If you are a salaried person earning between Rs 5 lakh and Rs 15 lakh net pay per year, you must first understand your current tax due. Once you have determined how much tax you must pay, you must prepare to save tax by claiming tax deductions under the applicable sections of the Income Tax Act.
You can maximize your tax savings by investing in the best saving scheme, making voluntary gifts, taking out a house loan, or asking your employer to restructure your compensation. Always remember to prepare ahead of time for tax savings, especially at the start of the fiscal year, to avoid any stress or bother while filing your yearly Income Tax Return (ITR).
Your tax burden is determined by the income tax department based on your yearly income. According to the tax slabs, a person under the age of 60 is taxed at 5% on an annual income of Rs 2.5 lakh to Rs 5 lakh. Individuals earning between Rs 5 lakh and Rs 10 lakh are subject to a 20% tax bracket, while those earning more than Rs 10 lakh are subject to a 30% tax slab.
You should also keep in mind that an extra 4% health and education cess is due. Individuals earning up to Rs 5 lakh are eligible for complete tax relief from the government. The government has offered a new tax slab for persons prepared to renounce certain deductions and tax exemptions beginning in the fiscal year 2020.
Best tax-saving method
Read on to learn more about the best methods for saving taxes:
1. Investment in tax-saving options
The most effective strategy to save taxes is to invest your hard-earned money in the best saving scheme. Tax deductions of up to Rs 1.5 lakh are available here under Section 80C of the Income Tax Act. You have the option of investing in:
2. Employee Provident Fund (EPF)
This is a retirement plan for salaried workers. The employer deducts 12% of the base wage and Dearness Allowance (DA) in this case. This money is subsequently invested in government-approved provident fund plans.
3. Public Provident Fund (PPF)
These are government-backed assets having a 15-year minimum lock-in term. After seven years, you may take a portion of your savings and receive an interest rate of roughly 8%.
4. Equity Linked Savings Scheme (ELSS)
These are tax-saving mutual fund plans that provide both tax savings and significant market-linked returns. These have a three-year minimum lock-in duration.
5. Sukanya Samriddhi Account
This government-backed plan allows you to invest up to Rs 1.5 lakh every year. As a parent of a female child, you may create an account in her name and earn interest of up to 8.5%.
6. Tax Saving Fixed Deposit
These are identical to typical fixed deposits but have a 5-year minimum lock-in duration. Interest rates can range between 7% and 9%.
7. National Saving Certificate (NSC)
These have a 5-year minimum lock-in term. The yearly interest payment of up to 8% is compounded.
8. National Pension Scheme (NPS)
This is a government-run social security program that provides retirement benefits to workers in the public, private, and unorganized sectors. It has two accounts, Tier I and Tier II. The former is a required account that permits money to be withdrawn only after retirement.
9. Making voluntary donations
Donations can also save you money on your taxes. You may donate to numerous relief funds, such as the PM relief fund, drug addiction control funds, and the clean Gange’s fund, or make voluntary contributions to approved non-governmental organizations (NGOs). Section 80G of the Income Tax Act exempts all of these gifts from taxes.
10. Taking a home loan
Did you know that getting a house loan might help you save money on taxes? Payments for both the interest and principal amounts of your home loan are tax-free under Section 80C of the Income Tax Act.
11. Restructuring of salary
You might ask your company to modify your compensation so that you can take advantage of tax breaks. These benefits include House Rent Allowance (HRA), transportation, personality development, medical care, telephone, uniform, and workplace entertainment, among others. In addition, you may claim tax breaks on your Leave Travel Allowance (LTA) twice every four years.
12. Opt for Life Insurance Plans
Tax breaks are available on both premium payments and the amount given at maturity under life insurance contracts.
Section 80C of the Income Tax Act provides for premium payments, and Section 10(10D) provides for the amount promised paid at maturity or early death of the insured, whichever occurs first.
Nonetheless, if the insurance is purchased after April 1, 2012, tax savings of up to 1.5 lakh on the yearly premium can be claimed under Section 80C, provided it is less than 10% of the entire value guaranteed.
If the policy was purchased before April 1, 2012, claims under Section 80C might be filed as long as the total premium payments do not exceed 20% of the amount guaranteed.
The sum insured on the best saving scheme is similarly excluded from tax calculations under Section 10(10D), provided it follows the requirements outlined above.
Looking for a life insurance policy that goes beyond the conventional insurance benefits? Take a look at the iSelect Guaranteed Future Plan.
The iSelect Guaranteed Future Plan provides tax breaks on both premium payments and the amount released at maturity. This implies that you may save a lot of money on your life insurance coverage with the iSelect Guaranteed Future Plan.
13. Donate to Charity
Donations given in cash to designated organizations are eligible for a tax exemption of up to INR 2,000 under Section 80G of the Income Tax Act. Wire and bank transfers, on the other hand, are free from taxes entirely or partially.
Donations to organizations that promote scientific research or rural development are eligible for Section 80GGA deductions.
Cash gifts get partial tax exemptions, while transfers made by check or draft receive the full tax exemption.
Wrapping It Up
‘A penny saved is a penny earned,’ as the old adage goes. Tax planning is one method for lowering your tax bill while increasing your revenue. The income tax statute allows for deductions for different investments, savings, and expenditures made by the taxpayer within a fiscal year.