Maximise your tax savings and keep more of your hard-earned money by filing taxes the right way!
The tax season is a difficult time for taxpayers. As we look at the hefty amount of tax to be paid, it’s natural to feel sad and wonder what we could have done with that money if we could save it instead. Well, you are not alone. Everyone has been through this. But, if you do things right, you will save taxes.
With that in mind, it’s essential to understand the differences between tax deductions, tax exemptions, and tax rebates. These tax breaks can potentially save you a significant amount of money. But the overwhelming amount of information and rules surrounding the tax law can make it challenging to know where to begin.
While paying your taxes, the first thing we must do is to look at deductions because that is an efficient way through which you can reduce your gross income.
To begin with, we need to deduct the standard deduction.
Now, what is a standard deduction?
The standard deduction is a flat discount on your taxable income.
Under the new tax regime, the salaried class can avail of a standard deduction of Rs 50,000. Also, family pensioners can deduct Rs 15,000 or ⅓rd of the family pension (whichever is lower). These deductions were previously only allowed under the old tax regime but are now proposed to be allowed under the new regime.
Now, that’s not all. Apart from the standard deduction, you can save taxes by investing or spending in different investment options under section 80C of the Income Tax act. These investment options are tax-saving fixed deposits, ELSS mutual funds, EPS, NPS, ULIP, LIC premium, SSY, PPF, and NSC.
When claiming deductions for tax-saving purposes, you must understand that you can utilise various instruments to a maximum limit of Rs 1.5 lakh under section 80C. You can invest the entire amount in a single instrument or spread it across multiple instruments. However, it’s essential to remember that the maximum limit is Rs 1.5 lakh.
Also, different tax-saving instruments offer varying returns and lock-in periods. Some investment avenues like ELSS are linked to the market and offer higher returns, while others may offer lower but safe returns. Hence, assessing your risk appetite and choosing the right investment avenue to park your funds for tax-saving purposes is crucial.
For more information, read this detailed article – Click here
Not just that, you can also save taxes by not investing a penny under different sections of the Income Tax Act. Click here to explore that strategy.
Now, after investing, saving and spending your money under section 80C, you could save Rs 46,800 annually if you belong to the 30% tax bracket!
So, the calculation is such that if you fall under the 30% tax bracket, by investing Rs 1.5 lakh, you save Rs 45,000.
But that’s not all. If your tax payable is above Rs 45,000, you will have to pay a health and education cess of 4%, which you ultimately save if you save Rs 45,000.
So, you save that 4% cess of Rs 1,800, bringing your total savings to an incredible Rs 46,800!
Now tax exemption simply means you don’t need to pay taxes on a few components of your income. If you are a salaried employee, this is an additional opportunity to save taxes.
Tax Exemption includes:
- House Rent Allowance: Normally, if you do not pay rent, the HRA allowance you receive in your salary becomes taxable. But, if you live in a rented apartment, you can provide proof of rent paid in a financial year, like rent receipts or a rent agreement. Submitting these documents to your employer can lower taxes on your salary income and will reflect in your Form 16. If you forget to provide this proof to your employer, you can still claim tax exemption on HRA while filing ITR.
- Children’s Education and Hostel Allowance: For up to two children enrolled in an educational institution, a monthly allowance of Rs 100 per child is provided. In addition, a hostel expenditure allowance of Rs 300 per month per child is given to those who reside in hostels, also for up to two children.
Similarly, gratuity, leave travel allowance, and company accommodation is also exempt from taxation.
After applying for deduction and exemption, you still get a chance for a final bargain, which is a tax rebate under Section 87A.
The tax rebate is a benefit that reduces the tax you must pay to the government. You can get this benefit under both old and new tax regimes. Until 31st March 2023, the amount of tax rebate available under both regimes is the same. If your taxable income after deductions and exemptions does not exceed Rs 5 lakh in a financial year, you can get a rebate of Rs 12,500 under both tax regimes. This means zero tax up to this limit.
If your income is Rs 5 lakh, you must pay a 5% tax on Rs 2.5 lakh, which comes to Rs 12,500. But under section 87A, you can claim a rebate of Rs 12,500; hence, your tax outgo becomes zero!
From the financial year 2023-24, the government has revised the income tax slabs under the new tax regime. To make the new tax regime more attractive, the tax rebate under Section 87A has been increased to Rs 25,000 for taxable income up to Rs 7 lakh. So if your taxable income does not exceed Rs 7 lakh in this regime, you will pay zero taxes.
However, the tax rebate under Section 87A available under the old tax regime for FY 2023-24 remains the same.
Albert Einstein once said, ‘The hardest thing in the world to understand is the income tax’, but not anymore! That’s because we have told you the right way to file taxes. First, deduct the standard and other deductions, then claim tax exemptions, and then look for a tax rebate!
So, this tax season, file taxes the right way!