Taxable income in India is levied on individuals, HUFs, companies, firms, local authorities, bodies of individuals and artificial judicial persons. The amount of tax imposed varies depending on income differences.
Taxable income is a modern concept that predicts precise economic reports, money, economic climate, expenses and earnings, and comprehension of receipts. This is to facilitate an organised socio-economic culture. However, everyone with financial planning concerns aims to reduce income tax. In this article, we will outline strategies for reducing taxable income.
Did You Know? Income-related taxes are governed by the Income Tax Act of India, 1961. Income taxes form a significant source of public service funding in India.
What is Taxable Income?
Taxable income is any amount of income of any organisation or individual subject to tax deductions. Taxable income is income minus tax deductions. This includes wages, salaries, bonuses, commissions and tips. Individuals need to know the total taxable income to determine the total payable or refundable tax. This is done by calculating the applicable tax rates and deducting the paid tax.
Examples of Taxable Income
Taxable income is levied on a limited number of sources of income. Here are some examples of taxable income
- Salary
- Bonus
- Wages
- Self-employment income or business income
- Interest and dividends
- Employee bonuses
- Pensions
- Estate and trust income
- Gambling winnings
- Earning from security or selling property
- Lottery
- Severance pay
- Gratuities and tips
- Prizes
- Alimony
- Taxable grants and scholarships
- License receipts and royalties
- Gross rent
Also Read: How To Calculate Income Tax On Shares Selling - Calculate Capital Gains Tax On Shares
How to Reduce Taxable Income in India?
Here are some effective ways to avoid income tax and save more with flexible plans.
1. Savings for Retirement
One of the most effective strategies for reducing income tax is to maximise retirement savings. Among other retirement savings accounts, employer-sponsored plans and individual retirement accounts are the most beneficial for reducing taxable earnings in a specific financial year.
Some business entities offer employer-sponsored plans like a 403(b) or 401(k) to their employees so that money from their salary is credited into another account before taxation. These pre-tax contributions ensure you get less from your disposable income, and the money is exempt from taxes. You will need to pay taxes on withdrawn funds.
2. Savings for Health
Another way to avoid income tax is a high-deductible HSA or Health Savings Account, which saves taxes by designing a medical checking account for healthcare costs in the future. It is a triple tax benefit account with tax-free funds that enter and remains tax-free by trading the account balance.
It is withdrawn tax-free during qualifying medical expenditures like copays, deductibles and coinsurance. These benefits reduce your taxable income, and your unutilised HSA balance rolls over year after year.
If you invest in health insurance, you can claim a tax deduction of ₹25,000 towards the annual premium under section 80D. The amount can be ₹50,000 if the policyholder or spouse is over 60 years of age.
3. Invest in Section 80C Products
You can reduce your tax liability by ₹1.5 lakhs if you make the following investments.
- Tax-saving Fixed Deposits
- Public Provident Fund
- National Savings Certificate
- Equity Linked Savings Scheme
- Life Insurance Premium
- Home Loan Repayment
- National Pension Scheme
- Payment of Tuition Fees
- Senior Citizens Savings Scheme
- Employees Provident Fund
- Sukanya Samriddhi Yojana
- Tax-saving Mutual Funds
- Unit Linked Insurance Plans
- Child’s tuition fee amount
4. Life Insurance Policy
Under Section 10, the bonus or maturity amount in LIC is free from income tax for premiums under 10% of the assured sum (given that the policy was purchased after April 1, 2012). If the policy is bought before the mentioned date, the maturity amount will be tax-free for premiums under 20% of the assured sum.
Suppose the policy covers a disabled person or a person affected by diseases specified under Sections 80DDB or 80U. In that case, the maturity amount will be tax-free for premiums under 15% and policies issued after April 1st, 2013.
4. Claim Deduction on Home Rent Allowance
You can claim tax deductions up to ₹ 60,000 under section 80GG if you are a salaried employee and pay rent with your House Rent Allowance.
5. Deduction Claims for Home Loan Interest
The Income Tax Act clarifies in Section 24 that you can reduce taxable income by claiming a tax deduction on home loan interest. The limit under this section is ₹2 lakhs.
