Taxonomy

Are you searching for ways to save on taxes? If so, you would have probably encountered the terms ‘tax deduction’ and ‘tax exemption.’ While they might seem similar at first glance, they’re quite distinct from each other, both stemming from the Income Tax Act of 1961 provisions. 

Many people find these terms confusing and opt to have their accountants, parents, or friends handle their tax filing. However, understanding these terms is crucial for maximizing the benefits of available schemes and policies. This article aims to clarify the difference between tax deductions and tax exemptions, their impact on taxes, and what investors can keep in mind.

What are Tax Deductions?

Tax deductions refer to specific investments and expenses that individuals can subtract from their taxable income, thereby reducing it. These deductions serve as incentives to promote retirement planning and foster long-term financial stability among taxpayers. Using a tax calculator also helps to find the deductions.

For example, if your total income is Rs. 10,00,000 and you’ve invested Rs. 1,50,000 in eligible instruments under Section 80C, then your taxable income would be reduced to Rs. 8,50,000.

Various sections of the Income Tax Act of 1961 offer avenues for tax deductions. Here’s a glimpse:

• Section 80C: Investments in schemes like the Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS), home loan principal repayments, and more, up to Rs. 1.5 lakhs annually, are deductible from taxable income. This is in addition to the standard deduction of Rs. 50,000 available to all taxpayers.
• Section 80D: Premiums paid for health insurance, ranging from Rs. 25,000 to Rs. 1 lakh, are tax deductible, along with other deductions for specified treatments.
• Section 80E: Interest paid on education and housing loans for first-time buyers can be deducted from taxable income, encouraging education and domestic real estate investment.
• Section 80G: Contributions to social causes and political parties are eligible for tax deductions, supporting charitable initiatives and social welfare activities.
• Section 80TTA: Interest income from savings accounts, up to Rs. 10,000, can be deducted from taxable income.

What are Tax Exemptions?

Tax exemptions refer to tax-free portions of one’s income, requiring no additional spending or investment to qualify for the exemption. These exemptions play a crucial role in reducing the overall tax burden for individuals.

Here are some examples of tax exemptions:

• Long-Term Capital Gains: Equity mutual funds’ LTCG is exempt from taxation up to a limit of Rs. 1 lakh per annum.
• Housing Rent Allowance (HRA): Part of an employee’s salary, HRA is exempt from income tax if the employee lives in a rented house.
• Leave Travel Allowance (LTA): Some employers provide LTA, which can be used for traveling during leaves. This exemption can be availed of once in four years.
• Agricultural Income: All agricultural income in India is exempt from taxation. This exemption is crucial as agriculture is the primary source of income for a large part of rural India, and the country is heavily dependent on it for food security.
• Lowest Income Tax Slab: An income of Rs. 5 lakhs and below is completely exempt from income tax. For instance, if one has an income of Rs. 7 lakhs, only Rs. 2 lakhs is taxable.

A tax calculator can help individuals assess their tax liability more accurately by factoring in exemptions and deductions. Understanding these exemptions is essential for taxpayers to optimize their tax planning and minimize their tax burden legally and ethically.

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What is the Difference Between Exemptions vs. Deductions?

Here’s a table highlighting the key differences between exemptions and deductions in taxable income in India:

This table should provide a clear overview of the distinctions between exemptions and deductions in taxable income in India. In conclusion, understanding the difference between exemptions and deductions is crucial for taxpayers in India to optimize their tax liabilities. By using a tax calculator and leveraging these provisions effectively, investors and individuals can minimize their tax burdens and enhance their financial planning. 

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considerea d as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

In India, the government offers two income tax regimes: the old tax slab and the new tax slab. 

While the new tax regime introduced in the 2020 budget features lower tax rates with no deductions, the old tax regime continues to entice taxpayers with its numerous deductions and exemptions.

This choice and flexibility with the new vs old tax regime allows you to choose a tax regime that benefits you the most based on your financial situation, investments, and spending pattern.

This blog delves deep into the old tax regime, outlining its tax slabs and exploring the various tax-saving opportunities it presents.

Old Regime Tax Slabs: Income and Tax Rates

The old tax regime’s structure is meticulously designed to cater to individuals across different age groups, offering three distinct categories: general taxpayers (individuals below 60 years), senior citizens (aged 60 years but below 80 years), and super senior citizens (aged 80 years and above). 

Here’s a detailed breakdown of the tax slabs in the old regime:

Note: Health and Education cess of 4% is levied on the income tax amount, along with surcharges applicable to incomes exceeding ₹50 lakhs.

Standard Deduction Under the Old Regime Tax Slab

Introduced in Budget 2018, the standard deduction replaced the transport allowance and medical reimbursement, simplifying tax calculations for salaried employees and pensioners.

The standard deduction under the old tax regime offered a flat deduction of ₹50,000 for salaried employees and pensioners, providing relief without the need to prove any expenses. 

This deduction directly reduces taxable income, enhancing the take-home pay of eligible individuals.

What are Surcharges in the Old Regime Tax Slab? What are the Surcharge Rates?

In India’s tax system, surcharges are additional taxes imposed on incomes above specific thresholds, making the tax system more progressive. This means that those with higher incomes must pay more taxes than those with lower incomes. 

These are calculated before the Health and Education Cess of 4%.

What are Rebates in the Old Tax Regime Slab?

In the old tax regime, a rebate under Section 87A allows you to receive a rebate, or equivalent, of up to  ₹12,500 if your net taxable income is up to ₹5,00,000. 

This can reduce your tax liability to zero. 

Tax rebates provide significant relief to low-income earners and make taxation more equitable.

*Remember, a rebate is applicable on your taxable income only when it is less than 5 lakhs in the old regime and 7 lakhs in the new regime. Anything above this threshold and the rebate under section 87A is no longer available.

Tax Saving Opportunities in the Old Tax Slabs 

Tax Deductions Under the Old Tax Regime Slab

Tax deductions are expenses or investments that can be subtracted from gross total income to reduce the overall taxable income and, thus, the tax liability.

Below are some key sections under which deductions can be claimed:

Section 80C Deductions

Under the old tax regime, Section 80C is one of the most vital tax-saving incentives. You can claim a deduction of up to ₹1.5 lakhs on listed investments and expenses.

This section provides details of tax-saving options that can be useful for your future financial plans.   

Note: Under Section 80C, the total combined deduction from all the above investments cannot exceed ₹1.5 lakhs.

Home Loan Tax Benefit

If you are an aspiring homeowner, you are eligible for various deductions related to home loans with the old tax regime slabs. 

Here are some details of the tax-saving options under this criteria.   

Note: Deduction limits are applicable only when specific conditions under the categories are met.

Section 80TTA Deductions

Section 80TTA under the old tax regime provides individuals and Hindu Undivided Families (HUFs) in India with a deduction on interest income earned from eligible sources. 

Here are some details of the tax-saving options under this section that you can choose to avail yourself of.

Note: Deduction limits are applicable only per individual or HUF, not per account.

Section 80D Deductions

Section 80D under the old tax regime provides individuals and Hindu Undivided Families (HUFs) in India with a deduction on Medical insurance premiums. 

Here are some details of the tax-saving options that you can avail of under this section.

Section 80E Deductions

Section 80E under the old tax regime provides a limitless tax exemption on the interest paid on your children’s education loans. Here,  either of the parents repaying the loan can avail of this taxation exemption.

Section 80G

Section 80G of the Income Tax Act allows deductions for donations made to specified charitable organizations, offering taxpayers the opportunity to reduce their taxable income while contributing to social causes.

Tax Exemptions

Exemptions are allowances offered on specific components of an individual’s income, which are not subject to tax, thereby reducing the taxable income.

House Rent Allowance

If you are a renter, the House Rent Allowance provides tax benefits on submission of valid rent receipts. Under the old tax regime, exemption depends on the salary, rent paid, and HRA received. 

The exemption depends on the least of the following:

• Actual HRA received.
• 50% of basic salary (for metros) or 40% (for non-metros).
• Rent is paid minus 10% of the basic salary.

