How can I reduce my taxable income?
Everyone wants to save more, and create a financially stable future that covers every expense even without a regular source of income. Rightly so, savings are fundamental to the success of any financial plan. However, paying income tax on your total taxable income, can reduce your savings and leave you with less money to plan your future.
What if you could create more wealth to secure your future simply by reducing your taxable income? Here are some ways for taxable income reduction.
What are the various investments that can be claimed as tax deductions?
There are a host of tax-saving tools under the Income Tax Act, 1961, where you can invest to build your wealth while reducing your taxable income. But first, you must know about the tax slabs to decide where and how much you should invest. Below are the current tax slabs:
|Net Income Range (Annually)||Rate of Income Tax|
|Up to Rs 2,50,000||NIL (0%)|
|Rs 2,50,000 to Rs 5,00,000||5%|
|Rs 5,00,000- Rs 7,50,000||10%|
|Rs 7,50,000- Rs 10,00,000||15%|
|Rs 10,00,000- Rs 12,50,000||20%|
|Rs 12,50,000- Rs 15,00,000||25%|
|More than 15,00,000||30%|
Now, for you, the ultimate tax-saving goal would be to lower your taxable income to 5 lakhs or lower. You can reduce your taxable income by investing and exhausting the various tax deduction limits defined under multiple sections.
You can achieve income tax reductions by undertaking the following points:
Invest in products applicable under section 80C.
The below-mentioned investments/payments reduce your taxable income by Rs 1.5 lakh.
- PPF (Public Provident Fund)
- Tax Saving FDs
- ELSS (Equity Linked Savings Scheme)
- NSC (National Saving Certificate)
- Life Insurance Premium
- NPS (National Pension Scheme)
- Home Loan Repayment
- Payment of tuition fees
- PDF (Employee Provident Fund)
- Senior Citizens Savings Scheme
- Sukanya Samriddhi Yojana
- ULIP (Unit Linked Insurance Plans)
- Tax Saving Mutual Funds
- Child’s tuition fee amount
Invest in Health Insurance
Investing in health insurance will allow you to claim a tax deduction up to Rs 25,000 towards the premium you pay annually under section 80D. The deduction can be increased to Rs 50,000 if the policyholder or the spouse is over the age of 60.
Claim deduction on your House Rent Allowance
If your salary includes House Rent Allowance, you can claim tax deductions on the allowance amount. If you are a salaried employee and do not get HRA but pay rent, you can claim a tax deduction up to Rs 60,000 under section 80GG.
Claim deduction on your home loan interest
Under section 24 of the Income Tax Act, you can claim a tax deduction to reduce taxable income on your home loan interest amount. The limit under the section is up to Rs 2 lakh.
Do not empty your savings account
Claiming tax deductions on your savings account interest is one of the easiest ways to reduce taxable income. Under section 80TTA, interest on the savings account is tax-exempted up to Rs 10,000. The limit is Rs 50,000 for senior citizens under section 80 TTB.
Contribute to charity
Donating to charities verified by the government can help you claim tax deductions between 50%-100% of the contributed amount and up to 10% of your adjusted total income under section 80G. If the donation has been towards scientific research or rural development, you can claim a tax deduction under section 80GGA.
What salary amount places you in a higher tax bracket?
Tax brackets are defined by the Income-tax slabs mentioned above. However, your salary alone does not constitute your total income. The Income Tax Act, 1961 has defined income as the total of all the earnings from these five income heads:
- Income from Salary.
- Income from House Property.
- Income from Profits and Gains of Profession or Business.
- Income from Capital Gains.
- Income from Other Sources.
You must add your salary, along with the earnings from these sources, to constitute your total income. Furthermore, if you have invested in any of the taxable income reduction investments specified earlier in this article, you must subtract the claimed tax deductions from your total income to identify your total taxable income. The final amount will determine your tax bracket against the prescribed tax slabs.
The answer to “How to reduce my taxable income” is an easy and profitable one. These investments/payments help you invest your savings for a secure financial future and save tax on the payments/contributions you made towards them. Either way, you can save more tax over time and create a future corpus that you can direct towards attaining financial stability.