How Can I Reduce My Taxable Income 2021?
- Reducing taxes is probably one of the most standard financial planning matters amongst individuals and entrepreneurs alike.
- Under Section 87A of the Interim Budget, a rebate was introduced on full income tax dues for people earning up to INR 5 lakh taxable income.
- It is a great incentive for lower- and middle-income groups to plan taxes and adopt strategies to reduce taxable income.
- Simply put, people whose Gross Total Income (GTI) is anywhere near Rs 5 lakh can demand eligible deductions from their GTIs to contract it to a taxable income figure of less than Rs 5 lakh.
How Is Tax Calculated On Your Income?
- First, an individual’s gross total income is evaluated by adding payment incurred from different sources.
- In the next step, all tax breaks and some tax-exempted allowances like HRA, LTA that you can claim are subtracted from the former figure.
- The net result is taxable income, which will determine whether you can use the 100% tax rebate as per the Interim Budget 2019 proposal.
- If your GTI falls anywhere between Rs 6 lakh to Rs 11 lakh, you could try to plan your income accordingly and ask for deductions from this income to lower it to Rs 5 lakh taxable income.
- Mentioned ahead are a few important strategies that will help your plan your tax-saving investments for the year.
Income Distribution Of People Who File Income Tax Returns
According to recent data, most of India’s population earns less than Rs 2.5 lakh per annum and constitutes 57% of the total taxpayers. Whereas, people earning more than Rs 50 lakh annually constitute only 1% of India’s taxpayers. A total of 1.5 crore Indians pay income tax which is 1.6% of the country’s adult population.
Ways To Reduce Your Taxable Income
- Start planning your tax-saving investments at the beginning of the financial year if you want to incur more benefits.
- Most taxpayers start planning in the last quarter of the year, which leads to hasty decisions.
- By planning since the start, your investments can increase and help you attain long-term goals.
- It is important to note that tax-saving should be an additional benefit, not a goal in itself.
Here are a few points you should consider to lower your taxable income:
Invest In Tax Saving Instruments
- You need to learn about different sections of the Income Tax Act to understand these strategies.
- For instance, Section 80C allows a person or a family to invest in tax-saving measures to lower their taxable income level.
- Thus, reduce their tax liability.
- An individual can invest around Rs 1.5 lakh each year in several instruments mentioned in this section.
Open A Health Savings Account
- If you are eligible for a high-deductible health plan, open a health savings account.
- Contributions to such accounts lead to immediate tax deductions and can be drawn out tax-free for qualified medical expenses.
- According to section 80D, the health insurance plan taken by you for your spouse or your family can help you reduce tax.
- Once you sign up for a health insurance plan, a premium of up to Rs 25,000 is deductible from your GTI - thereby reducing taxable income.
- Mediclaim policy purchased for your parents can help you lay claim to an extra deduction which could amount to Rs 25,000.
- In case your parents are above 60 years, you can claim more deduction.
- Mediclaim policy offers a deduction of up to Rs 50,000 disbursed as a health insurance premium for senior citizens.
Invest In NPS
- Under section 80CCD(1b), an individual can claim an additional deduction of Rs 50,000 if one invests in NPS.
- This means the person can save a total of Rs 2 lakh in a financial year if tax saving under sections 80C and 80CCD(1b) is combined.
- Over and above this Rs 2 lakh figure, you can claim a deduction on the employer’s offering made to the NPS account.
- You can claim a maximum deduction of 10% of your regular salary in addition to dearness allowance.
- There is no fiscal limit on this deduction.
- Under this section, you can ask for deduction of expenditure collected on a person who is dependent on you for daily support and care, like specially-abled people.
- One can demand deductions of up to Rs 75,000 if the disability falls between 40% to 80%.
- If the disability is more than 80%, then the person can claim up to Rs 1,25,000.
- Note that you won’t be allowed to request this deduction if the dependent has claimed it under Section 80U.
Consider Money Spent On Certain Medical Treatments
- Expenditure collected on yourself or your family members for health treatment of specific afflictions is allowed.
- It is deducted from GTI.
- All the diseases that come under it are mentioned in Rule 11DD of the Income Tax Act.
- Some of the diseases include Parkinson’s, Alzheimer’s, chronic renal failure, etc.
- You can avail of tax benefits of up to Rs 40,000 per year.
- If you or anyone dependent on you is above 60, then the benefit increases up to Rs 1 lakh.
- To make use of this benefit, the individual is required to submit a health certificate from an accomplished medical practitioner.
Consider Interest Paid On Education Loan
- Under Section 80E of the Income Tax Act, interest paid specifically on study loan is eligible for a deduction.
- It is deducted from your GTI while evaluating taxable income.
- Note that only interest paid on the study loan taken for self, spouse, or children is permitted for the deduction.
- An individual can’t demand reduction from the year he/she took the loan.
- It can only be claimed from the year the repayment starts and can be availed for either a maximum of 8 years or till the loan is fully repaid with interest (before the 8 year period ends).
Tax Benefits Available To New Homebuyers
- Under section 80EE of the Income Tax Act, a benefit of Rs 50,000 can be availed by first-time homebuyers.
- The tax-deductible is up to Rs 2 lakh per annum on a home loan.
Donate To Relief Funds And Charities
- Under Section 80G, donations made to notable relief funds, charities, or NGOs are authorised for a deduction.
- Under this section, one can claim deductions up to 100% of the contributions made, but it is subject to a few limits listed in the Income Tax Act.
- An individual needs to have a receipt with the name, PAN, address, registration number of the NGO/trust, amount donated, and name of the donor.
- You can make cash donations or transfer money via online transaction.
- By considering all the points/strategies, you can find out how to reduce your taxable income.
- Start investing at the beginning of the financial year so that you can spread out other investments over the year.
- This leads to informed investment decisions.
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Q. What refers to legal tax avoidance in India?
- The Indian government expects you to pay income tax every year, but it also allows you to follow legal measures to save on income tax.
- An individual doesn’t need to pay income tax if his/her income is less than Rs 2.5 lakh per year.
- Income more than that is taxed as per different criteria, with the tax rates increasing with the increase in income.
- No matter how much taxable income one earns, there are certain exemptions and deductions available to everyone.
Q. Why are income taxpayers low in number?
- Recent government data shows that only 1.5% of Indians pay income tax.
- The reason is that India is a developing nation and 93% of Indian households earn less than Rs 2.5 lakh annually.
- Moreover, agricultural income is wholly exempt from tax even if it exceeds the Rs 2.5 lakh limit.
- Only a little percentage of the population earns a taxable income.
- Hence, income taxpayers are less in number.