If your annual rent is over ₹1 Lakh, you will need the landlord’s PAN. 

Leave Travel Allowance (LTA)

Exemption for travel expenses (not accommodation or food) to any destination in India twice in a block of four years.

Conclusion

The old tax regime, with its detailed tax slabs and many tax-saving opportunities, offers a significant advantage in efficiently planning taxes. 

By understanding and utilizing the deductions, exemptions, and rebates available with old tax regime slabs, you can significantly reduce your tax liability, making an informed choice crucial for your financial well-being.

FAQs on Old Tax Regime

Wondering what is professional tax? Are you earning an income from a salary in India? Are you a practicing professional like a lawyer, doctor, or chartered accountant? If yes, then you must pay Professional Tax in India.

Professional tax stands out as a unique component in India’s complex taxation tapestry. It is a tax levied by state governments. 

Despite its name, professional tax return filing is not just confined to professions but extends to all trades and employment. 

This blog aims to demystify what Professional Tax is, outlining its rates, due dates, compliance requirements, and eligibility criteria.

What is Professional Tax?

Professional tax is a direct tax levied by state governments on the income earned by individuals working in government or non-government entities or practicing professionals such as lawyers, doctors, and chartered accountants. 

The maximum amount that can be levied as professional income tax is ₹2,500 per annum, as per the Constitution of India. It is important to note that not all states impose professional tax.. It varies from state to state based on the respective state government’s legislation.

Eligibility Criteria for Professional Income Tax

The eligibility for professional tax is determined by the income threshold set by the respective state governments. If you are earning above a certain amount specified by the state’s legislation, you are required to pay this tax. 

Professional tax will be applicable if you belong to any one of the following:

• Employees with fixed annual salaries
• Self-employed individuals like part-time earners or freelancers
• All professionals, like lawyers, architects, chartered accountants, or doctors
• Pensioners 

How is Professional Tax Calculated?

1. Understanding Professional Tax Slabs for Different Salary Brackets

Professional tax is calculated based on the salary brackets defined by each state. For instance:

• Karnataka: Rs. 200/month for salaries above Rs. 15,000.
• Maharashtra: Rs. 200/month for 11 months and Rs. 300 in the last month for salaries above Rs. 10,000.

2. Example Calculation of Professional Tax Deduction

Let’s say an individual earns Rs. 20,000 per month in Maharashtra:

• Professional tax deduction: Rs. 200 for 11 months + Rs. 300 for the 12th month.
• Annual professional tax: Rs. 2,500.

3. Factors That Impact Professional Tax Amount

• State-specific slabs and rates.
• Type of employment (salaried or self-employed).
• Applicable exemptions (e.g., physical disability).

Professional Tax Deduction: Benefits and Compliance

1. Benefits of Professional Tax Deduction for Employees

• Tax Benefits: Professional tax is eligible for income tax deductions under Section 16 of the Income Tax Act.
• Compliance Advantage: Ensures compliance with state laws, avoiding penalties.

2. Importance of Timely Compliance by Employers

Employers must deduct and remit professional tax on time to avoid penalties and maintain their credibility.

3. Penalties for Non-Payment or Late Payment of Professional Tax

Failure to comply can result in penalties, often calculated as a percentage of the unpaid amount, along with interest.

States With and Without Professional Income Tax

List of Some State-Wise Professional Income Tax Slabs

It’s important to note that these slabs are subject to change based on the state government’s policies.

Who Should Collect and File the Professional Tax Returns?

The maximum amount anyone is liable to pay when it comes to Professional Tax is ₹2500 per year, regardless of which Indian state you are a resident of.. The responsibility for professional tax return filing varies:

• Employers: If you are a salaried employee, then your employer must deduct the Professional Tax from your salary and deposit it with the state government. 
• Individual Professionals: If you are practicing law, medicine, or accountancy, you must directly file professional tax returns with the state government based on the slabs applicable to your earnings.
• Business Owners: If you are a sole proprietor and business owner (partnership firm, corporate), pay professional tax on your earnings, in addition to collecting and depositing the tax for your employees.

In this scenario, the business owner is required to secure two types of certificates: one for paying professional tax on their business activities, known as a professional tax registration certificate, and another, a professional tax enrollment certificate, which authorizes them to withhold the tax from their employees’ salaries and remit it. Additionally, the laws of the particular state may necessitate individual registrations for each branch of the business.

Professional Tax Return Filing: Compliance and Due Dates

Statewise Due Dates ?

Compliance

Compliance with professional tax regulations involves timely deductions and payments to the state government. 

Employers must obtain a registration certificate from the professional tax office when they employ staff, and they are required to file returns – monthly, quarterly, or annually, depending on the state’s regulations.

Failure to comply with professional tax regulations can lead to a penalty of up to 2% of the tax amount due to be paid.  Therefore, both employers and professionals must stay informed about the due dates and compliance requirements in their respective states.

All About Professional Tax Return Filing

• The applicability of professional tax is based on the state of profession, employment, or trade.
• Each state that implies professional tax also follows a strict payment deadline. Failure to comply with the same can result in penalties. 
• You require proper identification documents and company documents as an employer to complete professional tax return filing. These can be documents like your PAN Card, Aadhar, bank statements, address proof like utility bills,  etc.
• Professional tax can be paid online if your state offers an online portal or website. States like Tamil Nadu, Karnataka, Maharashtra, West Bengal, etc., offer dedicated online portals.  If this option is unavailable in your state, you can pay the same offline in your state.  

Exemptions for Professional Tax Return

The professional tax is applicable to all income earners. However, there are some exemptions in this category, and they are as follows. 

• An employee or working professional who is 40% mentally or physically challenged 
• Factory workers hired on a contractual basis. 
• Any income earner above the age of 60.
• Any worker in government bodies like the Army, Navy, Air Force, etc. 
• Workers from any union territory. 
• Female employees with a specific limit of monthly income. However, this is an individual decision of each state that applies professional tax. 

Conclusion 

Professional tax, impacts individuals and businesses. 

Understanding how it works, what rates apply to you, when you need to make your payments and the subsequent penalties regarding late payments and professional tax return filing is essential for everyone subject to this tax. 

Since professional tax is governed by state legislation, it is important to be aware of the specific rules and regulations applicable in each state. Staying compliant not only contributes to the state’s revenue but also ensures avoidance of any legal repercussions.

To reduce your tax liability in other tax brackets, like capital gains tax, consulting a SEBI-registered advisory can help. You will get professional guidance on which long-term stocks to buy and how to manage them with detailed reports for better financial independence.

FAQs on Professional Tax

With the financial year ending, do you fear the upcoming tax season? Do you find yourself struggling to calculate your tax liability? Do you wish a magic tool could do this task for you? Well, there is! A tax calculator is a tool that allows you to estimate your taxes based on your income, deductions, and exemptions. Sounds interesting, right? 

But wait, there is a catch. A tax calculator is only as useful when you give the right inputs. If you make some common mistakes when estimating your taxes, you might get a nasty surprise when you file your return. 

Do you know that filing incorrect tax returns can result in severe penalties such as imprisonment? Yes, you heard me correctly! That is why you should exercise caution and avoid making these common mistakes when using tax calculators.

What is a Tax Calculator?

Tax Calculator is an online tool that helps you calculate your net income and tax liability after taking into account various deductions, exemptions, and rebates available under the Income Tax Act. You can use this tool to plan your investments and savings and optimize your tax outgo.

Inputs Required in A Tax Calculator

Some of the common inputs are:

Basic details: Your age, residential status, financial year, and assessment year. These details help determine your applicable tax slab and rates.

Income details: Your income from various sources, such as salary, house property, capital gains, business or profession, and other sources. These details help calculate your gross total income.

Exemptions: The income exempt from tax, such as HRA, LTA, EPF, gratuity, etc. These details help reduce your taxable income.

Deductions: The amount of investments or expenses eligible for tax deduction, such as 80C, 80D, 80G, 80E, 80TTA, etc. These details help lower your tax liability.

