If your taxable income is above ₹5 lakh, you can avoid paying tax by investing in certain investment instruments
For this financial year, if your salary is ₹5 lakh, you can earn full rebate on your tax liability of ₹12,500
Did you know you could pay zero taxes even if you earn more than ₹5 lakh? According to the current tax laws, there are three tax slabs depending on your income. To begin with, if your salary is ₹2.5 lakh or lesser, you don’t have to pay any taxes. If your salary is between ₹2.5 and ₹5 lakh, you will be taxed at 5%. If your salary is more than ₹5 lakh and less than ₹10 lakh the tax liability will be equal to ₹12,500 plus 20% of total income exceeding ₹5 lakh and if your income is more than ₹10 lakh then your will be taxed at 30%.
For this financial year, if your salary is ₹5 lakh, you can earn full rebate on your tax liability of ₹12,500. In the interim budget, the then finance minister had increased the rebate amount from the erstwhile ₹2,500. However, you should note that the rebate is not a tax exemption and you will still have to file your returns. The tax slab on income above ₹2.5 lakh continues for those who earn above ₹5 lakh. For instance, if your taxable income is ₹6.5 lakh, you still have to pay tax based on slab rate and you don’t get the rebate.
However, if your taxable income is above ₹5 lakh, you can avoid paying tax in case you invest your money in certain investment instruments. While it will not be applicable to all income categories, there are some who can benefit from it. Say your taxable salary is ₹8.5 lakh and your standard deduction is ₹50,000, which means your gross income becomes ₹8 lakh. The income tax payable along with cess according to the slabs will be ₹75,400. Now if you have a home loan and if you subtract ₹1.5 lakh as interest paid on housing loan, it can bring down your taxable income to ₹6.5 lakh. You can further invest in investment instrument allowed under section 80 C of the income tax Act with a limit of ₹1.5 lakh and bring down your taxable income to ₹5 lakh. Your tax payable now becomes ₹12,500, down from ₹75,400.
Once this happens, your effective tax payable can further come down to nil after claiming rebate of ₹12,500 under section 87A. There are a set number of investment instruments that you can consider to get tax benefit.
“Deduction of up to ₹1.5 lakh for investments made under section 80C covers investments in public provident fund (PPF), employee provident fund contribution, LIC insurance premium, ELSS of mutual funds, NPS contribution, five-year fixed deposits and national savings certificate (NSC). You can also claim the deduction under the limit of ₹1.5 lakh for payments made for tuition fees of children and repayments of housing loan," said Archit Gupta, founder and CEO, Cleartax. Thus, in the above example, cumulatively you can save ₹3 lakh and bring your income down to ₹5 lakh from ₹8 lakh, according to Gupta.
However, tax-saving should not be the only parameter to invest. You should also focus on your overall financial portfolio.