Taxes are an important and largest source of income for the government. The government uses the money collected from taxes for various projects for the development of the nation. The Indian tax system is well structured and has a three-tier federal structure.
The tax structure consists of the central government, state governments, and local municipal bodies. When it comes to taxes, there are two types of taxes in India - Direct and Indirect tax. The direct tax includes income tax, gift tax, capital gain tax, etc while indirect tax includes value-added tax, service tax, Good and Service taxm, customs duty, etc.
The Central Government of India imposes taxes such as customs duty, central excise duty, income tax, and service tax. The state governments impose income tax on agricultural income, state excise duty, professional tax, land revenue and stamp duty. The local bodies are allowed to collect octroi, property tax, and other taxes on various services like water and drainage supply.
Understanding Direct Tax
Direct taxes are imposed on corporate entities and individuals. These taxes cannot be transferred to others. For individual taxpayers like you, the most important type of Direct tax is the income tax. This tax is levied during each assessment year (1st April to 31st March). As per the Income Tax Act, 1961, it is mandatory for you to make income tax payments if your annual income is above the minimum exemption limit. You can get tax benefits under various sections of the Act. Before we talk about tax benefits, it is important for you to understand the income tax slab.
What is Tax slab?
Individuals in India, earn an income in a diverse range. Therefore, it is important to levy a tax on you based on your income and if someone earns more, the tax percentage should be different. The Income Tax Act segregates the income range and charges different rates as per the segregation. The different groups are known as tax slabs. Your tax slab can vary not only based on your income but also your age. Every year during the Central Government’s Budget Session, amendments are made in the income-tax slabs.
|Income Tax slab||Tax applicable|
|Rs.0 – Rs.2,50,000||Nil|
|Rs.2,50,001 – Rs. 5,00,000||5.00%|
|Rs.5,00,001 – Rs. 7,50,000||Rs.12500 + 10% of total income exceeding Rs.5,00,000|
|Rs.7,50,001 – Rs. 10,00,000||Rs.37500 + 15% of total income exceeding Rs.7,50,000|
|Rs.10,00,001 – Rs.12,50,000||Rs.75000 + 20% of total income exceeding Rs.10,00,000|
|Rs.12,50,001 – Rs.15,00,000||Rs.125000 + 25% of total income exceeding Rs.12,50,000|
|Above Rs. 15,00,000||Rs.187500 + 30% of total income exceeding Rs.15,00,000|
The above tax rates are applicable for you if you do not wish to avail exemptions or deductions (discussed later). If you want claim applicable exclusions and deductions, you may do so but then the income tax slab will be as follow:
|Income Tax slab||Tax applicable|
|Up to Rs. 2,50,000||Nil|
|From Rs. 2,50,001 to Rs. 5,00,000||5%|
|From Rs. 5,00,001 to Rs. 10,00,000||20%|
|Above Rs. 10,00,000||30%|
You need to choose which of the two options you need to opt for. Let us make things easy for you. Assume, you have an annual income of Rs 8 lakhs. Taking into account standard deduction, HRA, etc, your net taxable income comes Rs 6 lakhs. Since there are no deductions or exemptions allowed in the new regime, your taxable income will be Rs 8 lacs only.
Based on two regimes below is how your taxes will be calculated:
|Tax Slab||Old rates||New rates||Old Tax||New tax|
|0 – 2,50,000||0%||0%|
|2,50,000 – 5,00,000||5%||5%||12,500||12,500|
|5,00,000 – 7,50,000||20%||10%||20,000||25,000|
|7,50,000 – 10,00,000||20%||15%||7,500|
|Total taxes||Rs 32,500||Rs 40,000|
In this case, the old tax regime is a better option.
However, when you are not investing anywhere or claiming tax deductions through a home loan or education loan, a new tax regime will be a better option in the above example. Which one is better will depend on your salary and investment, so you need to evaluate the better option for you.
Exemptions on taxes/tax deduction
The tax deduction is a reduction of income that eventually lowers your tax liability. Deductions are expenses that you incur during the year and it can be subtracted from your total income in order to calculate how much tax you need to pay. There are many deductions that you can use to reduce your total income. Here are some of the most commonly used ways for the tax deduction –
House Rent Allowance - If you have a rented accommodation, you can get the tax benefit under HRA. The amount exempted can be totally or partially exempted from income tax.
Medical Insurance Deduction - If you have brought a medical policy, the premium you paid for the policy could save your tax as the amount is deducted from gross income (up to a limit).
Food coupons - Some employers may provide you with food coupons such as Sodexo. Such meal coupons are tax-exempt up to a certain limit. The yearly exemption for food coupons is up to Rs 26,400.
Section 80C, 80CC and 80CCD(1) - This is the most popular option and you must already be using it to reduce your taxes. Under this, you can reduce your taxable income by putting your money in tax saving investments.
|Section 80C - Deductions on Investments||You can claim a deduction of Rs 1.5 lakh your total income under section 80C.|
|Section 80CCC – Insurance Premium||Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer|
|Section 80CCD – Pension Contribution||Deduction for Contribution to Pension Account|
|Section 80GG – House Rent Paid||Deduction for House Rent Paid Where HRA is not received|
|Section 80 TTA – Interest on Savings Account||Deduction from Gross Total Income for Interest on Savings Bank Account|
|Section 80E – Interest on Education Loan||Deduction for Interest on Education Loan for Higher Studies|
|Section 80EE – Interest on Home Loan||Deductions on Home Loan Interest for First Time Home Owners|
|Section 80D – Medical Insurance||Deduction for the premium paid for Medical Insurance|
What are Tax saving investments?
Investment in certain instruments can help you reduce your taxable income. Such an investment option which reduces your taxable income is known as Tax saving investment. Even the Indian government offers few tax saving instruments like the Public Provident fund (PPF), National Pension Scheme, etc. Other popular taxes saving investments are Life insurance premium/term insurance premium, Equity Linked Savings Scheme (ELSS), Tax saving Fixed Deposits, Employee Provident Fund (EPF), etc.
How does Tax saving investment work?
The key feature of tax-saving investment is that they have a certain lock-in period. To understand this better, let us take an example of a Term Insurance. Term Insurance provides cover for a fixed period to the policyholder. If the policyholder dies during this period, the nominee is paid the selected cover amount.
When you buy term insurance, not only it offers your loved ones financial security but also reduces your taxable income. When you buy a Term Insurance plan from insurers like Canara HSBC, you pay a nominal sum of money as a policy premium every year. This is equivalent to the amount to be deducted from your total income to bring down your taxable income. You can enjoy the tax benefits of up to a limit of Rs 1.5 lacs.
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