Penny saved is a penny earned but one should not be penny wise and pound foolish when trying to save tax. It is always better to start tax planning at the start of financial year to avoid sudden outgo of money from salary/income and last-minute rush especially when opting ELSS or other market linked investment options.
Firstly, let’s understand how Income is taxed.
Let’s assume your annual salary is 12 Lakhs
As per old regime, applicable tax slabs are,
Up to Rs 2,50,000 there is no tax.
2.5 lakhs to 5 lakhs, Rate of Tax is 5%= Rs. 12,500/-
5 lakhs to 10 lakhs, Rate of Tax is 20%= Rs. 1 Lakh
Above 10 lakhs, Rate of Tax is 30%= Rs 60,000.
So you will be paying 1,72,500/- in taxes. It is misunderstood sometimes that on whole 12 Lakhs you are supposed to pay 30% i.e. 3.6 lakhs.
There is a new tax regime where lower Rates of Tax are applicable but without any of the deductions, there are various calculators to find out how much tax you will have to pay under new vs old regime of Income Tax. It will depend on case-by-case basis as to which regime is better suited, so make use of those calculators.
Now let’s understand various options available for deduction of taxable income.
Eligible deductions under Income Tax Act.
80 C- Up to Rs. 1,50,000/-
PPF, EPF, NPS, Equity Linked Savings Scheme (ELSS) Mutual Fund, Sukanya Samridhi Yojana, National Savings Certificate, Senior citizen savings scheme (SCSS), Term Insurance etc.
May be avoided- ULIP, LIC (Do not mix Investments and insurance), Home loan- avoid if taking only for the sake of tax savings, 5 years Fixed deposits (longer lock in period with very less and taxable return).
80 CCD (1b) - Additional deduction of Rs 50,000 is allowed for amount deposited to NPS account
80 TTA- deduction of 10,000 on interest earned from savings bank account only.
80 TTB- for senior citizens above 60- 50,000 on interest from banks (includes Fixed Deposits), post offices etc
80 E- Interest paid on Educational Loan for a period of 8 years
80 GG House rent allowance- simplest way to calculate is to go on following link.
https://incometaxindia.gov.in/Pages/tools/house-rent-allowance-calculator.aspx
Section 24(b) of IT Act, 1961-Deduction in income of 2 Lakhs for Interest paid as part of EMI (only after possession of the property is received, co-borrower who is co-owner of the property is also able to claim this exemption, in effect doubling the exemption amount)
80D – Premium paid in a year for Medical Insurance and Critical illness rider of term insurance are eligible under this deduction.
Rs. 25,000/- If all insured are below 60.
Rs. 25,000 dependent parents if below 60, above 60 Rs 50,000/-
If you and parents both are aged more than 60 years, the maximum deduction is Rs 1,00,000/-
80 DD- Disabled Dependent- Medical treatment or maintenance
Rs. 75,000/- if disability is 40% to 80%
Rs. 1,25,000/- if disability is above 80%
80DDB – specified diseases and ailments- medical expenditure on self or dependent-
Rs. 40,000/- if aged below 60
Rs. 1,00,000/- if aged above 60
80U- taxpayer suffering from disability- Up to Rs 75,000 or Rs 1,25,000
80 G- donations to registered charitable institutions
80 GGC- Donations to political parties
You can claim Rebate under section 87a if your total income after reducing the deductions under chapter VI-A does not exceed Rs 5 lakh.
In words of Benjamin Franklin “In this world nothing can be said to be certain, except death and taxes”
Thus, before making a purchase decision, take into account your post tax income.
Also, when anticipating returns from your investments, always calculate tax adjusted returns.
Taxes on Equity Mutual Funds/ shares
Short Term Capital Gains
If you buy a share and sell it within 12 months, and end up making a profit, you have to pay 15% tax on the profit amount, irrespective of your Tax slab.
Suppose if you make a loss, a short-term capital loss can be adjusted against short or long term capital gain in eight years, if you file your returns within due date.
Long Term Capital Gains
If you buy a share and sell it after 12 months, and end up making a profit, you have to pay 10% tax on the profit amount beyond 1 lakh in a year, irrespective of your Tax slab.
Here you get an exemption of 1 lakh.
Suppose if you make a loss, a Long term capital loss can be adjusted against only long term capital gain in eight years, if you file your returns within due date.
Cess and surcharges as applicable.
Taxes on Debt Mutual Funds
Short Term Capital gains
If a debt Mutual Fund is sold within 3 years, you have to pay tax on the profit made as per your tax slabs.
Long Term Capital Gains
If a debt Mutual Fund is sold after 3 years, you have to pay 20% tax on the profit made after taking indexation benefit.
Cess and surcharges as applicable.
Dividends earned from Shares
With the abolition of Dividend Distribution Tax, the receiver shareholder is liable to pay Tax on Dividends received by them as per their tax slabs.
Apart from above Direct Taxes, there is going to be GST, an Indirect Tax.
Suppose you plan to buy a Phone worth 1 Lakh Rupees, firstly you have to earn around 1.5 Lakh, lets assume pay 20% Income Tax which comes to Rs 30,000 on it and then pay 18% GST on 1 Lakh value of the Phone which is Rs 18,000. As a consumer, we seldom come across separate calculation of GST as the MRP has included it beforehand. But you have to understand that an iPhone having MRP of Rupees 1,20,000/- has GST included and the cost of actual phone is roughly 1 Lakh only. Same thought process may be followed before making any bog purchase.
On a lighter note
The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin. - Mark Twain