Tax credits: The amount of tax already paid or deducted, such as TDS, TCS, advance tax, self-assessment tax, etc. These details help adjust your final tax payable or refundable.

How to use a tax calculator correctly?

Here are some tips on how to use a tax calculator properly:

1. Choose a tax calculator that suits your needs

You can choose a tax calculator based on the complexity of your income calculations.  For example, if you are self-employed, you might want to use a specialized tax calculator that can handle your business income and expenses.

If you only have salary income, you might prefer a simple tax calculator that only asks for your basic information.

2. Enter your information carefully and completely

The utility of a tax calculator is limited to the data you enter. Make sure to enter your income, deductions, and loans accurately and honestly. 

Don’t forget to include any additional sources of income you may have, such as interest, dividends capital gains etc. Also, don’t miss out on any loan obligations you have.

3. Check the results for errors or inconsistencies

A tax estimator can help you estimate your tax liability, but it is not a substitute for professional tax consultants. 

You should always review and compare the results to previous tax returns, pay slips, and bank statements.

Common sources of income and deductions that people miss or miscalculate

Here are some of the most common sources of income and deductions that people miss or miscalculate:

Self-employment income 

You may be working as a freelancer, contractor, or consultant, you need to report your self-employment income and pay self-employment tax on it. You also need to deduct your business expenses, such as equipment, supplies, travel, or home office. 

However, many people either forget to include their self-employment income, or overstate or understate their business expenses, which can result in paying too much or too little tax.

Capital gains 

If you sell any assets, such as stocks, bonds, or property, you need to report your capital gains or losses on your tax return. You also need to distinguish between short-term and long-term capital gains, which are taxed at different rates. 

However, many people either fail to report their capital gains, or mix up the holding periods, which can lead to paying the wrong amount of tax.

Alimony 

If you pay or receive alimony as part of a divorce or separation agreement, you need to report it on your tax return. The payer can deduct the alimony payments, while the recipient must include them as income. 

However, many people either neglect to report their alimony, or confuse it with child support, which is not taxable or deductible, which can cause tax problems for both parties.

Charitable donations

If you make any donations to qualified charitable organizations, you can deduct them from your taxable income. You need to keep track of your donations and provide proof of them when filing your tax return. 

However, many people either forget to keep receipts of their donations or claim more than the actual amount they donated, which can result in overstating their deductions and underpaying their taxes.

Tax Blunders: How to Avoid the Top 5 Pitfalls of Tax Estimation

Here are the top five tax blunders that you should avoid at all costs:

1. Not choosing the right tax regime

The government has introduced two tax regimes – the old one with higher tax rates but more deductions and exemptions, and the new one with lower tax rates but fewer deductions and exemptions.

Don’t blindly follow the new regime just because it has lower rates, or stick to the old one just because you are used to it. Choose wisely and save more.

2. Not declaring all your income sources 

You might have income from various sources, such as salary, house property, capital gains, business or profession, and other sources. You need to declare all of them in your tax return, even if they are exempt or below the taxable limit.

If you fail to do so, you might face penalties and interest for under-reporting or concealing your income. Don’t fall into this trap and be honest and transparent.

3. Not claiming all your deductions and exemptions 

You might be eligible for various deductions and exemptions that can reduce your taxable income and tax liability. These include investments under section 80C, health insurance premiums under section 80D, donations under section 80G, education loan interest under section 80E, and many more. 

You need to claim them in your tax return and provide the relevant proofs and documents. Don’t miss out on any of these tax-saving opportunities, make the most of them.

4. Not paying advance tax on time

You need to pay advance tax if your tax liability exceeds Rs. 10,000 in a year, and you don’t have enough TDS or TCS deducted from your income. 

You need to pay advance tax in four instalments – 15% by June 15, 45% by September 15, 75% by December 15, and 100% by March 15. 

If you fail to pay advance tax on time, you might have to pay interest and penalty for late payment of tax. So, be punctual and disciplined.

5. Not verifying your tax return and refund status 

After filing your tax return, you must verify it either online or offline within 120 days of filing. If you do not verify your tax return, the tax department will not process it, and you will not receive a refund or acknowledgment.

You should also check the status of your refund online to see if there are any discrepancies or delays. If there is an issue, you must contact the tax department to resolve it. Do not ignore your tax return or refund status; instead, be proactive and vigilant. 

The Bottom Line

Tax estimation is a crucial but challenging task for taxpayers, especially those with multiple income sources, deductions, and exemptions. Many common mistakes can lead to inaccurate tax estimation, resulting in penalties, interest, or refunds from the tax authorities. 

A tax calculator can help you avoid common mistakes in tax estimation by providing a clear and comprehensive breakdown of your income, deductions, and tax payable. 

It can also help you compare different scenarios under both tax regimes and optimize your tax savings. By using a tax calculator, you can ensure that you pay the right amount of tax at the right time, and avoid any hassles or surprises later.

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*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considerea d as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

Income tax in India represents a significant aspect of the country’s financial structure, influencing the economy and the individual taxpayer. Income tax payment is a financial and legal obligation in India under the 1961 Income Tax Act.

This complex system, governed by various laws and regulations, requires a thorough understanding to navigate effectively. Whether it’s details about the different income sources or tax-saving investments, such as tax-free bonds, taxpayers must provide financial information through Income Tax Returns (ITR) every year.

Having a clear understanding of income tax and tax filing is vital for meeting legal obligations and optimizing your finances. But what exactly is Income tax, and how is it charged?

What is Income Tax?

Income Tax Meaning: A Simplified Explanation

Income tax is a direct tax levied by the government on the income earned by individuals, corporations, and other entities. It is a key revenue source for the government, ensuring the availability of funds for public services and national development.

What is Taxation and Its Role in Economic Stability

Taxation refers to the system by which governments collect revenue from citizens and businesses to fund public expenditures. It ensures economic stability by reducing income inequalities and financing essential services.

Key Objectives of Income Tax in a Country’s Economy

• Funding government initiatives and public services.
• Reducing income disparity through progressive tax structures.
• Promoting savings and investments via tax deductions and incentives.

Types of Income Tax

1. Individual Income Tax: Salaries and Other Personal Earnings

This applies to income individuals earn, such as salaries, freelance income, and other personal earnings.

2. Corporate Income Tax: Tax on Business Profits

Levied on the net income or profit of corporations.

3. Capital Gains Tax: Tax on Investments and Assets

Applies to profits from selling assets like stocks, real estate, or mutual funds.

4. Other Specialized Taxes (e.g., Property Income, Dividends)

Includes taxes on rental income, dividends, and other non-salary earnings.

About the Income Tax Department, India 

The Income Tax Department is a government agency tasked with overseeing the implementation of the Income Tax Act, collecting taxes, and enforcing compliance. 

It operates under the Department of Revenue in the Ministry of Finance and plays a critical role in the nation’s economic management.

 Income Tax Act of 1961 

The Income Tax Act of 1961 is the cornerstone legislation that governs income tax in India. It provides a comprehensive legal framework covering all aspects of taxation, from income definition and tax liability to penalties for evasion. Regular amendments to the Act ensure its relevance and effectiveness in the contemporary economic landscape. 

 Income Tax Return (ITR) 

An Income Tax Return (ITR) is a form taxpayers use to declare their income, expenses, tax deductions, and taxes paid during a financial year. 

Income tax filing is mandatory for individuals and entities that meet certain income criteria, and it also serves as a vital document for various financial applications.

The tax rates and slabs for income tax payment may vary, depending on the nature of income and the taxpayer’s category, making it imperative for taxpayers to stay updated with the latest tax regulations. The submission of ITR by the due dates assigned is mandatory. It is not only to report your income but also to claim applicable tax refunds, if any.

 e-Filing Income Tax 

E-filing is submitting income tax returns online through the Income Tax Department’s official website. It offers taxpayers convenience, efficiency, and security, along with instant acknowledgment of submission. 

The government has greatly encouraged the process, with numerous facilities providing easy compliance.

