Know your income tax liability and ways to save

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We all owe to government for tax payment. Therefore, it is very important to know our income tax liabilities and also ways to save or lessen these liabilities. The month of January, February and March in India is known as JFM among banking and financial intermediaries fraternity. That because during this period most of salaried and business people invest some portion of their income to save on income tax payment. Though it is not a health practice, it is inevitable as clarity of income earned during the year & tax on those earning is visible by end of the year.

Keeping this in mind let us know our tax liabilities, available exemptions and ways to save to save tax obligation as per Income Tax Act 1961 https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx.

The tax liabilities

Income tax slabApplicable rates
Rs.0.0-Rs.2.5 lakhNil
Rs.2.5-Rs.5.00 lakh5%
Rs.5.0-Rs.7.5 lakh10%
Rs.7.5 lakh – Rs.10 lakh15%
Rs.10 lakh – Rs.12.50 lakh20%
Rs.12.5 lakh – Rs.15 lakh25%
Rs.15 lakh and above30%

Method of tax calculation

Say Mr.X earns an income of Rs.20 lakh per annum. His tax liability will be calculated as below:

Income tax slabApplicable ratesTax calculationTax payable
Rs.0.0-Rs.2.5 lakhNil00
Rs.2.5-Rs.5.00 lakh5%250000 X 5%12500
Rs.5.0-Rs.7.5 lakh10%250000 X 10%25000
Rs.7.5 lakh – Rs.10 lakh15%250000 X 15%37500
Rs.10 lakh – Rs.12.50 lakh20%250000 X 20%50000
Rs.12.5 lakh – Rs.15 lakh25%250000 X 25%62500
Rs.15 lakh and above30%250000 X 30%150000
Total  337500

This approach is known as progressive tax calculation

Available deductions

Though government is levying tax on income, it also giving certain exemption keeping in mind different income group in the society and also to encourage savings and investments.

Under Income Tax Act 1961, exemptions are given under following section to deduct such invest or expenditure from the total income for tax purpose.

Invest under section 80C

  1. Tax saving FD for 5 year
  2. Public Provident Fund
  3. Employee’s Provident Fund
  4. National Saving Certificate
  5. Unit Linked Investment Plan
  6. Equity Linked Saving Scheme or tax saving MF
  7. Sukanya Samridhi Yojana
  8. Senior Citizen Saving Scheme
  9. Post office Term Deposit
  10. Infrastructure bond of Govt. or corporate

Payments eligible under 80C

  • Life insurance premium
  • Children tuition fee
  • Principal repayment of housing loan

If someone is not able to invest or spent which is eligible to cover under section 80C, may get exemption for following investment/expenditure under different sections of the Income Tax Act 1961.

IT sectionDescription & limitlimit
80CCCFor amount deposited in annuity plan of LIC or any other insurer for a pension
80CCD(1)Employee’s contribution to NPS1.5 lakh
80CCCD(2)Employer’s contribution to NPS accountmaximum upto 10% of salary
80TTA(1)Interest income from savings accountMaximum upto 10000
80TTBExemption of interest from banks, post office etc. (applicable for senior citizens)Maximum upto 50000
80GGRent paid when HRA is not received from employerLeast of : – Rent paid minus 10% of total income
– Rs. 5000/- per month
– 25% of total income
80EInterest on education loanInterest paid for a period of 8 years
80EEInterest on home loan for first time home owners50000
80CCGRajiv Gandhi Equity Scheme for investments in EquitiesLower of
– 50% of amount invested in equity shares; or
– Rs 25,000

The combined investment or expenditure under the above section is capped at Rs.1.50 lakh. Apart from the above there are 3 (three) other avenues through which one can save tax beyond the threshold limit of Rs.1.5 lakh.. They are

  1. Additional investment in NPS upto Rs.50,000 under section 80CCD(1B)
  2. Premium on Health insurance upto Rs.25,000 & Rs.50,000 for senior citizen under section 80D
  3. 50% of donation or 10% of adjusted total income under section 80GG

These tax structure is applicable to all individual and HUF, proprietorship firm.

Let us understand from above example of Mr.X how tax liabilities can be saved by investing under these sections.

  Treatment for tax purposeApplicable section
Income of Mr.X20,00,000  
Investment made under PPFNPS  25,000 1,00,000  To be deducted from total income80 C
Expenditure incurred Life insurance premiumChildren education  13500 25000  Under 80C maximum deduction is Rs.1.50 lakh. With PFF, NPS & children education total investment add upto Rs.1.50 lakh. Therefore life insurance premium will excluded though it is eligible.80 C
Donation10000  To be deducted from total income to extent of 50%, because it is permitted over & above the maximum deduction of Rs.1.50 lakh under section 80C.80GG 80D 80D
Medical insurance for selfMedical insurance for parent (age above 60 year)25000 50000To be deducted from total income, because it is permitted over & above the maximum deduction of Rs.1.50 lakh under section 80C 
Taxable income177000  
Tax to be paid268500  

As compared to tax liability without investment/expenditure Mr.X saved Rs.69000 (Rs.337500 – 268500) by making various tax eligible investments.

If it is a partnership firm, LLP or company than applicable tax rate will be 30% on the income earned during the year. However, they can reduce their tax burden by booking expenditure on account of

1) travel & accommodation

2) marketing or brand building

3) Business utilities like telephone, vehicle, electricity etc.

4) engage family member as employee

5) Deduct Tax at source correctly

6) Providing appropriate depreciation on plant & machinery, building etc.

In case of companies, tax rate could be at rate of 15% to 25% if they opt for exemption under section 111BA, 111BAA, 111BAB. I have highlighted only the important and generally applicable tax liabilities and available options for tax saving. There are many other criteria and provision through which tax liabilities can be reduced. It may not be easy to calculate tax saving investment if your sources of income are multiple or if you fall in high income bracket or different category of income tax payer. It will therefore be advisable to take help of a tax expert to guide you correctly.

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