- Date : 07/07/2021
- Read: 6 mins
Learn about how to save on your taxes if your salary increases and falls under taxable slab
Growth is an important part for any individual from both a work perspective as well as financial perspective. A salary increment, especially in your early professional life, can bring you immense joy and also allow you to upgrade your lifestyle.
However, you should keep a check on taxable slabs to see whether you fall into one of the slabs post your salary increment. As soon as your salary goes above Rs 2,50,000, which is the basic exemption limit, you are liable to pay income tax to the government. However, those earning less than Rs 5,00,000 can claim tax rebate up to Rs 12,500 against their tax liability, which means one pays zero tax effectively until their income crosses Rs 5,00,000.
Let’s say your previous salary was Rs 5,00,000. After 10% increment due to your outstanding performance, your revised salary is now Rs 5,50,000. This means your salary now falls into the taxable slab, and you are required to pay a tax of 5% on Rs 5,00,000, which works out to Rs 12,500. For an amount higher than Rs 5,00,000, you’ll be paying 10% tax, which in this case works out to Rs 5,000. So, as your salary is revised to Rs 5,50,000, you are liable to pay a total tax of Rs 17,500 to the government.
How taxes work
Once an individual earns more than Rs 5,00,000, they would have to pay taxes as per the slab rates mentioned below:
|Net Income Range||Rate of Income Tax|
|Up to Rs 250,000||Nil|
|Rs 250,000 to 500,000||5% (tax rebate u/s 87a)|
|Rs 500,000 to 10,00,000||20%|
|Above Rs 10,00,000||30%|
Tax planningTo understand about whether you should stick to the old tax regime or move to the new one. Read this piece in detail.
The tax rates as mentioned above are based on net Income range. The rules formed within the IT Act offer various measures through which an individual can reduce their Gross income tax and reduce their tax liability – or even pay zero tax if they are able to plan their finances properly.
An individual with a Gross Income of Rs 5,50,000 can avoid payment of tax by Investing Rs 50,000 in a life insurance policy or equity linked savings schemes or even by investing in PPF. They would also be able to avail deduction for PF deducted from their salary from their Gross income to reduce their net income.
Related: Tax-saving components of your CTC
Traditional measures of reducing tax liability
Investors have various options to reduce tax, including the following traditional measures:
- Deduction under Section 80C: A salary revision may propel a person into the taxable slab rates. However, the individual can reduce their tax liability by investing in instruments available under 80C. This could include payment for life insurance, investment in ELSS mutual funds, as well as risk-free assets like PPF. These instruments will allow a tax break as well as provide valuable protection or income for the future.
- Mediclaim: Mediclaim is tax deductible under the IT act and allow you to enjoy tax benefits as well as security with regards to one’s health. An individual can claim deduction for payments for Mediclaim of family up to Rs 25,000, and in case of parents who are senior citizens, an additional tax benefit up to Rs 50,000 is available. Those in the 20% tax bracket can claim a tax deduction of up to Rs 15,000 by payment of Mediclaim for their family and parents.
- House rent allowance: The structuring of one’s salary can make a significant difference in terms of taxability of their salary. Instead of basic salary, an individual can receive HRA as a component of the salary if they are staying on rent. They can also offer rent to their parents if residing with them.
Non-traditional measures of reducing tax liability
One can also rely on non-traditional means, such as the following:
- National Pension Scheme: The exemption limit under section 80C is for Rs 1,50,000. If an individual is facing an increased tax rate due to salary revision, they can take advantage of NPS. Under this, an individual can get additional exemption up to Rs 50,000, which translates to Rs 10,000 in tax saving at 20% tax rate and Rs 15,000 with 30% tax rate.
- Interest on education loan: An individual can enjoy the benefits of a promotion through higher education and the tax benefit of interest on loan taken to pay for it. Under Section 80E of the IT Act, one can get deduction for interest paid on education loan wherein the loan can be taken for the individual, their spouse, or children.
- Deduction of interest on housing loan: One can reduce their taxable income thanks to deduction for interest on housing loan. This interest can be claimed as a deduction up to Rs 2,00,000 under Section 24, whereas in case of a first house of value up to Rs 50,00,000 an additional amount up to Rs 1,50,000 is available. This can have a huge impact on the taxable income, with Rs 3,50,000 available as potential deduction.
Salaried individuals often feel that tax planning is not possible and they would have to pay taxes on any increase in their salary or as they switch from one slab to the other. However, the IT department allows for tax planning within its purview and through the measures mentioned above, an individual can ensure that they pay the least taxes possible while staying within the purview of the law.
An individual can claim deduction u/s 80C up to Rs 1,50,000, NPS up to Rs 50,000, and Mediclaim worth potentially Rs 75,000. With proper planning, an individual may end up paying zero taxes up till Rs 7,75,000. They can benefit even more if they have a housing loan, and this can potentially extend up to Rs 10,00,000 wherein the individual may not have to pay any taxes. Should you stick to the old tax regime or move to the new one?