Income Tax Rules in India

1. Understanding Tax Slabs and Rates for Individuals

India follows a progressive tax structure with varying slabs based on income levels. For example:

• Old Regime: ₹2.5 lakh exemption for individuals below 60 years.
• New Regime: ₹3 lakh exemption for all taxpayers.

2. Differences Between Old and New Income Tax Regimes

• Old Regime: Allows deductions under sections like 80C, 80D.
• New Regime: Lower tax rates but limited deductions.

3. Tax Exemptions, Deductions, and Rebates

Examples include Section 80C for investments and Section 80D for medical insurance.

How is Income Tax Calculated?

1. Income Tax Computation Formula: Total Income x Applicable Tax Rate

The formula involves determining total taxable income and applying the relevant tax rate.

2. Step-by-Step Example of Income Tax Calculation on Salary

Example: If an individual earns ₹10 lakh annually under the new regime:

• Deduct exemptions (e.g., standard deduction of ₹50,000).
• Apply the appropriate tax slab rate.

3. Importance of Declaring Exemptions and Deductions

Proper declaration minimizes tax liabilities and ensures compliance.

Income Tax on Salary: What You Need to Know

1. Components of Salary Considered for Taxation

Basic salary, allowances, and perquisites are subject to tax, but house rent allowance (HRA) and leave travel allowance (LTA) may be exempt.

2. How to Minimize Tax Liabilities With Deductions

Sections like 80C, 80D, and 24(b) can help reduce taxable income.

3. Employer’s Role in Deducting Tax at Source (TDS)

Employers deduct TDS based on income and provide Form 16 for tax filing.

Who is Eligible for Income Tax Payment?

All Individuals earning over ₹2.5 lakhs annually for the old tax regime and ₹3 lakhs annually for the new tax regime are eligible for Income Tax payment.

These include the following taxpayer types:

• Individuals under 60 years
• Individuals between the ages of 60 and 80 years
• Individuals aged over 80 years
• Hindu Undivided Family (HUF)
• Association of Persons (AOP)
• Artificial Juridical Person (An Assessee who does not fall under any of the other categories included in the definition of Person)
• Firms
• Companies

Income Tax Forms 

Income Tax Payment Details 

Income tax payments can be made both offline and online, with various options available for different taxpayer categories. 

Advance tax, self-assessment tax, and TDS (Tax Deducted at Source) are some methods through which the government collects taxes.

Common Mistakes to Avoid in Income Tax Filing

1. Failing to Declare All Sources of Income

It is imperative to report all streams of income, encompassing but not limited to interest, dividends, rental income, and freelance earnings. Neglecting to disclose any source of income can trigger penalties and legal repercussions. Deliberately concealing income sources is a violation of the law and can result in severe consequences, including potential criminal charges and substantial fines.

2. Not Utilizing Available Deductions and Exemptions

Taxpayers are entitled to various deductions and exemptions that can significantly reduce their tax liability. Failing to claim these eligible deductions and exemptions can lead to overpayment of taxes. It is crucial to be aware of the deductions and exemptions available and ensure they are accurately claimed on the tax return. By not availing themselves of these legitimate tax benefits, individuals may end up with a higher tax outgo than necessary.

3. Filing Returns Late or Providing Incomplete Details

Adhering to tax deadlines is essential. Submitting tax returns after the due date can attract penalties and interest charges. Additionally, providing incomplete or inaccurate information on the tax return can lead to further complications. Manual entry of data increases the risk of errors, potentially resulting in miscalculations and tax discrepancies. These issues can trigger audits, investigations, and additional financial burdens.

Quick Guide for Income Tax Filing Online 

Filing an ITR online involves a streamlined process accessible through the E-filing portal. Here’s a concise guide to income tax online payment:

1. Access the Portal: Visit the official Income Tax E-filing website and log in using your PAN as User ID, password, and captcha code.
2. Navigate to the E-File Menu: Select ‘Income Tax Return’ under the ‘E-File’ menu to proceed to the Income Tax Return page.
3. Enter Details: Your PAN is auto-filled. Specify the Assessment Year, ITR Form Number, and Filing Type, and choose ‘Prepare and Submit Online’ as the Submission Mode.
4. Filing Mode: Select ‘Online’ as the mode of filing and click on ‘Proceed.’
5. Select Status: Choose the applicable status – Individual, Hindu Undivided Family (HUF), or Firm/LLP
6. Choose ITR Form: Opt from ITR 1 to ITR 4 for E-filing.
7. Fill Sections: Provide the necessary information as required for each of the forms.
8. Review Summary: The website will display a tax computation summary. After reviewing, enter residence details and click ‘Submit’.
9. Verification: Choose a verification method (E-Verify now, E-Verify later, or send ITR-V to CPC Bengaluru) and complete the process with an EVC or OTP.
10. Submit ITR: Finalize your income tax online payment submission. An acknowledgment will be sent to your email.

Conclusion 

Understanding what income tax is and the importance of income tax filing and its implications is crucial. This legal obligation is vital in maximizing your finances legally. 

Moreover, if you’d like to reduce your tax liability when it comes to investments in direct equity and maximize your finances, consulting a SEBI-registered investment advisory can help.These services can offer personalized portfolio management services like quality advice for your direct equity investments to help you make sound financial decisions catered to your unique preferences.

FAQs on Income Tax

Filing Income Tax Returns (ITR) online has become a streamlined and straightforward process in India, thanks to the digital initiatives of the Income Tax Department. E-filing of income tax not only saves time but also ensures accuracy and quick processing of tax returns.

Whether you are a seasoned taxpayer or new to the concept, understanding how to file ITR returns online is crucial to complying with the country’s tax laws.

What is Income Tax Return (ITR) Filing in India?

ITR filing in India is when a person declares their income, deductions, and tax payments for a particular financial year. It is a mandatory exercise for anyone earning a certain level of income, and it helps the government assess the tax liability of an individual or entity. 

E-filing of income tax is not only about paying taxes; it also serves as an important document for availing loans, visas, and other financial services. You can also read more about the concept of taxation with our blog.

Also Read: How to pay less tax.

Documents Required For Income Tax E-Filing

Before you begin income tax e-filing, ensure you have the following documents ready:

• PAN (Permanent Account Number)
• Aadhaar Card
• Bank account details
• Form 16 (if employed)
• Proof of investments and savings
• Details of income from other sources (if any)
• Previous year’s tax returns

Which ITR Form Should You Choose for E-filing of Income Tax?

The Income Tax Department has designated different forms for different categories of taxpayers:

• ITR-1 (Sahaj): This form is for individuals earning income from salaries, one-house property, and other sources (interest, etc.) and having a total income of up to ₹50 lakhs.
• ITR-2: For individuals and HUFs not carrying out business or profession under any proprietorship.
• ITR-3: For individuals and HUFs having income from a proprietary business or profession.
• ITR-4 (Sugam): For presumptive (assumed) income from business & profession without actual estimation of net income 

Choose the form that best suits your income structure.

How To File Income Tax Returns Online?

Step 1 :

• Navigate to the official Income Tax E-filing portal. 

Step 2:

• Log in by entering the required details for:

• Your User ID or PAN
• Your Password
• Captcha code

• Once you are done, navigate to the ‘E-File’ menu and click the ‘Income Tax Return’ option.
• This should redirect you to the main Income Tax Return page. 

Step 3:

• The PAN will be auto-filled on the Income Tax Return page.
• You will need to provide the following details:

• Assessment Year. (This is the financial year that follows the financial year in which your income was earned)
• Income Tax Return Form Number. ( Filing of ITR 1 and ITR 4 can be done online)
• Filing Type. 
• Submission Mode. (The option of ‘Prepare and Submit Online is available here)

Step 4:

• Click on ‘Continue’.
• Navigate to the ‘Mode of Filing’.
• Select ‘Online’ from the drop-down menu.
• Click on ‘Proceed’.

Step 5:

• Click on ‘Status’
• Select Individual, Hindu Undivided Family (HUF), or Firm/LPP depending on what is applicable.

Step 6:

• Select the required Income Tax Return Form. (ITR 1 and ITR 4 are available for E-filing).

