Are You Managing Your Taxes Right? Quick Steps to Do It.

Human life is a mixture of contradictions. Let's think about salaried individuals for a moment. Making less money can be a bummer, but we grumble about taxes when we receive a raise. 😅

There are two kinds of people in the world. One pays a huge chunk of their earnings as taxes (while grumbling), and the other plan their budget wisely & hence pays a small amount. If you are the first kind, then this article is a must-read.

And, if you are the second one, you could still learn a thing or two here. You never know; you could save up even more of your money from taxes!

In this article, we will answer these questions:

• What is tax & its types?
• How to save taxes?
• What mistakes do people make while dealing with taxes?
• How to file a tax return?

Shall we begin?

Understanding Taxes: A Headache & A Necessity

If you also have difficulty understanding the types of taxes and filing an ITR, then you are not the only one. Most people face this dilemma as the Indian tax system is difficult to comprehend.

Our nation's finance department is working hard to simplify it. But we can't keep waiting for FM Nirmala Sitharaman to finally bring out a better tax system, can we? Then, what to do? 🤔

Like always, let Insider be in charge of helping you out with simple explanations of the complicated jargon or ITR forms, in this case, for you.

Firstly, the tax slabs:

Above is the current income tax slab, as no changes were introduced in the Interim Budget 2024-25. With a standard deduction of ₹50,000, income slabs below ₹7 lakh per annum are free of any tax. As the income slabs increase, so do the tax rates.

Now, the tax rates for both old and new tax regimes differ. Read Income Tax Slabs for 2023-24 for detailed information.

Types of Taxes:

In India, the tax system can seem complex, but understanding the different types of taxes can help you navigate it better. Here's a breakdown of the main categories

1. Direct Taxes:

These are levied directly on your income or wealth.

a. Income Tax: This is the most well-known direct tax levied based on income from various sources like salary, business, investments, etc.

b. Capital Gains Tax: This tax applies to profits from selling assets like property or stocks. Capital gain taxes are of two types: long & short-term. Read about them from the article: Capital Gain.

c. Wealth Tax: This tax was applied by the central government on individuals & companies based on their properties, assets, etc. At present, this tax has been abolished in India.

d. Gift Tax: This is levied on gifts received above a specific limit (₹50,000).

2. Indirect Taxes:

These are embedded in the price of goods and services you consume. You essentially pay them indirectly to the government.

a. Goods and Services Tax (GST): This is the most significant indirect tax levied on most goods and services. Different products have different GST rates (e.g., 0%, 5%, 12%, 18%, 28%).

b. Customs Duty: This is levied on goods transported across international borders, AKA imported goods. Customs duty differs depending on the product.

c. Excise Duty: This is levied on domestically produced goods like tobacco, alcohol, and fuel.

3. Other Taxes:

These are levied for specific purposes or by local authorities.

a. Professional Tax: This is levied on professional income by some state governments like Karnataka, Bihar, West Bengal, etc.

b. Property Tax: This is levied on property ownership by local authorities.

c. Stamp Duty: This is levied on various legal documents like property purchase agreements or contracts.

Now that you know what taxes are, it's time to see how to save your income from them.

How Can You Save Taxes?

Meet Rahul and Khyati, 2 colleagues working in the same company. Both earn decent salaries, but their tax burdens look vastly different. Let's see why:

Let's see the tax calculations for both Rahul and Khyati to get better idea on how Khyati saved much larger sum despite earning more than Rahul.

Like smart Khyati, you can also reduce your taxable amount and utilise it for other prospects.

There are a few methods to do it based on the kind of individual and the type of taxes one pays. For salaried individuals, some of the tax-saving options are:

a. HRA Deductions:

HRA stands for House Rent Allowance and is a part of your salary provided by your employer to help cover the cost of living in rented accommodation. It decreases liability for taxes if one lives in a rented apartment.
 
Refer to the article What is House Rent Allowance? for in-depth information.

b. Deductions Under Section 80C:

Section 80C of the Income Tax Act offers salaried individuals to deduct up to ₹1.5 lakh from their taxable income. It takes place via specific investments and expenses like contributions to the Public Provident Fund (PPF), National Pension Scheme (NPS), etc.

Learn about all the investment schemes you can select to reduce your taxable income from the article: Tax Benefits Under Section 80C of Income Tax Act

c. Additional Options: Balance Between Exemptions & Taxable

Are you familiar with the tax-free income categories EEE, EET, or ETE? These categories could help you create a tax-free income quickly. Don’t know how? Let me tell you!

They offer a mix of Exempt & Taxable options with lots of schemes to choose from. You can get exemptions on principal, interest, withdrawal income, or all three. How cool is that? 🤗

• EEE Category: This category involves schemes like PPF & EPF, and it showers the subscribers with an exemption on all 3 areas: principal, interest, and mature capital.
• ETE Category: ETE involves a tax saving deposit option and provides subscribers with exemptions on principal amount & withdrawal amount. Only interest accrued over time is taxable.  
• EET Category: This category allows users to enjoy a tax-free principal and interest by levying tax on the mature amount. Pension plans, NPS, etc., are the investment options under EET.

Tax Strategies & Common Mistakes

Now that you are familiar with the tax-saving options, it's time to tweak your financial plan accordingly. And I would advise you to start planning immediately; you may find something glittery amidst the cloudy tax affairs.

But first, let's look at the basic errors you might be making every year (that are costing you tremendously!)

a. Missing or inaccurate information: Forgetting to include all income sources, misspelling names or personal details, or entering incorrect bank account information can cause delays and processing issues.

b. Filing the wrong form: Choosing the wrong tax form can lead to incorrect calculations and potential audits.

c. Missing deadlines: Filing your return or making payments late can result in penalties and interest charges.

d. Claiming ineligible deductions or credits: Not understanding eligibility requirements for specific deductions or credits can lead to tax liabilities you cannot legally avoid.

e. Overlooking deductions or credits: Missing out on legitimate deductions or credits can mean leaving money on the table.

f. Recordkeeping errors: Not keeping proper records of income, expenses, and other tax-related documents can make it difficult to claim valid deductions and credits.

Know about the various tax forms from Form 16 A & B: The Two Sides You Need to Know.

Filing Taxes the Right Way

First, you gather all the necessary documents, like Form 16, which you will get from your employer. Make sure to keep your investment proofs, bank statements, medical bills, and other relevant documents.
Next is a crucial step: choosing the right form. There are 7 forms, from ITR-1 to ITR-7, and all are used for different purposes.  
You can download the ITR form, fill it out manually, and submit it physically or electronically via the official Income Tax e-filing portal.

Know other details about filing an income tax return and how to do it from the following articles:

• Income Tax Filing: Everything You Need to Know
• Is Filing of Income Tax Return Compulsory?

The Bottom Line

If you feel like you've absorbed much information about taxes and your brain is getting overwhelmed, don't worry. You can find the Bookmark button next to your article (for desktop) or at the end of the article (for mobile). Click it, and you can return to this article whenever you want.

For more information on taxes and filing a tax return, use the search option on Insider and enter the keyword "tax". Or you can click this link right here. ⬅️