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Pay 0 Tax with an Income of upto ₹12 Lakh

Created on 16 Jan 2024

Wraps up in 6 Min

Read by 2.3k people

Updated on 20 Jan 2024

Direct tax collections show a 19% increase, hitting ₹14.70 lakh crore by 11 January 2024. This achievement represents 81% of the fiscal year 2023-24 target, as reported by the Central Board of Direct Taxes (CBDT).

Your income is the key player, but taxation is not applied directly to your salary; it's imposed on your taxable income after considering various exemptions and deductions.

Alright, so let's break it down a bit. Income tax is that part of your earnings that you've got to set aside for the government. Now, when your salary rolls in, a bunch of exemptions and deductions hit in like the extras in your paycheck story.  

After all that's said and done, you land on your taxable income.

As your income grows, it's crucial to understand the tax implications and obligations that come along with it. By familiarising yourself with effective tax reduction strategies, you can benefit greatly and reduce your tax burden.

Now, let's tackle a fundamental question: Old Tax Regime or New Tax Regime? 🧐

Understanding the Income Tax Slabs

In India, the income tax department has set up a progressive tax regime, meaning the tax rates keep increasing with your income. It's important to be aware of the income tax slabs to determine how much tax you need to pay. 

With two distinct tax regimes in place, the decision may seem straightforward at first glance. However, the choice is not as simple as opting for the regime with lower percentage rates. 

The New Tax Regime may boast lower percentages, but it comes with fewer exemptions and deductions compared to the Old Tax Regime, impacting your taxable income.

To make an informed decision, consider your income bracket and investment type. Let's take a look at the income tax slabs for the old tax regime and the new tax regime.

Old and New Income Tax Regime

Calculating Tax Liability

To determine your tax liability, you need to calculate your net taxable income and apply the appropriate tax rates. Let's take a look at the calculations for both the old tax regime and the new tax regime using an example of an annual salary of ₹12,00,000.

Understanding Tax Calculation in the Old Regime:

Let's consider an income of ₹12 lakh. In the old tax system, it might seem like you have to pay a hefty 30% tax, totalling ₹3,60,000. But hold on, it's not that straightforward.

  • Consider an income of ₹12 lakh in the old tax system.
  • An initial ₹2.5 lakh is exempt from tax.
  • For the income segment between ₹2.5 to ₹5 lakh, a 5% tax applies, amounting to ₹12,500.
  • The bracket from ₹5 to ₹10 lakh attracts a 20% tax, resulting in ₹1,00,000.
  • For the range of ₹10 to ₹12 lakh, a 30% tax applies only to the amount exceeding ₹10 lakh, which is ₹2 lakh in this case.
  • Ultimately, you end up paying around 15% of your total income, which may seem more manageable than the initial 30%.

Example of Old Tax Regime

To explore the tax implications under the new regime, take a look at the details provided below.

Calculation using the New Tax Regime:

Let me take you through the calculations using the New Tax Regime.

Example of New Tax Regime

How to Pay Less Tax?

Let me share some tricks to lower the amount of income that gets taxed. By using certain benefits in the Old Tax System, you can end up paying less tax. Let me explain!

Exemptions and Deductions

To reduce your tax burden, taking advantage of the exemptions and deductions available under the tax regime you choose is essential. Let's explore the exemptions and deductions applicable in case you opt to pay your taxes using the old and new tax regimes.

Exemptions and Deductions under the Old Tax Regime

Under the old tax regime, several exemptions and deductions can help reduce your tax liability. Here are some notable ones:

House Rent Allowance (HRA)

If you receive HRA as part of your salary, you can claim exemptions based on certain conditions and limits. In your total earnings (CTC), about 50% is your basic salary, which comes with tax benefits. You can take deductions on the remaining 50%, excluding the basic pay. For example, if you receive 20% HRA, you won't have to pay taxes on that amount.