Step 7:

• If ITR 1 is selected, you must  complete the five following sections:

Step 8:

• If ITR 4 is selected, you must complete six sections, out of which five remain the same as above. 

Step 9:

• A summary of the tax computation for the current financial year will be provided to you on the screen.
• This summary is based on the information you provided earlier. 
• The webpage will calculate your tax amount, determining whether you owe tax or if you are eligible for a tax refund. 
• Once done with previewing, enter the details of your residence. 
• Click on ‘Submit’ 

Step 10:

• Click on the ‘Proceed to Validation’ option.
• The following verification options can be selected to verify the Income Tax Return:

• E-Verify.
• E-Verify later within 120 days from the date of filing.
• E-Verify via ITR-V through regular or speed post within 120 days from the filing date. ( Addressed to Centralised Processing Center, Income Tax Department, Bengaluru – 560 500 )
• If you choose the self-e-verification option, an Electronic Verification Code (EVC) or One-time Password (OTP) must be generated to complete the process. 
• It can be done in the following ways:
• Generation of Electronic Verification Code (EVC) through the taxpayer’s bank ATM. 
• Generation of One-time Password (OTP) through Aadhar Card.
• Using a pre-validated bank account.
• Using a pre-validated Demat account.

• If you choose the option of self-e-verification, a copy of the ITR form must be sent to CPC Bengaluru at the address mentioned in the form. 
• Verify the details and click on ‘Preview and Submit.’

Step 11:

• Click on ‘Submit’ to submit the Income Tax Return.
• An acknowledgment will be sent to the email ID you submitted.

Conclusion

E-filing income tax is a significant step towards financial responsibility and compliance with Indian tax laws. Although the process is detailed, the Income Tax Department’s user-friendly portal and comprehensive instructions make it easy. 

Remember, timely income tax e-filing not only helps avoid penalties but also aids in faster processing of refunds, if any. The online filing process can be completed smoothly and efficiently with the right documents and a clear understanding of the applicable ITR form.

Optimal financial planning and understanding the details of new vs old tax regimes are crucial for making the most out of the deductibles in the ITR. You can read our blogs to learn more about portfolio management and stock market advisory.

Frequently Asked Questions

Are you searching for ways to save on taxes? If so, you would have probably encountered the terms ‘tax deduction’ and ‘tax exemption.’ While they might seem similar at first glance, they’re quite distinct from each other, both stemming from the provisions of the Income Tax Act of 1961. 

Many people find these terms confusing and opt to have their accountants, parents, or friends handle their tax filing. However, understanding these terms is crucial for maximizing the benefits of available schemes and policies. This article aims to clarify the difference between tax deductions and tax exemptions, their impact on taxes, and what investors can keep in mind.

What are Tax Deductions?

Tax deductions refer to specific investments and expenses that individuals can subtract from their taxable income, thereby reducing it. These deductions serve as incentives to promote retirement planning and foster long-term financial stability among taxpayers. Using a tax calculator also helps to find the deductions.

For example, if your total income is Rs. 10,00,000 and you’ve invested Rs. 1,50,000 in eligible instruments under Section 80C, your taxable income would be reduced to Rs. 8,50,000.

Various sections of the Income Tax Act of 1961 offer avenues for tax deductions. Here’s a glimpse:

• Section 80C: Investments in schemes like the Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS), home loan principal repayments, and more, up to Rs. 1.5 lakhs annually, are deductible from taxable income. This is in addition to the standard deduction of Rs. 50,000 available to all taxpayers.
• Section 80D: Premiums paid for health insurance, ranging from Rs. 25,000 to Rs. 1 lakh, are tax deductible, along with other deductions for specified treatments.
• Section 80E: Interest paid on education and housing loans for first-time buyers can be deducted from taxable income, encouraging education and domestic real estate investment.
• Section 80G: Contributions to social causes and political parties are eligible for tax deductions, supporting charitable initiatives and social welfare activities.
• Section 80TTA: Interest income from savings accounts, up to Rs. 10,000, can be deducted from taxable income.

What are Tax Exemptions?

Tax exemptions refer to tax-free portions of one’s income, requiring no additional spending or investment to qualify for the exemption. They play a crucial role in reducing the overall tax burden for individuals.

Here are some examples of tax exemptions:

• Long-Term Capital Gains: Equity mutual funds’ LTCG is exempt from taxation up to a limit of Rs. 1 lakh per annum.
• Housing Rent Allowance (HRA): This is part of an employee’s salary and is exempt from income tax if the employee lives in a rented house.
• Leave Travel Allowance (LTA): Some employers provide LTA, which can be used for traveling during leaves. This exemption can be used once every four years.
• Agricultural Income: All agrarian income in India is exempt from taxation. This exemption is crucial as agriculture is the primary source of income for a large part of rural India, and the country is heavily dependent on it for food security.
• Lowest Income Tax Slab: An income of Rs. 5 lakhs and below is completely exempt from income tax. For instance, if one has an income of Rs. 7 lakhs, only Rs. 2 lakhs is taxable.

A tax calculator can help individuals assess their tax liability more accurately by factoring in exemptions and deductions. Understanding these exemptions is essential for taxpayers to optimize their tax planning and minimize their tax burden legally and ethically.

What is the Difference Between Exemptions vs. Deductions?

Here’s a table highlighting the key differences between exemptions and deductions in taxable income in India:

This table should provide a clear overview of the distinctions between exemptions and deductions in taxable income in India. In conclusion, understanding the difference between exemptions and deductions is crucial for taxpayers in India to optimize their tax liabilities. By using a tax calculator and leveraging these provisions effectively, investors and individuals can minimize their tax burdens and enhance their financial planning. 

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considerea d as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

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FAQs

The Interim Union Budget 2024-25 was announced recently. All eyes were on the income tax slabs and the applicable tax rates for the forthcoming year. However, being an election year and an interim budget, the tax slabs and rates were left unchanged. Most have applauded the announcement, while some are figuring out basic income tax concepts.

Indeed, the Budget, finance, taxation, and their impact on individuals can be challenging to understand. This blog attempts to explain helpful income tax knowledge so one can understand how one’s income is taxed.

Basics of Income Tax for Beginners

Soon, a new fiscal year will start. It is also when we fill out Form 16 and file Income Tax Returns. It can be quite confusing for those filling out the forms for the first time, given the many aspects of filling it out. Here, we explain some basic income tax concepts to make tax filing easier. 

1. Defining the ‘Previous year‘

After you fill in the personal details in your ITR, there is a field ‘Previous Year.’ It is one of the most crucial income tax basic concepts. It is the year before the year the tax is filed. Individuals file their income tax returns for a fiscal year in the following year. For example, if an individual files his tax in 2023-24, 2022-23 is the Previous Year. Simply put, it is the year before the current year when one files the returns.

Assessment Year

Along with the ‘Previous Year,’ there is also the ‘Assessment Year, ’which is crucial from the perspective of basic income tax knowledge. The assessment year is the year right after the present financial year. The assessment year also starts from 1 April to 31 March.

Both the Previous and the Assessment years can be explained with an example.

Period: April 1, 2023 – March 31, 2024.

Financial year – 2023-24

Assessment year – 2024-25

Understanding your Salary

In income tax basic concepts, the income tax rate applies to one’s income depending on one’s income slab or category. This information about the income is available in the individual’s salary slip. 

The salary slip, also known as the pay slip, which your HR department maintains, gives the break-up of the salary structure in a given month. The salary slip contains information about the basic salary, house rent allowance (HRA), conveyance allowance, and medical allowance. 

As fundamental income tax basics, the employers also mention the applicable deductions such as professional tax, Employee Provident Fund (EPF), and Tax Deducted at Source (TDS).   

Income On Which You Pay Tax

There is so much to income taxation, and every aspect of it is crucial to income tax basic concepts. Generally, most individuals are either salaried, businesspersons or self-employed. While this is their core income, they could also get income from other sources. In this case, your total income is your income as a salaried individual/self-employed or a businessman.   

