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TAX-Exemption Instruments For Newbie Earners

Why we need to pay a portion of our hard-earned money as TAX to the government, this is the question that runs in the minds of all the newbie earners. After reading this article, newbie earners will understand,

  • What is Tax?
  • Why it is so important to pay Tax?
  • What are the Tax exemption investments?
  • What are the different types of Tax?
  • How to avoid the TAX.

Through this article, newbie earners can learn comprehensive details on which all savings and investments help to save income tax in India. Below mentioned income tax saving method will help to save a substantial amount of Tax through numerous waivers and exemptions available under each section of the income tax act.



What do you mean by Income Tax?

A tax is a compulsory financial charge imposed on an individual or legal entity by the government in order to get the fund to spend for various public expenditures. Most countries charge a fixed percentage of income as the tax on an individual’s as well as on corporate.

Why are taxes so important?

Tax is the main source of income for the government to pay the salaries for government employees, build and maintain the common resources, and for the development of infrastructure in the country, which are essential for the growth of the country.

Who is exempted from income tax in India?

An Indian citizen whose income is less than ₹500,000 are exempted from paying the income tax in India.

What is Advance Tax Payment?

  • An Indian citizen whose estimated tax for a financial year more than Rs. 10,000, need to pay tax in advance.

Advance tax payment needs to pay if the income from other sources and so on is more than Rs 10,000 in a financial year. Salaried people think that as their tax is already deducted at source from their salaries. they don’t have to pay advance tax, but if they have any other source of income and overall Tax is more than Rs. 10K in a financial year, they also need to declare it and need to pay the advance Tax.

Can advance tax be paid online?

Advance tax can pay online on the official website of the income tax department. Under the e-payment facility on the website of the Income Tax Department. Any individual or a corporation can make the advance payment. Also, advance tax can pay at bank branches authorized by the Income Tax (I-T) Department. If an individual or corporate pays the tax amount of more than 10% of tax liability, the IT department will pay an interest @ 6% per annum on the excess amount.

How to save Income TAX?

For the Taxpayers, the Central Government provided various provisions to ease the annual financial burden under the Income Tax Act of 1961. Citizens invest their income in various financial instruments which enhance the quality of life but it may lead to severe financial strain. To promote the investment habits among the people and reduce the tax burden, the government provides income tax waivers on direct taxes levied on the income for some of the investments under different sections.

Section 80C

The total amount of deduction allowed is Rs. 15000 in a financial year. The list of investment schemes that come under section 80C is listed below. In simple terms, a salaried person can reduce up to Rs 1,50,000 from the total taxable income by investing in any of the below instruments. This Tax exemption is available for Indian individuals as well as HUF.

  • Life Insurance Premium
  • Public Provident Fund
  • National Savings Certificate
  • Sukanya Samridhi
  • Infrastructure Bonds
  • Payment of Tuition fees for Children
  • Equity Linked Savings Scheme
  • Principal repayment of Home Loan
  • Unit Linked Insurance Plan
  • Tax Savings Mutual Funds
  • Investment in Term Deposits
  • Deposit in Post Office
  • Mutual Fund Pension
  • Cumulative Term Deposits
  • Stamp duty and Registration charges
  • NSC Interest
  • NABARD Rural Bonds

Section : 80CCC

Premium paid for annuity plan of LIC or Other Insurer in a financial year.

  • Pension Fund

An individual can claim tax deduction under Section 80CCC of Income Tax Act 1961, for contributions made to certain pension funds in India. A pension fund is an investment product to get the retirement income. The tax benefit is only for the premium to the insurer.

Section : 80CCD(1B)

  • NPS: Rs. 50000.00

Additional Contributions made towards NPS Tier 1 account is qualified for deductions under Section 80CCD(1) and also under Section 80CCD(1B). If the investment is Rs. 2 lakh in Tier 1 account and then claim a deduction of Rs. 1.50 lakh under Sec 80CCD(1) and additional Rs. 50,000 under Section 80CCD(1B).

 Section : 80TTA(1)

  •  Interest on Savings Account: Rs. 10000.00
  • Interest on deposits for senior citizens (Sec 80TTB) : Rs. 50000.00

 Section 80TTA provides a tax exemption for Rs 10,000 on the interest income earned from the fixed or saving account. This exemption is available to an Individual and HUF. The maximum exemption is limited to Rs 10,000, if the interest is more than 10K, it will add up to the total income and need to pay tax as per the Tax slab.

Section : 80E

  • Repayment of Interest on Educational Loan
  • Interest for purchase of Electric vehicle: Rs. 150000.00

Section 80E of the Income Tax Act, 1961 is for the tax exemption of the repayment of Interest on Education Loan. The total interest paid amount is exempted from the taxable income if the loan taken by a student for education from an eligible financial institution. Also, the interest paid for the purchase of the electrical vehicle will come under this section.

Section : 80D

  •  Medical Insurance(Self, spouse, children): Rs.  25000.00
  • Medical Insurance for Parents(Parents more than 60 years old or uninsured parents more than 80 years old): Rs. 50000.00
  • Preventive Health Checkup (Self): Rs. 5000.00
  • Preventive Health Checkup (Parents): Rs. 5000.00

Deduction for the premium paid for Medical Insurance for the Indian citizen or HUF can claim a maximum exemption of Rs.25,000 under section 80D. The exemption is eligible for self, spouse, and dependent children of the taxpayer. For parents with an age of fewer than 60 years are eligible for additional deduction up to Rs 25,000, in a financial year.

