Business Finance

How to go tax-free on a salary up to Rs.10 lakh

No, you didn’t read that wrong. Yes, you can go ‘tax-free’ even if your income exceeds that of the non-taxable income bracket. Who wouldn’t like that? Here’s what you need to know to make the seemingly impossible, possible, and all within perfectly legal means of course.

Before we go into the nitty gritty of that, we need to understand income tax slabs according to the latest Union Budget. The most significant announcement for the salaried class, from this year’s Union Budget, is that there would be a full tax rebate for income earned up to Rs.5 lakh, for the financial year 2019-20. Earlier, the income tax slab for a full tax rebate was Rs.3.5 lakh. So, whereas the earlier tax rebate benefit was Rs.2,500 per year, it is now Rs.12,500 per year. This is great news for the salaried class but you can make it even better if you have smart financial management skills.

Points to be noted for income tax 2019-20

There are some important points that can be easily overlooked but which are very important to take into consideration. For example, note that the basic exemption limit for tax remains at Rs.2.5 lakh per annum. All that this means is that you don’t have to pay income tax for income up to Rs.2.5 lakh per annum. The other important point is that those who have a taxable income up to Rs.5 lakh will get a rebate. For those with a taxable income that exceeds Rs.5 lakh, the same tax slabs and rates as 2018-19 are applicable. The standard deduction earlier was Rs.40,000, whereas now, it is Rs.50,000. The important point here is that the taxable income in a year is what gets the rebate. So technically, any salary earned up to Rs.10 lakh per annum can be tax-free. If this is still confusing to you, read on.

Difference between total income and taxable income

To understand this, you need to know the difference between total income and taxable income. Your total income is what you earn in a year from different sources such as salary, rental income, freelancing, etc. The Income Tax Act allows for various instruments that give tax exemptions for some investments that are made. For example, your contribution towards the Employees’ Provident Fund is eligible for a tax exemption. So you should deduct that amount from your total income that is earned from your salary. This reduces the part of your salary that is taxable. This is the key to reducing the tax on your salary up to Rs.10 lakh.

How you can go tax-free on your salary up to Rs.10 lakh

Even if your salary exceeds the Rs.5 lakh tax exemption income bracket, you can still go tax-free by following these two simple steps:

  1. Invest in investments that provide tax exemption.
  2. Reduce taxable income to Rs.5 lakh by making such investments.

Let’s take an example to make things clear. If you have a salary of Rs.10 lakh, you would first subtract from it the standard deduction of Rs.50,000. Now you would ideally make investments under Section 80C that give you tax exemptions. You should make investments to the tune of Rs.1.5 lakh under this. Apart from this, you will also get exemption for interest paid on home loan, which is exempt under Section 24, and let’s assume that this amounts to Rs.2 lakh. Then you may also contribute towards the National Pension Scheme which gives you exemption under Section 80CCD (1B) of Rs.50,000. The next exemption you can get is for health insurance. If you are paying premium towards health insurance, which is under Section 80D (which is for dependent parents and family), let’s assume you get an exemption of Rs.50,000. This will bring your taxable income down to Rs.5 lakh already. Now subtract Rs.2.5 lakh and you get Rs.2.5 lakh remaining. Now tax payable at 5% is Rs.12,500. You get a tax rebate under Section 87A that is Rs.12,500. So effectively your tax liability is now zero.

Recap to ensure zero tax liability

You can reduce your tax liability to zero following the above strategy. For a quick recap, here’s what you need to do:

  1. File your income tax returns on time.
  2. Make maximum contributions towards tax-saving instruments. Look out for those that give you tax exemptions under Section 80C.
  3. Make an NPS contribution of Rs.50,000 towards their tier I account which should be over the Rs.1.5 lakh limit under Section 80C.
  4. Take a home loan that has an interest of Rs.2 lakh per year.
  5. Pay Rs.25,000 towards medical insurance for yourself or spouse and children.
  6. Pay Rs.25,000 additionally for the health insurance of dependent parents (as long as they do not file their own income taxes).

By following the steps above, not only will you be saving on income tax, you will also be making long-term financial investments that will secure your family’s future and be ensuring any future health-related expenses are taken care of without it becoming a financial liability.