Sources of Income for Tax Filing

To understand the basic income tax concepts, we must also know the different sources of income. The following are the income heads from which an individual can earn and are taxed.

• Business Income: These are the profits from owning and operating a business, including self-employment earnings, partnerships, and sole proprietorships.

• Rental Income:  This is the income from a house or a building that could be self-owned/ self-occupied or rented. 

• Income from Capital Gains: This is the income one makes from selling capital goods or investments. Even if an individual makes a loss, they will still be taxed.

• Income from Other Sources: This is the income from other sources not included above, such as interest on savings bank accounts, fixed deposits, family pensions, or gifts. 

Deductions

As a part of income tax basic concepts, deductions are claims individuals make to reduce their taxable income. It is a tax benefit that helps them save tax. Individuals with additional income from various investments and other expenses can claim tax deductions to lower their taxable income. 

Deductions Under Section 80C

One of the most significant and helpful income tax basic concepts is the deduction under Section 80C. This section of the Income Tax Act 1961 allows deductions for investments in specified instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS), life insurance premiums, tuition fees for children, home loan EMIs, Post Office Time Deposits, etc., up to a maximum limit of Rs. 1.5 lakh per financial year.

Standard Deduction

Another significant concept in income tax basic concepts is standard deduction. A standard deduction is another claim by salaried individuals and pensioners, irrespective of any investment or spending by taxpayers. As per the new FY 2023-24 tax regime, salaried individuals can get a standard deduction of Rs. 50,000. The same standard deduction applies to pensioners, while family pensioners qualify for a standard deduction of Rs.15,000.

TDS or Tax Deducted at Source

A deduction is one of the most crucial income tax basic concepts. It is Tax Deducted at Source or TDS. TDS is the tax deducted by the person making the payment. The amount of tax deducted is as per the rules prescribed by the Income-Tax department. An employer will assess your income and deduct the applicable amount if your income exceeds the Rs. 2,50,000 threshold. Also, your fixed deposit will attract a TDS on the interest income. The TDS is generally 10% and can be 20% if the PAN card number is not mentioned.   

How to Calculate Income Tax Payable

Income tax basic concepts also include the income tax payable. It is the amount of tax one has to pay in a year. An individual’s final tax payable is determined by the taxable income and the rates that apply to it. From this tax payable, one deducts the TDS to arrive at the final tax payable. You can also learn more about income tax concepts with our blog.  

Illustration on Salary TDS

Using some of the income tax basic concepts and deductions discussed, we take an example to understand the basic income tax formula.

Anuja’s gross salary – Rs.13,00,000.

Tax-exempted HRA – Rs. 1,00,000

Tax-exempted LTA – Rs. 1,00,000

Standard Deduction – Rs. 50,000

80C deduction declared by an employee – Rs. 1,50,000

80D deduction declared by an employee – Rs. 50,000

Net Salary = Gross salary – (tax-exempted HRA) – (tax-exempted LTA) – (standard deduction) 

Net Salary = 13,00,000 – 1,00,000 – 1,00,000 – 50,000.

Net Salary = Rs. 10,50,000.

Then, 

Net Taxable Salary = Net salary – 80C deduction – 80D deduction

Net Taxable Salary = 10,50,000 – 1,50,000 – 50,000

Net Taxable Salary = Rs. 8,50,000

Tax Payable 

Up to Rs. 5,00,000: 5% of Rs. 2,50,000 = Rs. 12,500

Rs. 5,00,000 to Rs. 8,50,000 = 20% of Rs. 3,50,000

                                               = 70,000

Tax Payable = Rs. 12,500 + Rs. 70,000

        = Rs. 82,500

Applicable TDS rate = Tax Payable / Gross Income *100

= 82,500 / 13,00,000 *100

                                = 6.35%

Hence, your employer will deduct 6.35% of your taxable income per the basic income tax formula.

Documents Required to File Income Tax Returns

When an individual is filing his income tax returns, he has to submit some documents. Knowing this is a part of the income tax basic concepts. These documents depend on the salary status of the citizen filing the ITR. However, the following documents are needed by the type of occupation status of the taxpayer.

Salaried Individual –  The finance department provides a salaried individual with the 16A/16B form. The 26 AS reflects the TDS deducted during the year. The employee submits the rent receipt (for HRA), payslips, and other investments made under  Sections 80C, 80E, 80D, and 80G should be provided.

Capital Gains – When filing ITR for capital gains, the individual must provide an ELSS statement, a mutual fund statement, proof of sale and purchase of securities/bonds, purchase/sale price of property, registration details of any residential property sold, and a capital gains statement showing stock trading and the sales of securities.    

House Property – PAN card, co-owner details, property address, and home loan interest certificate.

Other Sources include interest from savings accounts, fixed deposits (FD), family pensions, or gifts. 

Income Tax Slabs

In India, the income tax individuals have to pay is organized in slabs or categories in which their income falls. It is an essential part of income tax basic concepts. Every such slab has a tax rate assigned to it. Generally, the tax slabs begin from the 0 tax liability slab to the highest tax liability. It means that while some portion of income is tax-free, the remaining is taxable. Also, as the individual’s income increases, the tax rates increase. 

In the recent interim Union Budget 2024-25, the tax slabs and the rates were left unchanged. The total Union Budget to be held later may change the tax slabs and the rates. Presently, two tax regimes are applicable as follows:

Income Tax Returns

The income tax basic concepts also include, Income Tax Returns (ITR). ITR is a form from the Income-Tax department with seven such forms available. They are ITR-1, ITR-2, ITR-3,  ITR-4, ITR-5,  ITR-6 and ITR-7. Which form applies to you depends on the sources of income, the income earned, and whether the taxpayer is an individual, a Hindu Undivided Family, or a company. 

Conclusion

As a responsible citizen, knowing income tax basics is very important. Here, we familiarised ourselves with some of the frequently used basic income tax concepts and some that also give tax relief. 

Together, the income tax concepts are of great help in understanding taxation.   

FAQ

We all have financial goals; a robust financial plan is the best way to achieve them. However, building a solid financial plan without proper tax planning is impossible. Taking measures to reduce your tax burden is a priority for all taxpayers as it is one of the best ways to retain your earnings. You can avail of several tax-saving options to reduce your overall tax liability.

In this blog, we shall discuss some of the popular income tax-saving options available and highlight a few tax-saving investments for different taxpayer groups.

 Preferred Tax-Saving Investment Options at a Glance

Tips for Effective Tax-Planning Through Tax-Saving Options

One of the most crucial pillars of financial planning – tax planning, must ideally be done at the beginning of the financial year. However, in India, most taxpayers postpone this critical decision-making process in the last quarter of a financial year, risking themselves to a last-minute scramble. 

• Tip #1: Estimate your yearly income at the beginning of the financial year. This will help you understand your expected taxable income.
• Tip #2: Check your existing tax-saving options. These may include your home loan repayment, EPF contribution, etc.
• Tip #3: Plan investment in tax-saving schemes accordingly. Once you know your estimated tax liability and current expenses, you can plan investments in tax-saving schemes wisely.
• Tip #4: Assess your tax liability at regular intervals. This step will help you adjust your tax-saving plan.
• Tip #5: Opt for tax-saving investments based on your risk profile and willingness to lock in the funds for the specified time. If you already have equity investments, you may look for options like ELSS that offer both equity exposure and tax benefits at relatively lower risk.
• Tip #6: Purchase adequate medical insurance for self, spouse, children, and parents; premiums are eligible for tax deduction under Section 80D.
• Tip #7: Start investing early in age and the first quarter of a financial year. Early investing gives you the benefit of the power of compounding, thereby increasing your overall returns. Investing in the first quarter of a financial year helps you spread the tax-saving investment options wisely.

Preferred Tax-Saving Options for Different Age Groups and Income Sources

1. Tax-Saving Investment Options For Unmarried Individuals Or Newly Married Couples

2. Tax-Saving Investment Options For Parents With Single Income

3. Tax-Saving Investment Options For Parents With Double Income

4. Tax-Saving Investment Options For Senior Citizens and Retired Persons

Conclusion

There are multiple ways to save tax. However, it is crucial to understand the tax-saving options that suit you the best and offer the dual advantage of saving and wealth creation. Planning your taxes and contacting a trusted investment advisory service like Research & Ranking is essential to help you make informed decisions.

