How to Save Income Tax? – Pay Zero Tax Up to Rs. 9.85 Lakhs

In the Union budget 2019-20 Mr. Piyush Goyel has announced a tax rebate for income up to Rs. 5 lakhs. This means that the salaried people whose yearly earning up to Rs. 5 lakhs, do not have to pay any tax. With this announcement, the person can save additional Rs. 10000 in the same tax bracket. There are sure ways by which you can save income tax for your first 10 lakhs of income.

As per the Union Budget 2019-20, the income up to Rs. 5 Lakhs is tax exempted, and you will get Rs. 12500 as a tax rebate. However, there is no change in the tax exempted limit of Rs. 2.50 lakhs. So if your income crosses Rs. 5 lakhs, you are liable to pay income tax as per the prevailing tax slab.

What is tax rebate?

The tax rebate is simple system. It takes account for all your income net of all your investments. And then the tax is calculated on the net income. Therefore, if your income is up to Rs. 5 lakhs, then your total income tax is reduced by Rs. 12500.

There are two important aspects here:

  • The limit of ₹5 lakh is seen after taking into account all the deductions that are already given as per Section 80C.
  • Rebate is applicable only if the net income, after such deductions, does not exceed ₹5 lakh. Otherwise the rebate is zero.

Due to this announcement, there will be around 3 crore tax payers which will get benefit of this rebate. But these tax payers have to compulsory file their returns every year.

Now with this amendment in the income tax clause, you can save tax on your income up to Rs. 9.85 lakhs. In other words, you don’t have to pay any tax on the first 9.85 lakhs you are earning. Below is the details on how to save income tax on your 10 lakhs of income.

How to Save Income Tax?

There is a rebate of up to Rs. 5 lakhs in the budget 2019-20. As per the budget now there will be a tax payable only if your net taxable income crosses Rs. 5 lakhs.

I will explain with the example on how to calculate the net taxable income. Let’s assume Mr. Amit is earning Rs. 9.5 lakhs per year. There are various investment options available for salaried people to save tax these are:

985000Gross Income
150000Investment under section 80 c
50000NPS Investment under sectoin 80CCD (1B)
200000Home loan interest under section 24(D)
50000Sandard deduciton 
25000Mediclaim under section 80(D)
10000TDS on interest earned on saving a/c.
485000Total Investment
500000Net Income (Gross Income – Total Investment)

In the above example, we have considered that the income of the person is Rs. 950000 per annum. Against that, if he invest Rs. 485000 as per above investment option, then the net taxable income will be Rs. 500000.

This Rs. 500000 will be tax exempted, hence Mr. Amit will not have to pay any tax on the net income of Rs. 500000

So if you have smartly invested in the above options, you will not have to pay income tax on the income up to Rs. 985000

Moreover, if you are a senior citizen the the same amount will be Rs. 1000000.

So in the budget, small tax payers will be benefited for gross income up to Rs. 9.85 lakhs. But for that, the person must have taken a home loan, he must have invested Rs. 1.5 lakhs under 80(C), there will be a NPS investment of Rs. 50000 and mediclaim premium of Rs. 25000.

The salaried person has to file the return and get the tax rebate, so for doing so, he/she must have to file the income tax return even if his/her income is not taxable as per the new guideline.

There is no benefit for the person who is earning 10-12 lakhs per annum. But there are around 3 crore tax payers who are earning around 6 lakhs of income. So for those people, there is a great relief given by the government.

Here you must be cleared that this is a tax rebate and not the tax exemption limit which got changed from 2.5 lakhs to Rs. 5 lakhs.

So this post is all about clarifying the tax rebate and how you can take advantage of the same if your income is up to Rs. 985000 and you are investing into tax saving instruments as mentioned above.

Is tax rebate really helpful?

To conclude this, let’s take an example of Mr. Amit whose income is Rs. 6.5 lakhs. As per the income tax slab, he would have to pay Rs. 42500 as income tax. Now if he decides to invest Rs. 1 lakh in section 80C, then the income tax payable would be Rs. 22500, further, if he decides to invest Rs. 1.5 lakhs, the tax payable would be zero.

The main point here is, for the benefit of the tax rebate, you need to invest money up to Rs. 1.5 lakhs even if you are earning around 6.5 lakhs. The monthly salary of the person earning 6.5 lakhs per annum would be around 50000 or may be less due to various deductions.

On the other hand, there are fixed household expenses of around 20-25 thousands per month. That leaves him with around 15000 of savings per month and Rs. 180000 per annum.

Now to get the tax rebate, you need to invest Rs. 150000 in various schemes mentioned in the table above.

Moreover, there are lot of pros and cons of investing in these schemes like:

PPF – though it gives high return, but there is a lock in period of 15 years which is very long. you can’t use this money for any short-term needs or as an emergency fund.

ULIP – ULIPs are investment + insurance instrument. It is not advisable to invest in ULIP funds as it will not give you high returns.

ELSS – ELSS funds are equity oriented mutual funds, investing into equity stocks. There is market risk associated with ELSS funds and it also comes with 3 years of lock in period.

Conclusion:

The bottom line is there is surely a tax rebate on the income up to Rs. 5 lakhs but for taking that benefit, there is lot more needs to be done. And that is to be done by the people who hardly have any disposable income with them for such investment. This is sad.


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