Taxes
This blog serves as a beginner's guide to tax planning, emphasising strategies to minimise tax liabilities by leveraging available tax benefits. It covers essential tax terms such as basic exemption limits, slab rates, deductions, and exemptions, while encouraging the exploration of tax-saving investment options like Mutual Funds and Fixed Deposits for effective financial management.
Minimising your tax liability by making the best use of the available tax benefits is an art called ‘tax planning’. In order to manage your finances by saving money on taxes, it is imperative that you plan your taxes well. You can explore and invest in tax-saving instruments such as Mutual Fund plans, Insurance, etc. To plan taxes through these options, it is first necessary to understand these important tax terms:
The basic exemption limit defined in the Income Tax Act of 1961 indicates the income threshold below which individuals are not required to pay income tax. In the financial year 2024-25, this limit is ₹2.5 lakh for individuals under 60 years of age in the old tax regime and ₹3 lakh in the new tax regime. For senior citizens aged between 60 and 80, the exemption limit is ₹3 lakh, while for those aged 80 and above, it is set at ₹5 lakh. This exemption alleviates the tax burden on low-income earners and senior citizens.
For the financial year 2024-25, India’s new tax regime has introduced updated income tax slabs. Under this system, individuals earning up to ₹3 lakh are exempt from taxes. Income ranging from ₹3 lakh to ₹7 lakh is taxed at 5%, while earnings from ₹7 lakh to ₹10 lakh incur a tax rate of 10%. Those with incomes between ₹10 lakh and ₹12 lakh face a 15% tax, income between ₹12 lakh and ₹15 lakh is taxed at 20%, and any earnings exceeding ₹15 lakh are taxed at 30%.
While this regime provides lower tax rates, it does not accommodate most exemptions and deductions, simplifying the process but potentially being less advantageous for taxpayers with substantial deductions.
A deduction is a type of tax benefit that helps reduce your taxable income. It can be either an income reduction or an expense that you incur. This deduction is subtracted from your gross income to determine your taxable income and, consequently, your tax liability.
You may be eligible for various deductions based on your income and expenses. For example, by investing in tax-saving schemes like 5-year Bank Fixed Deposits, certain post office schemes, Public Provident Funds, pension funds, and insurance policies, you can claim a total deduction of up to ₹1.50 lakh under Section 80C, thereby reducing your tax liability.
When considering investment options, look for those that offer different deductions. For instance, you can claim a deduction for house rent paid under Section 80GG and medical insurance under Section 80D.
Tax exemptions are monetary exclusions that can reduce your taxability. These exemptions either provide you tax relief, reduce tax rates, or ensure that tax applies only to certain portions of your income. For example, if you pay the rent of your house, you can avail of an exemption on your House Rent Allowance that is calculated as per your salary. While calculating your taxable income, a certain portion of your HRA gets exempted from the gross income.
Your gross income is your total income in a financial year. It is the sum total of all the income from the following income heads:
Your deductions and exemptions are subtracted from this gross income to calculate your taxable income. You find your tax liability on this taxable income as per different slab rates.
Understanding tax terms can help you calculate your tax liability more accurately and save money. While reviewing your investments and expenses, seek instruments that offer maximum tax benefits. For instance, consider investing in Bank Fixed Deposits or Public Provident Funds instead of just saving in a regular account. Effective tax planning not only minimises your tax burden but also enhances your overall financial management.
Investors can claim a maximum deduction of ₹1.5 lakh per annum by investing in a tax-saving FD. Know about your returns with the FD Calculator.
Disclaimer: * The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.