Did you know you could pay zero taxes even if you earn more than Rs 5 lakh? According to the current tax laws, if your ‘taxable’ salary is Rs 2.5 lakh or lesser, you don’t have to pay any taxes; and if your taxable salary is Rs 5 lakh, your tax liability will become Rs12,500 and you can earn full rebate on that amount. In the interim budget, the then finance minister had increased the rebate amount from the erstwhile Rs 2,500. However, you should note that this is not an exemption and you will still have to file your returns.
The tax slab on income above Rs 2.5 lakh continues for those who earn above Rs 5 lakh. For instance, if your taxable income is Rs 6.5 lakh, you still have to pay tax on the Rs 2.5 lakh and Rs 5 lakh slab of 5%. However, you can avoid paying tax in case you invest your money in certain investment instruments.
Say your taxable salary is Rs 8.5 lakh and the total tax payable on it is Rs 85,800 including 4% cess. If you bring your taxable income below Rs 5 lakh from Rs 8.5 lakh, you can avoid paying tax.
Here is how: If you invest in areas which are allowed for tax deduction, you can reduce your taxable income to Rs 5 lakh. “The deductions allowed are as follows under various sections. Section 80C – up to Rs 1.5 lakh ( PF, PPF, life insurance premium, tuition fee for two children, principal repayment of home loan, Sukanya Samriddhi Yojana, Tax saver FD), Section 80D – up to Rs 25,000 towards health insurance premium paid for family, Section 80D – up to Rs 25,000 towards health insurance premium paid for parents (This is Rs 50,000 if parents are above 60 years), section 80CCD (1B) – up to Rs 50,000 invested in NPS and Section 24 – up to Rs 2 lakh for the interest paid on home loan,” said Melvin Joseph, founder of Navi Mumabi-based FinVin Financial Planners.
If you do not find these above sections relevant, you can further claim tax deductions in other sections. “You can claim house rent allowance (HRA), however, the deduction for HRA cannot exceed: 50% of your basic salary for metro cities and 40% for non-metro cities, provided your monthly rent amount is 10% more than your basic salary; leave travel allowance but this is allowed twice in a block of four years for self and family members for amount spent on fare,” said Ashok Shah, partner, NA Shah Associates LLP.
You can invest in these areas to reduce your taxable income to Rs 5 lakh. “If you can show Rs 3.5 lakh in total under these heads, your taxable income will be Rs 5 lakh and tax liability will be Rs 12,500. Then you are eligible for a full rebate of Rs 12,500 under section 87A. This way your tax liability can be zero,” said Joseph.
Remember that it will not work for everyone and don’t focus on investment only to save tax. You should consider the overall financial plan and then invest.