Income tax is the portion of a citizen’s income that must be paid to the government for the cause of national welfare and development. Although taxes are meant for betterment and progress, higher tax liabilities can be unsavoury for taxpayers. One can legitimately reduce their payable taxes if they claim the expenses and deductions under different provisions of the Income Tax Act, 1961; most of which come under important clauses of Section 80C, 80CCD, 80D and Section 24 among several others. Here is a detailed look at these concessions and the tax saving potential if you earn Rs.8.5 Lakh annually.
A Comparison of Income Tax Regimes in FY 2024-25
Indian taxpayers can pay their taxes under the old tax structure or the new one. While the old regime grants exemptions and concessions, the new regime does not extend these tax-saving advantages. Instead, the latter offers lower tax rates allowing taxpayers to reduce their tax liability.
If you are unsure about which tax structure suits you best, access an Income Tax Calculator. It can compute taxes payable for the current financial year, in addition to comparing the taxable income under both tax regimes to establish the tax savings involved.
The following table shows a comparison between the old and the new tax regime:
| Taxable Income | New Tax Regime | Old Tax Regime |
|---|---|---|
| Up to Rs.2.5 Lakh | Exempt | Exempt |
| Rs.2.5 Lakh to Rs.3 Lakh | Exempt | 5% |
| Rs.3 Lakh to Rs.5 Lakh | 5% | 5% |
| Rs.5 Lakh to Rs.6 Lakh | 5% | 20% |
| Rs.6 Lakh to Rs.9 Lakh | 10% | 20% |
| Rs.9 Lakh to Rs.10 Lakh | 15% | 20% |
| Rs.10 Lakh to Rs.12 Lakh | 15% | 30% |
| Rs.12 Lakh to Rs.15 Lakh | 20% | 30% |
| Above Rs.15 Lakh | 30% | 30% |
Best Ways to Save Taxes on Rs.8.5 Lakh Salary Annually
The first step in tax calculation begins with identifying your salary structure and its components.
Understanding Salary Structure
There are two parts to your salary: gross salary and net salary. Your gross salary constitutes multiple allowances such as home rent allowance, leave travel allowance, professional tax and more. Employers will deduct these amounts as applicable before they give you the in-hand or net salary. For example, if you have a gross monthly income of Rs.30,000, you may receive Rs.23,000 as your net monthly salary following the deductions made by your company. This is the amount on which one pays taxes, better known as taxable income.
Therefore, your salary minus exemptions = Taxable salary income
Taxable salary income minus deductions = Net taxable income
While calculating taxes, individuals should consider two basic steps:
Step 1 - Eliminate the Exemptions
Your salary structure as given in the CTC will normally entail the following:
| Salary Components | Annual Taxability |
|---|---|
| Basic salary | Fully taxed |
| Dearness allowance | Fully taxed |
| House rent allowance (HRA) | Certain portion is tax-exempt |
| Leave travel allowance (LTA) | Travel ticket costs for 2 trips in 4 years are exempted under Section 10(5) |
| Mobile/internet reimbursement | Tax-exempt when used for professional purposes; bills need to be submitted as proof |
| Children education (up to 2 children) | Rs.4,800 for each child |
| Food | On the basis of Rs.50 a meal up to 2 meals/day, amounting to Rs.31,200/year |
| Standard deduction | Rs.50,000 |
| Professional tax | Rs.2,400 (may vary from state to state) |
Step 2 - Cut the Necessary Deductions
One can avail of numerous deductions as listed here:
| Particulars | Provisions |
|---|---|
| Section 80C – Investments in tax saving instruments | You can obtain tax relief up to Rs.1.5 Lakh per year when you invest in these options:
|
| Section 80E – Taking up an education loan | Interest deduction for 8 years when financing higher education expenses for yourself, your spouse, dependant children or a student for whom you are the legal guardian |
| Section 80G – Donations to charity | 50% to 100% of the eligible amount |
| Section 80D - Payment of health insurance premium | Rs.25,000 for self, spouse and dependant children if you are under 60 years and Rs.50,000 if you are more than 60; Rs.25,000 for parents below 60 years old and Rs.50,000 if above 60 years |
| Section 80DD - Medical treatment for disabled dependants | Relaxation in taxes for medical expenses of disabled dependants up to Rs.75,000 in case of 40% disability and Rs.1,25,000 for 80% disability |
| Housing loan repayment deductions | Section 80C – Exemption on the principal amount up to Rs.1.5 Lakh Section 24(b) – Concession on the interest sum up to Rs.2 Lakh |
| Section 80C – Life insurance policy maturity amount | Policy maturity proceeds are tax-exempt for assured sums of:
|
Individuals who have availed loans like education loans or Home Loans should remember to claim tax relief at the time of filing their annual tax returns. Additionally, housing credit borrowers must be aware of the other tax deductions on Home Loan that they are entitled to like Sections 80EE and 80EEA. Both single and joint applicants can enjoy substantial Home Loan tax benefits which will double their tax savings. Further, when considering house loans, check the Home Loan eligibility criteria to ensure competitive interest rates for optimised credit deals.
How to Pay Zero Tax on Rs.8.5 Lakh Salary: Tax Calculation Example
Individuals who draw a salary of Rs.8.5 Lakh per annum can compute payable taxes as given in the table below to arrive at zero tax figures. These are approximate numbers:
| Particulars | Amount Per Annum |
|---|---|
| Gross total income (all income sources) | Rs.8,50,000 |
| Net income | Rs.7,50,000 |
| Less: Deductions under Chapter VI A - Section 80C | Rs.1,50,000 |
| Section 80CCD (1B) | Rs.50,000 |
| Section 80D | Rs.50,000 |
| Section 80TTA | Rs.10,000 |
| Total taxable income | Rs.4,90,000 |
| Applicable tax with cess | Rs.12,000 |
| Less: Rebate under Section 87A | Rs.12,000 |
| Final tax payable after rebate | Zero |
The table above indicates how taxpayers may pay zero tax on an annual salary of Rs.8.5 Lakh. When you claim the available deductions, your net taxable income comes to less than Rs.5 Lakh. This will qualify you for a rebate under Section 87A, which stipulates that one does not incur any tax if the net taxable income is below Rs.5 Lakh.
On the other hand, individuals who wish to file their taxes according to the new tax structure may benefit from very few deductions and/or exemptions. They can, therefore, compute 15% + Rs.37,500 (as per tax slab) on Rs.8.5 Lakh annual income to get Rs. 75,000 including cess as the payable tax for that financial year.
Tax slabs in the new tax regime have been reduced to five while the tax exemption limit has increased to Rs. 3 Lakh. Revisions announced in the 2023 budget will apply to income earned from FY 2023-24. Although, the points enumerated here can help determine your tax liability, consulting your accountant or a tax professional may prove useful for a wider understanding of your tax savings and better financial management.
Frequently Asked Questions (FAQs)
Taxpayers can claim deductions under Section 80C when they file their income tax returns during each financial year.
The Income Tax Act states that exemptions on earnings can be availed as follows:
- Income up to Rs.2.5 Lakh per year is tax-free for taxpayers below 60 years of age
- Individuals between 61 to 79 years old have an exemption limit of Rs.3 Lakh
- For super senior taxpayers above 80 years, Rs.5 Lakh is tax-exempt
Yes. You can save 100% taxes on your salary provided you invest wisely and plan your taxes judiciously.
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