Your first job is an essential milestone in life. It is a time full of excitement, curiosity, and anticipation. Several concerns go on in mind when you approach the first stepping stone in your career. One of those concerns is related to the income tax system. As you have recently begun earning, it is in your best interest to know about the tax you need to pay from a financial standpoint.
Income tax is one of the most crucial sources of revenue for the government. Every earning citizen of India must pay a certain amount of income tax, which varies based on their annual salary. If your income falls into the taxable category, there are ways you can follow to save on the tax. Some income tax saving sections allow you to minimize the payable tax.
Listed below are a few fundamentals of the income tax system that you must understand to save on taxes:
Basics of Income Tax Exemptions
When you start your first job, the money you earn makes you feel incredible. It is when you can begin to plan your life financially. The first step is to maximize savings. A few income tax saving sections can prove to be helpful in this aspect. It might be challenging to invest in long-term savings in the beginning. You can start with efficient planning of your taxes, which is one of the best saving plans for short term.
Various income tax saving sections include a set of expenses and investments that are tax exempted. They offer a multitude of benefits for salaried individuals. To understand the tax exemptions in detail, you must first understand a few relevant terms.
- Slab rates
All Indian citizens fall under a specific segment based on their annual income. The most basic rule is that an individual under the age of 60 is liable to pay income tax if their yearly salary exceeds Rs. 2.5 lakhs. With the increase in annual wage, the amount to be paid as income tax increases as well. There are different slab rates devised for varying annual income categories.
|Income Tax Slabs||Income Tax Rates|
|Income below Rs. 2.5 lakhs||Nil|
|Income more than Rs. 2.5 lakhs but less than Rs. 5 lakhs||5% of the amount exceeding Rs. 2.5 lakhs|
|Income more than Rs. 5 lakhs but less than Rs. 10 lakhs||Rs. 12,500 + 20% of the amount exceeding Rs. 5 lakhs|
|Income more than Rs. 10 lakhs||Rs. 1,12,500 + 30% of the amount exceeding Rs. 10 lakhs|
Before you dig deeper into the income tax saving sections, you must know the slab rates and their exceptions. These rates do not apply to all types of income. Income from capital gains, house property, profits from business, and other sources like lottery winnings are taxed separately.
Under the income tax saving sections, you need not pay tax for some of the specific expenditures or investments. These are known as tax deductions and can lower down your taxable income. These deductions also offer an opportunity to enhance your short-term saving plans.
- Section 80C of the Income Tax Act makes life insurance premium liable for a tax deduction. If you want to know more about the life insurance premium, you can use online premium calculators. Make sure you buy a life insurance policy from a renowned insurer, such as Max Life Insurance. Along with the benefit of life coverage, their insurance policies are an excellent way to save on taxes.
- If you are living in rented accommodation, House Renting Allowance from your company is eligible for total or partial exemption from income tax.
- Under other income tax saving sections, investments like mutual funds, fixed deposit, provident funds and more are also eligible for a tax deduction.
- Furthermore, the principal and interest paid for home loans are liable for deduction under Section 24 of the Income Tax Act.
Difference Between Gross and Taxable Income
Your gross income is the sum of income you earn from various sources, such as salary, rent from property and others. Taxable income is the amount of your gross income that is subject to income tax. It is rather simple to calculate your taxable income. The eligible investments can give you tax rebate under several income tax saving sections, thereby lowering down your taxable income.
Tax liability can become the cause of substantial financial drain for you if you fail to plan it wisely. While several income tax saving sections can provide some relief, you must begin tax planning early to reap its advantages. Start investing in some of the best saving plans for short term for wealth creation.