When you start earning, there are multiple things to take care of in financial terms. One of the essential steps is to understand the income tax structure and consider various tax saving investment options to manage your money better. The terms and processes may get confusing and unfamiliar for you. That is why a beginner’s guide to income tax savings can help you protect your hard-earned money.
There are several tax saving investment options that you can consider as a tax saving investment to minimize your overall liability. These tax saving investment options are primarily covered under different income tax saving sections. At the same time,you can consider a comprehensive tax saving investment strategy to provide for long-term financial security through instruments such as mutual fund investments using the top investment app Australia has to offer, ULIPs (Unit Linked Insurance Plans) and term insurance policy.
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Let’s take a look at some of the relevant terms to understand the income tax saving sections and the various term insurance tax benefitsin detail:
- Basic exemption limit
Income Tax can be a source of substantial financial pressure. It is essential to plan your tax saving investment strategy carefully to minimize your tax liability. For a young professional, it may be challenging to balance their expenses and savings. Therefore, it is crucial to understand how tax exemption applies to various tax saving investment options to avoid unnecessary taxation.
The tax saving investment options listed under the income tax saving sections are subject to specific restrictions. These provisions help inculcate a habit of saving among the people. For example, the premiums paid towards life insurance policy can be exempted upto Rs1.5 lakh per annum under section 80 C of the Income Tax Act. Similarly, the HRA deduction allows people to claim the money paid as rent for a tax exemption, depending on the salary of the individual.
- Applicable Deductions
Different tax saving investment options are eligible for deductions that help reduce the tax liability of an individual. Some of the significant deductions allowed under the income tax saving sections are HRA Deduction, deduction on the interest on a home loan, insurance policy, savings account interest and Leave Travel Allowance(LTA).
They are subject to varying conditions depending on the individual’s slab of taxation. To understand the applicability of these deductions, you must know the slab rates of the Income Tax structure.
- Slab Rates
Every citizen of India is eligible to pay income tax. The existing tax regime describes the applicable tax rates for salaried and self-employed individuals and senior citizens. Below are the applicable tax rates for the financial year 2019-20 (Assessment Year 2020-21):
- For salaried individuals and HUFs under the age of 60 years
| Taxable Income | Tax Rate |
| Up to Rs. 2,50,000 | Nil |
| Rs. 2,50,000 to Rs 5,00,000 | 5% |
| Rs. 5,00,000 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
- For senior citizens (between the ages of 60 and 80 years)
| Taxable Income | Tax Rate |
| Up to Rs. 3,00,000 | Nil |
| Rs. 3,00,000 to Rs 5,00,000 | 5% |
| Rs. 5,00,000 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
- For super senior citizens (80 years or above)
| Taxable Income | Tax Rate |
| Up to Rs. 5,00,000 | Nil |
| Rs. 5,00,000 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
Over time, the rules and regulations regarding tax exemptions have gone through some changes. It is to accommodate the financial situation of the people better. Budget 2020 has introduced an optional system to fall under a slab rate. It allows complete tax exemption upto Rs. 5 lakh on the condition that the individual gives up certain exemptions and deductions.
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- Gross Income and Taxable Income
Gross income is the total amount of income earned by an individual. The deductions and exemptions under the various income tax saving sections apply to this income. The amount of these deductions is dependent on the tax saving investment opted and the applicable tax slab.
Taxable income is the amount that remains after the relevant deductions. It is the amount that is subject to income tax. Various tax saving investment options that you consider can help you bring down your gross taxable income, thereby lowering your income tax.
- Tax Exemptions
The income tax saving sections can minimize your tax liability considerably. You must be aware of the tax exemptions provided under them to enjoy the benefits. Some commonly known sections for tax-saving are:
- Section 10 – House Rent Allowance (HRA), Transportation Allowance, and Children Education Allowance
- Section 80 C – Provident Fund, Annuity Schemes, Tax Saving Mutual Fund, and Home loan principal repayment
- Section 80 D – Medical Insurance Deduction
Start Saving Taxes Today!
When it comes to your hard-earned money, every penny is precious. As an individual who has just begun their career, many of these investments must be on your financial plan to enhance your savings.
Tax saving instruments such as life insurance from reputable insurers such as Max Life Insurance allow you to secure your family’s financial future while earning significant tax savings. These investment opportunities also will enable you to diversify your portfolio so that you can avail of 360-degree financial protection for yourself and your loved ones.