This is a blog to help the first-timers to understand the basic income tax terminology when they start working. Also, we provide you steps to check which tax regime is better – the old tax regime or the new tax regime?
It can be overwhelming especially in the first one year of working when we are excited to get our first salary. But at the same time, in the salary slip, there could be an amount under the tax deducted at source (TDS) which could make us sad as that is an outgo from our income. I would like to mention that paying income tax is not bad. There are two ways in which our Government gets revenue for the country’s development – Direct taxes and Indirect taxes.
Income taxes is one of the Direct tax options. But, taxes can be saved legitimately. The terms “tax ” and “tax evasion” are often used interchangeably, but they are very different concepts. Tax avoidance is legal, while tax evasion is not. We will get into the details of how to avoid taxes, but broadly the concept is avoiding it through by availing tax exemptions and investing to save taxes. The Government provides tax benefits to people to encourage them to save so that in their old age, they do not get dependent on the Government for survival and subsidies. There is a thin line between getting people to spend now (and thus boost up the economy), versus encouraging them to save for later use (thus deferring the spending).
Let’s understand some of the basic terms which appear in your salary slip or Form 16.
It is the total earning, before claiming any deduction or exemptions. Gross income includes not only your salaried income but the income you earn from various other sources like interest, dividend, capital gains, etc.
For income tax purposes, income is classified as under 5 heads. While filing income tax returns, which form to be used would also depend on what sources of income need to be declared. All the heads are self-explanatory. The tax rates vary depending on the type of income head.
As mentioned earlier, not entire income which is earned is subject to taxes. There are certain exemptions that are provided which helps in reducing the tax liability.
4. Tax Deductions
Income tax rules also provide for tax deductions under various types of investments. A summary of deductions available under various sections is provided below:
|Section||What?||Amount & criteria|
|80 C||ELSS, PPF, NSC, Principal loan, Tuition fees, Insurance, ULIP, Sukanya Samriddhi, etc.||Cap of Rs 150,000|
|80 CCC||Pension Policy||Max deduction is under section 80 C itself|
|80 CCD (1)||National Pension Scheme||Max 10% of salary or total income up to Rs 150,000, under 80 C limit|
|80 CCD (2)||Additional contribution to NPS||Rs 50,000|
|80 D||Medical insurance –self & family; parents||Rs 25,000 (Rs 50,000 in case of sr. citizens); Additional for parents;|
Rs 5,000 for preventive health check up
|80 DD||Medical expenditure –handicapped dependent relative||40 to 80% disability: Rs 75,000 fixed|
> 80% disability: Rs 125,000 fixed
|80 DDB||Medical expenditure –self, dependent||Specified ailment or disease; Amount incurred up to Rs 40,000 (Rs 60,00 for sr. citizen and Rs80,00 for very sr. citizen)|
|80 E||Education loan for higher studies -Self, spouse, children, legal dependents||Interest up to max of 8 years|
|80 EE||Additional Housing loan benefits||Sanction in 2016-17, Loan < Rs 35 lakhs and property less than Rs 50 lakhs, No other residential property owned|
|80 G||Donations for social causes||100% or 50% with or without restriction. In cash > Rs 2,000 disallowed. Max allowed up to 10% of income|
|80 GG||Rent where HRA is not paid||Min: Rent paid minus 10% income; Rs 5,000 pm; 25% of total income|
|80 GGC||Contribution to political parties||Other than cash, certain restrictions, else there is no limit|
|80 RRB||Income: Royalty of Patent||Lower of Rs 300,000 or income received|
|80 TTA||Interest on Saving Bank Account||Interest above Rs 10,000 p.a. taxable|
|80 U||Physical disability of dependent||Rs75,000. In case of severe disability, Rs 125,000|
|10 13 (A)||House Rental Allowance||Min: HRA, Rent minus 10% Basic, 40% or 50% (Metro) of Basic|
|24||Housing Loan Interest||Up to Rs 2 lakhs. If a property is not occupied within 5 years of loan sanction date, the benefit is restricted to Rs 30,000|
This is the income after the exemptions and deductions have been subtracted from the Gross Income. Tax is paid on the taxable income and not on the Gross income. There is something called “Exemptions” and “Deductions” which are reduced from your income to arrive at “Taxable Income”.
Based on the proposed investments planned by the employee in the financial year (generally submitted at the beginning of the financial year), the employers start deducting tax at source (TDS) for the remaining taxes due for the year every month. The investment proofs for the declared investments are generally called for by the employer in Jan or February of the financial year. If they are submitted tax proofs are for the lower amount than the plan, then remaining taxes that are due are deducted as TDS before the end of the financial year. However, if TDS is more than what is due, then the employee can claim the refund while filing the income taxes. Please do note that if any taxes are due for any income other than salary, then they should be calculated ourselves, and advance taxes should be paid on or before the respective due dates to avoid any penalty and interest while filing taxes. At any point in time, you can check all TDS which has been deducted in form 26AS which can be downloaded from TRACES website.
The Budget announced in February 2020, made some radical changes to the income tax structures. It has given an option to the assessees to choose whether they want to continue with the previous tax regime (with tax benefits but higher tax rate) or new tax regime (with no tax benefits but lower tax rate). This is to provide an option for people who would like to spend now (and not save for the future) and therefore have more money in hand, which could also provide an impetus to the economy.
A comparison of the two structures is provided below:
|Earlier tax regime||Annual Income||New tax regime|
|Nil||Up to Rs 2.5 lakhs||Nil|
|5%||Rs 2.5 lakhs to Rs 5 lakhs||5%|
|20%||Rs 5 lakhs to Rs 7.5 lakhs||10%|
|Rs 7.5 lakhs to Rs 10 lakhs||15%|
|30%||Rs 10 lakhs to Rs 12.5 lakhs||20%|
|Rs 12.5 lakhs to Rs 15 lakhs||25%|
|Above Rs 15 lakhs||30%|
Health & educational cess: 4%
Surcharge: Income Rs 50 lakhs to Rs 1 crore: 10%
Income Rs 1 crore to Rs 2 crores: 15%
Income Rs 2 crores to Rs 5 crores: 25%
Income > Rs 5 crores: 37%
In new tax regime, some of the 70 exemptions and deductions would not be available
Yes! If you plan it well, you can get your income taxes to zero. Besides, in Budget 2019 there was an announcement that if the net taxable income (after claiming exemptions and tax deductions) is less than Rs 5 lakhs, then the taxes due are subject to a rebate under Section 87A, thereby no taxable income for the assessee. However, if it exceeds by even Re 1, then the entire amount would be subject to taxes and this rebate will not be available. So, do check out various deductions given earlier in a table and see which are the ones applicable to you. Proper tax planning can save money, legitimately!
Government proposes to provide a choice to tax payers: savers or spenders
Comparison between Old and New tax regime
Planning of taxes should be planned at the beginning of every financial year and not towards the end. There are several advantages:
So, I hope this primer on tax planning was useful to you in understanding some of the terminologies and ways in which taxes could be saved. Remember taxes should be avoided and not evaded! If you have any questions, please feel free to comment below or contact me. If you would like to read more personal finance blogs, then you could check out my website or my YouTube channel for videos on this topic.