh, which is again your taxable income. Under the current tax slab, the tax payable for this is 5%, which is Rs.12,500 (to know more about the latest income slabs and effective tax rates, click here). Thus, your effective tax liability will now be zero.
There is a lot of satisfaction to be had when you are able to reduce your tax liability by making investments that will hold you and your family in good stead throughout your life. The fact that you are doing this in a perfectly legal way is also something that will not leave you with sleepless nights. So, get going now with your investments and get your tax liability reduced to an absolute zero.