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What are the best tax-saving options?

The best tax-saving option depends mainly on your income, risk-taking ability, and willingness to lock in your funds for a certain period. However, some popular tax-saving options include ELSS, ULIP, PPF, etc.

How can I save my 30% tax?

Individuals with earnings of ₹15 lakhs and above in a financial year come under the 30% tax range. Besides investing in high-return stock, consider investing in instruments offering tax benefits under Section 80C. You can earn additional tax benefits by purchasing medical insurance and opting for a home loan.

How can I save tax beyond 1.5 lakhs?

Section 80C offered a deduction of up to ₹1.5 lakhs. You can save tax beyond this limit by purchasing a health insurance policy (Section 80D), investing in NPS (Section 80CCD), opting for a home loan (tax deduction on interest under Section 24(B)), or availing of deduction on bank interest savings (Section 80TTA).

How do you save taxes on a 10 lakh salary?

Firstly, opt for the right tax regime based on your investment in tax-saving options. Next, utilize your Section 80C and  80D deductions. Also, take advantage of HRA exemption to save maximum tax on ₹10 lakh salary.

In investment options, tax-free bonds stand out as a secure haven for those seeking stable returns without the burden of tax liabilities. Let’s delve into the intricacies of these bonds and understand why they are becoming an increasingly attractive choice for investors.

What Are Tax-Free Bonds?

Tax-free bonds are fixed-income securities issued by public undertakings, providing investors with interest income exempt from taxation. With a face value typically set at Rs. 1000, these bonds offer a stable return on investment, unaffected by fluctuations in the secondary market.

Features of Tax-Free Bonds

• Annual Interest Payouts: Investors enjoy annual interest payouts without any tax implications. This regular income stream and tax benefits make tax-free bonds an attractive proposition.
• Investment Tenure Options: Flexible investment tenures ranging from 10 to 20 years allow investors to align their choices with their financial goals and preferences.
• Trading Flexibility: Tax-free bonds can be traded based on market rates, allowing investors to capitalize on favorable market conditions.
• Physical and Dematerialized Holding: Investors can hold tax-free bonds in physical or dematerialized form, catering to their preferences and convenience.

Issuers of Tax-Free Bonds

Renowned entities like Power Finance Corporation, NTPC Limited, and Indian Railways Finance Corporation Limited issue tax-free bonds in India. Understanding the credibility of the issuer is crucial for risk-conscious investors.

Trading and Investment Options

Investors can trade tax-free bonds through a Demat account or in physical form. The option to apply online or offline adds flexibility to the investment process. However, selling bonds in the secondary market may attract capital gains tax.

Interest Rate Dynamics

The interest rate on tax-free bonds remains fixed based on the face value, ensuring a predetermined annual return for investors. Despite fluctuations in the secondary market, the interest income remains constant, making them a reliable choice.

Bond Tenure Importance

The tenure of tax-free bonds, ranging from 10 to 20 years, plays a pivotal role in determining returns. Investors holding bonds until maturity receive the entire principal amount, highlighting the long-term commitment associated with these instruments.

Advantages of Tax-Free Bonds

• Safety of Investment: Tax-free bonds offer a high level of safety, minimizing the risk of default in interest payments and principal repayment as government entities back them. Despite the low risk, these bonds provide relatively higher yields than other fixed-income options.
• Tax-Free Interest Income: One of the primary advantages is the tax-free nature of the interest earned. Investors in higher tax brackets find tax-free bonds more appealing than taxable alternatives, as they shield earned interest from tax deductions.
• Liquidity and Secondary Market Trading: Investors can liquidate their investments by selling tax-free bonds in the secondary market, capitalizing on market fluctuations. This flexibility adds another layer of attractiveness for those looking to optimize returns.

How Do Tax-Free Bonds Work?

• Purpose and Issuing Entities: Government entities issue tax-free bonds to raise funds for specific capital expenditures. The issuance remains open for a short period, during which investors can subscribe to purchase these bonds.
• Subscription Process: Tax-free bonds offer fixed interest rates determined by prevailing yields, credit ratings, and investor qualifications like other bonds. Retail investors and high-net-worth individuals (HNIs) are categorized based on their investment amounts.
• Tenure and Maturity Redemption: With 10, 15, or 20 years, investors can redeem tax-free bonds at maturity. The option to buy and sell in the secondary market exists, with profits taxed differently based on the holding period.

Ideal Investors for Tax-Free Bonds

• Long-Term Investors: Given their extended tenure, tax-free bonds are ideal for long-term investors seeking stable income over an extended period.
• Low-Risk Profile: Investors with a low-risk appetite find tax-free bonds attractive due to their safety and government backing, minimizing default risks.
• Consideration for Senior Citizens: Senior citizens aiming for a secure income in their retirement years may find tax-free bonds suitable for their investment needs.

Redeeming Tax-Free Bonds

While tax-free bonds cannot be redeemed before maturity, they can be sold in the secondary market. Investors must be mindful of capital gains tax if they sell before maturity.

Issuers of Tax-Free Bonds

Only government-backed PSUs have the authority to issue tax-free bonds. However, not all bonds issued by these entities fall under the tax-exempt category. Recognized entities such as Power Finance Corporation, NTPC Limited, and Indian Railways Finance Corporation Limited are among India’s common issuers of tax-free bonds.

Income Tax Exemption for Tax-Free Bonds

Tax-free bonds qualify for exemption under Section 10(15) of the Income Tax Act, providing investors with a shield against tax obligations. Not all bonds issued by government-backed PSUs enjoy tax exemption. Identifying specific issues that fall under this exemption for a tax-efficient investment strategy is essential.

Investors holding tax-free bonds until maturity enjoy complete exemption from taxes on interest income, providing a significant tax advantage. Capital gains tax applies if a tax-free bond is sold before maturity. The holding period determines the taxation rate, emphasizing the importance of a strategic investment horizon.

Risks Associated with Tax-Free Bonds

Credit Default Risk: While tax-free bonds are generally safe from credit default risk, liquidity, and interest rate risks remain potential concerns, mainly if sold before maturity.

Liquidity and Interest Rate Risks: The liquidity of tax-free bonds may be lower due to their extended tenure. Additionally, interest rate fluctuations can impact bond values, highlighting the importance of holding bonds until maturity.

Advantages of Investing in Tax-Free Bonds

• Tax-Free Regular Income: Investing in tax-free bonds provides investors with a regular, tax-free income stream, ensuring financial stability and predictable returns.
• Safety Assurance: Backed by public undertakings or the government, tax-free bonds offer a high level of safety, making them a preferred choice for risk-averse investors.
• Trading Ease and Profit Potential: Listed on the stock exchange, tax-free bonds offer ease of trading and profit potential when market prices appreciate.
• Higher Returns for High Tax Brackets: Investors in higher tax brackets stand to gain more from tax-free bonds, making them an attractive option for wealth maximization.

Identifying the Best Tax-Free Bonds

When seeking the best tax-free bonds to make informed investment decisions, you must carefully evaluate issuer profiles, yield to maturity, and maturity dates.

• Issuer Profile: Understanding the reputation and financial stability of the issuer is crucial for assessing the safety and reliability of tax-free bonds.
• Yield to Maturity: The Yield to Maturity of a bond provides insights into the total returns an investor can expect over the bond’s entire tenure, helping make informed investment choices.
• Maturity Date: Remember the maturity date to avoid early liquidation and exposure to liquidity and interest rate risks.

In conclusion, tax-free bonds offer a unique investment avenue, combining safety, tax benefits, and the potential for stable returns. While they may not be suitable for all investors, those seeking long-term stability and tax advantages should consider adding tax-free bonds to their investment portfolio.

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Understanding Tax on Rental Income: Why Managing Tax on Rental Income is Important

What is Income Tax on Rent Income?