Leave Travel Allowance (LTA)

LTA exemptions are available for the expenses incurred on domestic travel for you and your family. In four years, you can claim it twice, and your travel expenses won't be taxed, provided they’re included in your CTC.

  • Standard Deduction: A standard deduction of ₹50,000 is available for salaried individuals.
  • Mobile Reimbursement: If you receive a mobile reimbursement from your employer, it is exempt up to a certain limit.
  • Food Coupons: Meal vouchers or food coupons provided by your employer can be exempted up to a specific amount.
  • Children Allowance: Allowances provided for your children's education and hostel expenses can be exempt.
  • Deductions under Section 80C, 80CCC, 80CCD(1): You can claim deductions for investments and payments made under these sections, including contributions to EPF, PPF, life insurance premiums, and more.

Take a look at the table below for the most popular 80C Investments:

Investment

Lock-in Period

ELSS Funds

3 years

Public Provident Fund (PPF)

15 years

National Pension System (NPS)

Uptil Retirement

National Savings Certificate (NSC)

5 years

Fixed Deposit (FD)

5 years

ULIP

5 years

Sukanya Samriddhi

21 years

Senior Citizen Savings Scheme (SCSS)

5 years

There are various choices, and I've highlighted a few popular ones in the table above. I think opting for a Tax Saving Mutual Fund is the best move. If you agree but are unsure about the best one for you, don't worry! Our article covers this and lists the Best Tax Saving Mutual Fund for 2024.

  • Deductions for Interest Payment on Education Loans (Section 80E): If you have taken an education loan for higher studies, you can claim deductions on the interest paid. In this case, there is a limit of ₹40,000, so keep that in mind.
  • Deductions for Home Loan Interest (Section 80EE): Interest paid on a home loan can be claimed as a deduction under certain conditions.
  • Donations to Charitable Organisations (Section 80G): Donations made to specified charitable institutions are eligible for deductions.
  • Deductions on Savings Account Interest (Section 80TTA): Interest earned on savings accounts is exempted up to a certain limit.

Exemptions and Deductions under the New Tax Regime

Certain exemptions and deductions are not applicable under the new tax regime. However, the Union Budget 2023-24 introduced a few deductions that you can claim. Here are some notable ones:

  1. Standard Deduction: A standard deduction of ₹50,000 is available for salaried individuals.
  2. Deduction for Agniveers (Section 80CCH): Agniveers working in the Indian Armed Forces can claim a deduction for the amount deposited in the Agniveer Corpus Fund.
  3. Deduction for Employer's Contribution to NPS (Section 80CCD(2)): The employer's contribution to the National Pension Scheme is eligible for deductions.

I've simplified this information, and keep in mind that I haven't covered small amounts.

Unpaid Taxes and the New Tax Regime

If you have unpaid taxes for previous years, you can even opt for the new tax regime applicable for FY 2020-21, FY 2021-22, and FY 2022-23

The tax slabs for these years are similar to the new tax regime FY 2023-24, but you won't be able to benefit from any deductions.

The Bottom Line

Understanding the sequence is key here- whether it's exemptions, redemption, reduction, or rebate. I haven't gone into all the details for simplicity's sake, but that order matters.

Take a close look at your financial situation, weigh the available deductions, and then make a smart call when picking the right tax plan.

Remember, good tax planning isn't just about saving money; it's also about playing by the rules. When you take charge of your taxes, you boost your savings and stay on the right side of the law. It's a win-win- more money in your pocket, and you're contributing to the country's progress.

Ultimately, we all want a nice chunk of change left in our hands.

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Sakshi Dhakre

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Sakshi is an adventurous spirit who enjoys both the intellectual stimulation of Finance and the sensory experiences of good food and nature’s beauty. She has a passion for delving into complex financial topics and distilling them down into easy-to-understand insights. When she's not poring over financial reports, you might find her exploring a new corner of the city, trying out new restaurants and cuisines or admiring the beauty of the night sky.

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