Section (U/S 80G)

Contributions made to prescribed relief funds and charitable institutions can be claimed under Section 80G of the Income Tax Act.

Section : 80DD

Medical treatment for Handicapped Dependant or payment to specified scheme for maintenance of Handicapped Dependant can be claimed under section 80DD.

  • Medical Disability of a dependent Family Member(Disability is 40% or more but less than 80%): Rs. 75000.00
  • Medical Disability of a dependent Family Member if severe(Disability is 80% or more): Rs.125000.00

Section : 80DDB

Medical Expenditure on Self or Dependent relative for Diseases specified in Rule 11DD can be claimed under section 80DDB.

  •  Medical Treatment of Specified Diseases(For less than 60 years old): Rs. 40000.00
  • Medical Treatment of Specified Diseases For Senior Citizen(For more than 60 years old and less than 80 years old) : Rs. 100000.00
  • Medical Treatment of Specified Diseases for Super Senior Citizen(For more than 80 years old and more)

Section: 80U

A Self-suffering individual from a Disability who has 40% disability or 80% disability can claim tax exemption under section 80U.

  • Suffering from Physical Disability(Individual suffering from a physical disability including blindness or mental retardation): Rs. 75000.00
  • Suffering from severe physical disability: Rs. 125000.00

What is the difference between Indirect TAX and Direct Tax?

Direct Tax

  • Direct taxes are non-transferable tax which taxpayer need to pay to the government.
  • Direct taxes are imposed on profits or income.
  • In Direct Tax, the tax rate will vary on the basis of the income of the individual or corporate.

Eg: Income Tax.

Indirect Tax

  • Indirect taxes are transferable taxes where the liability to pay will shift from one payer to another.
  • Indirect taxes are levied on services and goods.
  • Indirect taxes depend on the profit margin on the transition. The remaining Tax payment responsibility will transfer from the intermediary to the end consumer of the goods and service.
  • Indirect tax, the percentage rate will be the same for everyone.

Eg: GST.

Various kinds of income taxes?

Generally, people think only about the direct taxes, which deducted as TDS from the salary, or the GST which pay during the purchase of goods and services. Tax can be categorized into 3 types.

  • Wealth Tax.
  • Corporate Tax.
  • Capital Gains Tax.

In General, the income tax needs to pay every year to the government for every income which an individual or a corporate earned in a financial year, as per the rate of income slab of the taxpayer. On the basis of the type of income, taxpayers need to file different types of income tax returns to get their returns assessed. After the assessment, the IT department will refund the additional amount if any excess amount paid in advance as tax to the government.

Wealth Tax

Wealth tax is a direct tax. This tax needs to pay for any income from the property, earnings, etc. Wealth tax is levied on companies and individuals on the basis of their income. HUF (Hindu Undivided Families) are also liable to pay tax the wealth tax as per their residential status.

Corporate Tax

Corporate tax is the tax that domestic companies or international corporate organizations need to pay to the government on their business profits. The foreign companies which earn income in India are required to pay corporate tax in India. The corporate tax also includes other tax types such as STT (Securities Transaction Tax) etc.

Capital Gains Tax

The capital gains tax is imposed on any income that is derived from the sale of capital investments or assets such as property, machinery, businesses, cars, art, bonds, and shares, etc. Capital gains tax applies to businesses as well as individuals in India. It is divided into two categorize such as short-term capital gains (STCG) tax or long-term capital gains (LTCG) tax on the basis of how long investment or asset held before the sale and book profit.

Less than 1 year is considered as short term and more than 1 year is considered the as long term capital gain.

Who should benefit from taxes?

 

The benefit of Taxes is more for the tax pair,  family’s and our neighbors, as our tax amount, is utilized by the government for the development of the society like infrastructure development, roads, schools, hospitals, etc. No matter the size of income, if it is above the taxable slab, one needs to pay the tax to the government as per the tax rates for the functioning of government bodies for the betterment of society.

How to save Tax legally?

There are many ways, an individual can save some amount of tax, for the betterment of themself or for the family.

  • Invest gifted money directly into tax-free instruments, which helps to avoid tax for the gain from it.
  • Invest the amount in the name of adult children who don’t have any other source of income.
  • If invested in the name of parents, it will not club to the tax pair income.

Conclusion:

As tax is the main source of income for the government to run the functionality of the government, it is the duty of every citizen or the corporate to pay the tax in time as per the income tax slab, which they come in. As the government is providing many tax-saving facilities for the betterment of the individual life, make sure to utilize the schemes and file the tax judicially to get that amount exempted from the tax. For salaried newbie earners, it is ideal to start with the investment instruments which come under section 80C of the Income Tax Act of 1961.

Thanks & Regards.

Harry.

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Harry
Harry J P is a Business development and sales professional passionate about sharing knowledge in the domain of sales, and personal finance which helps in Personal financial learning for newbie earners. This blog came out of the experiences in the domain of personal finance, business development, and the share market.

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