Income tax on rent income is a tax levied on the earnings generated from letting out property. This income is subject to tax under the “Income from House Property” head as per income tax on rental income India regulations.

Tax Implications for Individuals Earning Rent in India

Rental income is added to your total income and taxed as per the applicable slab rates. Understanding these implications helps minimize your tax liabilities.

Overview of Tax Slabs and Rates for Rental Income

For individuals, the tax rates range from 5% to 30%, depending on their annual income. Rental income, after permissible deductions, is included in the total income for taxation.

Strategy 1: Claiming Standard Deduction on Rental Income

How the 30% Standard Deduction Reduces Taxable Rent

The Income Tax Act allows a 30% standard deduction on the annual value of the property to cover maintenance costs, reducing the taxable income significantly.

Eligibility and Process for Claiming the Deduction

This deduction is available to all property owners earning rental income. The calculation is straightforward and does not require proof of expenses.

Strategy 2: Using Home Loan Interest Deductions

How to Offset Rental Income Tax With Interest on Home Loans

Interest paid on loans for acquiring or constructing rental properties can be deducted under Section 24(b). This can reduce your taxable income substantially.

Section 24(b): Understanding the Deduction Limit for Rental Properties

The deduction limit is Rs. 2,00,000 annually if the property is self-occupied. For rented properties, there is no upper limit, making this an excellent tool for reducing tax liability.

Strategy 3: Accounting for Municipal Taxes Paid

How Municipal Taxes Lower Your Taxable Income

Municipal taxes paid by the property owner can be deducted from the rental income before calculating taxable income.

Conditions to Claim Deductions for Municipal Taxes

Ensure the taxes are paid during the financial year to claim this deduction. Retain receipts as proof for tax filing purposes.

Strategy 4: Leveraging Joint Ownership for Tax Benefits

Splitting Rental Income Between Co-Owners to Reduce Tax Liability

When a property is jointly owned, the rental income can be split among co-owners, reducing the tax burden.

Key Rules for Joint Ownership Deductions

Each co-owner must have a valid ownership share, and the rental income division should align with their ownership proportions.

Strategy 5: Investing in Tax-Saving Instruments

Using Section 80C and Other Exemptions to Offset Taxable Income

Investments in instruments like PPF, ELSS, and NPS can reduce taxable income under Section 80C.

Tax-Saving Investments Tailored for Property Owners

Property owners can also consider NPS and other retirement schemes for additional tax benefits.

The rental income tax deduction is not just an economic move but a smart strategy that can lead to significant savings. By using these five smart strategies, including the “rent to mum” strategy, investing in NPS, claiming HRA deductions, taking home loan interest deductions, and carefully checking records types, you pay taxes while protecting your financial future -Can significantly reduce liability

Also, the potential of the National Pension System (NPS) cannot be overstated. Not only does it offer incredible tax savings, but it is also an excellent retirement planning tool. These steps allow you to optimize your finances, reduce taxes, and pave the way for a safe and prosperous financial journey. You can also learn more about income tax concepts with our blog.

Other Tax Exemptions on Rental Income: What You Should Know

Exemptions for Properties Rented to Government or Charitable Organizations

Certain properties rented to government bodies or charitable organizations may qualify for exemptions.

Special Provisions for Senior Citizens Earning Rent

Senior citizens can leverage additional exemptions and deductions, reducing their overall tax liability.

Common Mistakes to Avoid While Filing Tax on Rent Income

• Not Declaring Rent Income in the Right Assessment Year:  This refers to incorrectly reporting rental income in the wrong tax year. It’s crucial to declare rental income in the year it is earned, not when it is received, to comply with tax regulations.
• Failing to Maintain Proper Documentation for Deductions:  This means not keeping adequate records to support claimed deductions related to rental property expenses. Without proper documentation, deductions may be disallowed, leading to higher tax liability.
• Ignoring Applicable Surcharges and Penalties:  This highlights the importance of being aware of and paying any applicable surcharges or penalties related to rental income tax. Failure to do so can result in additional financial costs and legal consequences.

Here’s a table outlining five smart strategies to reduce tax on rent in India using the NPS (National Pension System) to cut income tax by Rs. 86,000. This table will provide a clear overview of each strategy, its benefits, and potential tax savings:

FAQs about Tax on Rental Income

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

Introduction

In India, the Income Tax Act offers myriad benefits to aspiring property owners. For example, when you sell certain capital assets like gold, mutual funds, and shares to buy a residential property, you can avail of capital gains tax exemption.

In this article, we will answer the common investor question – can I enjoy tax benefits on capital gains if I buy another house? Before we explore this topic in detail, we must understand terms like capital gains tax and long-term capital gains (LTCG) tax.

Capital gains tax

When investors sell their capital assets like stocks and shares, jewelry, vehicles, or land at a price higher than their purchase price, they profit. These profits are called capital gains.

Capital gains are of two types: short-term and long-term. When an investor makes a profit on the sale of equity shares and bonds held for more than one year (12 months) or property older than three years (36 months), it is referred to as long-term capital gains.

Unlisted and foreign shares have to be held for no less than two years for profits from their sale to be categorized as LTCG.

Profits from selling debt mutual funds may be considered LTCG if the assets have been held for at least three years.

Long-term capital gains tax

Short-term capital gains do not enjoy tax exemptions. By contrast, as per the Income Tax Act guidelines, long-term capital gains may be tax deductible.

One good way to avail of long-term capital gains tax exemptions is to use the money to purchase or build a residential property.

Taxable gains accumulated by selling the following assets only – diamond or gold jewelry, equity or debt mutual funds, bonds, and shares (Indian, foreign, or unlisted) can be safeguarded by transferring them to a Capital Gains Account Scheme (CGAS), helping to reduce the tax burden by up to 20%.

When purchasing a new house through the Capital Gains Account Scheme, capital gains are exempt from taxes if used to buy the house within two years or construct one within three years.

Let us understand this better with an example. An owner of a successful Indian start-up sells a portion of his company shares for Rs. 10 crores and transfers the entire amount to a CGAS. After one year, he withdraws eight crores and purchases a house.

He will have to pay taxes on only the remaining two crores. Simply parking the gains in a CGAS is not enough. You have to transfer the complete funds to a capital gains account with a bank.

For example, if you bought shares worth Rs. 2 lakh and made a profit of Rs. 50,000, you have to transfer the entire amount (principal + gains), i.e. Rs. 2.5 lakhs in a CGAS. The money can be withdrawn from the CGAS by filling out Form C.

Conditions

Under the Income Tax Act of 1961, the following are the preconditions to availing the CGAS tax exemption benefits:

• On the day of the sale, you should not own more than one property.
• The money withdrawn from CGAS can be only used to purchase residential property. You cannot use it to buy commercial property or land.

When availing of the tax exemptions granted by the CGAS, you must buy the property and file your returns within the timeframe to enjoy said benefits.

For instance, if you sold your shares and transferred all the funds to CGAS in October 2020, you would have two years to buy a residential property to avail of the tax exemptions until October 2022 before filing your returns in 2022.

To enjoy the tax benefits, you must buy the property by 31st July 2022 (non-audited) and not 31st March 2023. According to section 54 (F), to enjoy the tax exemptions under the CGAS, you cannot resell the property before three years.

Selling your property before three years will undo the tax benefit completely. In addition to the tax, you will also have to pay the interest and penalty on the LTCG, calculated from the date of the sale.

Joint ownership

Individuals, such as a married couple, can jointly own shares and still avail of this tax exemption. For example, a couple who realized profits from the sale of jointly owned shares transferred all the proceeds to CGAS and, after the stipulated time, bought two separate residential properties, will enjoy the same tax benefits as a single individual.

Availing tax benefits by transferring gains from the sale of shares to a CGAS and buying a residential property can be a win-win for those who make intelligent financial decisions.

On one hand, they can save a substantial portion of their hard-earned money and invest in a valuable asset they can sell off later at a premium or generate regular income through lease or rent.

FAQ

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.