6. Deduction in Savings Account Interest
You can reduce your taxable income by claiming a tax deduction on your savings account interest. Section 80TTA specifies a ₹10,000 tax exemption. Senior citizens can enjoy a maximum limit of ₹50,000 under Section 80TTB.
7. Contribution to Charity
You can enjoy tax exemptions under Section 80G ranging between 50% - 100% of your contributed donation and up to 10% of your total income if you donate to charities approved by the Government. If you donate towards rural development or scientific research, you can claim a tax deduction under Section 80GGA.
8. Contribution to Political Parties
There is no upper limit on tax deductions for contributions to political parties. These tax deductions are specified under Section 80GGC, which ensures a 100% taxable amount deduction under Section 80GGC for individuals and Section 80GGB for a company.
9. Income from Agriculture
This kind of income does not fall under income tax. However, indirect taxation is defined by the Income Tax Act as the partial integration of non-agricultural and agricultural incomes. However, it imposes higher taxes on non-agriculture earnings.
Also Read: Taxable Income - What Is Taxable Income & Learn How Tax Is Calculated on Income
What Amount of Salary Can Place You in High Tax Slabs?
Tax slabs are the tax brackets that define the tax rate depending on income. Your salary is not the only component that determines your net income. The Income Tax Act of 1961 defines total income as the sum of earnings from the 5 income heads.
- Income from House Property
- Income from Salary
- Income from Capital Gains
- Income From Profits in a Business or Profession
- Income from other Sources.
Old and New Tax Slab Rates
|
Slab |
Old Tax Regime Slab Rates for FY 22-23 (AY 23-24) |
New Tax Regime Slab Rates |
|||
|
Resident Individuals & HUF < 60 years of age & NRIs |
Resident Individuals & HUF > 60 to < 80 years |
Resident Individuals & HUF > 80 years |
Before Budget 2023 (until 31st March 2023) |
After Budget 2023 (From 1st April 2023) |
|
|
₹ 0 - ₹ 2,50,000 |
NIL |
NIL |
NIL |
NIL |
NIL |
|
₹ 2,50,000 - ₹ 3,00,000 |
5% |
NIL |
NIL |
5% |
NIL |
|
₹ 3,00,000 - ₹ 5,00,000 |
5% |
5% (tax rebate u/s 87A is available) |
NIL |
5% |
5% |
|
₹ 5,00,000 - ₹ 6,00,000 |
20% |
20% |
20% |
10% |
5% |
|
₹ 6,00,000 - ₹ 7,50,000 |
20% |
20% |
20% |
10% |
10% |
|
₹ 7,50,000 - ₹ 9,00,000 |
20% |
20% |
20% |
15% |
10% |
|
₹ 9,00,000 - ₹ 10,00,000 |
20% |
20% |
20% |
15% |
15% |
|
₹ 10,00,000 - ₹ 12,00,000 |
30% |
30% |
30% |
20% |
15% |
|
₹ 12,00,000 - ₹ 12,50,000 |
30% |
30% |
30% |
20% |
20% |
|
₹ 12,50,000 - ₹ 15,00,000 |
30% |
30% |
30% |
25% |
20% |
|
> ₹ 15,00,000 |
30% |
30% |
30% |
30% |
30% |
Tax Reduction: Old or New Tax Slab?
The Old Tax Regime is the tax system that prevailed before the new regime. Under this regime, more than 70 deductions and exemptions are available, including HRA and LTA, that can reduce taxable income and tax payments. Section 80C of this regime allows a reduction of taxable income up to ₹1.5 lacs. You can decide which regime is better for you and choose to pay taxes under that regime.
Conclusion
Your investments and other saving plans can ensure a financially secure future by saving a lot in taxes. It is unnecessary to go by the format- if you want to reduce income tax. Taxable income is the income subject to taxation. Such deductions and exemptions can include things such as expenditures, donations and personal exemptions. Your salary and income from all of these sources constitute your total income. You can subtract your claimed tax deductions for income tax reduction investments from your total income to get the amount of taxable income. This amount will indicate the tax bracket you will fall into.
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