If you have just gotten a job and started earning, CONGRATULATIONS! But before you start dreaming of a Ducati or a Ferrari there is something you need to know about. You have to pay taxes! But there is some good news, and the good news is that there are ways in which you can reduce the taxes you have to pay with the help of a few sections of the Income Tax Act.
Since we are talking about the basics of income tax there are two things you will need to know:
- When do you start paying taxes?
- How can you save on the taxes owed?
Let’s start with the first one, when do you start paying taxes.
The Tax Slabs
If you haven’t heard about this, then let us inform you now. The tax slab is nothing but a table that shows you how much will you have to pay as tax for a certain annual income. Since income tax is applicable on all your sources of income, the total annual income decides how much tax you’ll pay.
This is the income tax slab for the financial year 2021-22, take a look at it and then we’ll talk about what this means for you.
|Annual Income||New Tax Regime||Old Tax Regime|
|Up to Rs.2.5 lakh||Exempt||Exempt|
|Rs.2.5 lakh – Rs.5 lakh||5%||5%|
|Rs.5 lakh – Rs.7.5 lakh||10%||20%|
|Rs.7.5 lakh – Rs.10 lakh||15%||20%|
|Rs.10 lakh – Rs.12.5 lakh||20%||30%|
|Rs.12.5 lakh – Rs.15 lakh||25%||30%|
|Above Rs.15 lakh||30%||30%|
If you are earning up to Rs. 2,50,000, or less, a year you are exempt from paying taxes. But we all know you’ll make progress and soon you’ll be liable to pay taxes as your income grows.
So, in that case, your other option is to explore tax benefits of which the two most basic ones are Section 80 C and Section 80 D.
Section 80 C
This is the section of the Income Tax Act that offers tax benefits on investments like life insurance, mutual funds, home loan rent, etc. It has a limit of Rs. 1,50,000 per year.
What this means is that if you have invested in instruments under this section, your taxable income will come down by a maximum of Rs. 1.5 lakhs. And income that exceeds that amount is still liable for tax.
These are some of the investments that fit under Section 80 C:
- Life insurance premiums
- Provident fund investments
- Equity Linked Savings Schemes (ELSS – mutual funds)
- Five-year fixed deposits
- Principal of a home loan
- Investment in National Savings Certificates
This is that section of the Income Tax Act which offers tax benefits on premiums paid towards health insurance premiums. Just like 80C, 80D will also help you reduce your taxable income by up to Rs. 25,000. It will cover expenses like:
- Payment of health insurance premiums
- Payments towards health checkups
- Payment for health insurance for senior citizens
- Payments for treatment of senior citizens without health insurance
There you have it, the most basic guide to income tax for beginners. But before you go there are a few things that you will need to know:
- Sections 80C and 80D are just two of the sections under which you get tax benefits. There are many more for which you’ll need to explore more and catch a professional.
- Always consult your CA to check with them how you can maximise your savings and learn about your tax liabilities.
- Never ignore your taxes as not paying them can, and may, attract penalties you’d want to avoid.
The best way to stop worrying about taxes would be to plan yours at the beginning of each financial year.