How To Save Taxes Legally?
Tax is something that every individual once in a week or twice a week thinks about. The tax saving and the benefits of it is not unknown to us. There are ultimate guides and financial advisors who helps us to save taxes on our income.
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This article will only give you some glimpses to save tax legally. For any financial step ahead, do not forget to discuss your financial guide or CA.
Why Do We Pay Taxes?
As we know that to run a household we need money; so ultimately the government. The government has various departments or ministries which runs the country. As the goal of our income is to run, uplift and upgrade our household, so the govt. is doing the same.
The areas of the government in which it uses our money which we gave it as a tax will be used in defense, infrastructure, healthcare, technology advancements and so on. Also, the tax is used in judiciary, police service and the salary of the government officials.
The tax we pay is also used in a time of emergency. For example : PM Modi declared 20 Lakh Crore package to safeguard MSMEs and other industries along with the people.
Also, do not forget that the public transport and other facilities we are using is also from the tax we paid. The government makes our society safe and functional, that is why to pay tax is necessary.
Does The Government Need Taxes?
Of course. If not, from where else the government will bring money! The expenditure of the government is always seems more than the income. The government also takes loans and tries to resolve the debt issue. No country wants the Greek and Venezuela type of debt crisis.
Why Government Do Not Print A Lot Money?
It is simple. If the government will print more and more money than it has, it will ultimately bring down the value of it. Something more available freely in the market will not have the actual value. Whatever the amount of money we have has the ultimate and fix value in the market.
If government will print more money than it has, it will lead to the inflation, black marketing and many more financial crisis.
How Can You Legally Pay Less Tax?
There are many type of taxes, but here only Income Tax will be discussed. Focusing on the Income tax, according to the Income Tax Act of 1961, any individuals' income can be divided into the 5 parts.
- Income from Salary. (From your salary)
- Income from house Property. (From your rental income)
- Income from Profits and Gains from the Business or Profession. (From any business which any individual books from the financial year)
- Income from Capital Gains. (Returns and profits from the stocks, small cases, mutual funds, etc.)
- Income from Other Sources.
India follows a Progressive Taxation Mechanism, which means the more you will earn the more you will have to pay taxes. There is no fix percentage for all citizen, it varies from the person to person. You also will not have a fix or single tax on every incomes. The tax varies according to the source and type of incomes.
So, the tax rate will increase as you will start to make more money.
Indian Tax Slabs
Old Tax Regime
- 0 to 2.5 Lac - Nil
- 2.5 Lac to 5 Lac - 5%
- 5 Lac to 10 Lac - 20%
- 10 Lac and Above - 30%
- (Surcharge) 50 Lac to 1 Crore - 10%
- (Surcharge) 1 Crore to 2 Crore - 15%
How Do You Calculate Tax According To Old Tax Regime?
Let's understand it by an example;-
Suppose your income is 11 Lac per annum. You will now have to pay different tax rate for different amount. You are supposed to pay, -
- 0 to 2.5 lac - 0 Rupee
- 2.5 to 5 lac - 5% which means 12,500 Rupees
- 5 lac to 10 lac - 20% which means 1,00,000 Rupees
- 10 lac and above - 30% which means 30,000 Rupees
Grand Total = 1.42 Lac Rupees + 4% Health and Education cess
New Total = 1,48,200 Rupees to pay as a Tax; you will pay annually if your income is 11 Lac.
(P.S. - It was an example)
How Do You Save Taxes or Pay Less Tax Legally?
When you calculate your whole income, it won't make your taxable income unless you add Exemptions, Reductions and Rebates. Over the years, the Government of India has added so many Claus which will help you to pay lesser amount of tax.
You can save tax via, -
1) Exemptions
It is a part of your salary in which you do not have to pay tax. Like House Rent Allowances (HRA), Phone Bill, Travel Allowances, food coupons, scholarship of cost of education, deposit bonds, payment received under provident, Fund Act 1925, etc.
2) Deductions
If you have saved, invested or spent on items which is listed in income tax act, than you are able to pay less or no tax. If you have used Section 80 C (Tax Saving Instruments - ELSS, PPF, National Saving Certificate) along with Tax Saving Deposit Schemes (Sukanya Samridhi) than you are not suppossed to pay tax up to Rupees 1.5 Lac.
You can also claim Deductions on,
- Home Loan
- Education Loan
- Medical Insurance and much more.
3) Rebates
Rebates is like if you have paid more tax than you have to pay; it will get refunded as a form of Rebates.
According to Section 87A, You can get a rebate of up to 12,500 rupees if your taxable income does not exceed Rs. 5 Lac after Deductions and Exemptions.
You will have to file an ITR, in which your income and tax will be calculated and according to that, you will get rebates.
What is Your Taxable Income According To Old Tax Regime?
Total Income - Tax deductions - Tax exemptions - Tax Rebates = Your Taxable Income
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New Tax Regime
People wanted to pay lower tax rate in a new Tax regime. So, the Government announced lower tax rates in a new regime. However, in a new tax regime you can not claim Deductions and Exemptions. In a new tax regime you can not use or claim as deductions the Section 80C, Medical Insurance, HRA, LTA, etc.
Tax Slabs | New Tax Rates
|
ANNUAL INCOME |
OLD TAX REGIME |
NEW TAX REGIME |
|
UP TO 2 LAC |
NIL |
NIL |
|
2.5 LAC TO 5 LAC |
5% |
5% |
|
5 LAC TO 7.5 LAC |
20% |
10% |
|
7.5 LAC TO 10 LAC |
20% |
15% |
|
10 LAC TO 12.5 LAC |
30% |
20% |
|
12.5 LAC TO 15 LAC |
30% |
25% |
|
15 LAC AND ABOVE |
30% |
30% |
Good thing is you can choose according to which tax regime you want to pay tax. You have to calculate your salary and identify which tax regime is more suitable for you. You have to calculate your deductions and exemptions.
Calculate and Compare Which Tax Regime Will Help You To Save More Tax
You must opt for the official Income Tax Calculator By The Government of India.
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