Individuals or entities are required to pay a certain percentage of their income or profits to the government, which is a tax on the income, called income tax. The system of taxation on income is prevalent since ancient times when kings used to take a share of the crops or earnings of the public, but this system has undergone many changes. Income tax is a mandatory requirement under the law, although ways to pay this tax vary. For instance, a business entity is required to deposit appropriate amounts to tax with the government. Still, tax is automatically deducted from the salary by an employer when a person is in employment. This is a law, and an employer holds the liability to deduct the income tax from the employee’s salary, which is referred to as ‘Tax Deducted at Source’ or TDS, as abbreviated. The question is, “How to Save Income Tax on salary?”
Deduction of Income Tax from Salary
Deduction of Income Tax from salary is unpleasing, but this is a liability that cannot be averted. When the income from salary equals or exceeds the taxable limit, the employer is bound to deduct a specified percentage of tax amount from the employee’s salary and to deposit the same in the government’s account within a specified period.
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A certain percentage of salaried income goes out of the pocket in the form of tax on personal income, but there are ways to combat this issue. There are ways to save a part of the tax, if not wholly, from the salaried income.
Saving Income Tax on Salary
How to Save Income Tax on salary is a complex issue. The government offers specific types of rebates on the taxable income. Income tax slabs, rates of tax, and discounts tend to change every year, and of course, the salaried income increases with the increase in the salary or perks.
- The individual in higher-income groups make a high income, but they don’t have a source to save their income, though they can save a meager sum. This doesn’t make a difference for them.
- The individuals in the lower-income group, not falling in tax bracket, do not worry at all to save the tax.
- The individuals in the middle-income group are most affected because their monthly budget is deviated due to the deduction of the tax.
Thus, income tax saving is more important for salaried individuals in the middle-income group compared to those in the high-income group, and the former needs more focus on income-tax savings. The individuals in a non-taxable bracket are exceptions.
Criteria for Optimal Tax Saving
How to Save Income Tax?
Let’s understand how a salaried individual can plan to save the income tax. Understanding the salary structure is essential from the perspective of saving income tax.
A gross salary is usually classified into two components – taxable and non-taxable. Basic salary, allowances, and certain perks are taxable. However, certain perks that are counted as reimbursements are non-taxable. A bonus paid in any form or incentives is fully payable.
Before planning tax saving, an individual must make a total of the taxable components of the salary to check if the annual salary amount equals or exceeds the minimum tax slab.
If the yearly salary amount exceeds the minimum tax slab, a separate list of permissible deductible amounts or rebates has to be prepared to deduct from the gross salaried taxable income to check whether the net value still exceeds the taxable bracket. These are the general criteria to check the possibility of tax saving.
Importance of Rebates in Tax Saving
Rebates are crucial for the salaried individuals whose income falls in the income tax bracket. The rebates offer relief to an individual to save the tax entirely to a certain extent, as the case may be.
Rebates are of 2 types:
One that is allowed by the government and another that can be claimed under the income tax rules such as rebates on savings allowed under the income tax rules.
Refunds are the best ways to discount your tax deduction. There is no set rule to claim the rebates because a mix and match of various rebates can create the best tax computation chart. An individual can save an optimum amount of tax by meticulous tax calculations vis-a-vis the deductions.
Importance of Investments in Tax Saving
Certain types of investments, called tax-saving investments, are essential for saving the income tax. It is a good idea to invest in the portfolios that bring tax relief besides assuring a certain percentage of returns during the investment period.
This is a dual benefit for salaried individuals. Investment in life insurance is a type of double profit of tax saving and life assurance. An income tax or financial expert may be consulted to know the tax-saving benefits that can be availed through certain investments.
The life insurance companies launch various tax-saving plans from time to time for salaried individuals and advertise their plans. These plans can also be checked with insurance agents or consultants.
Make Better Tax Saving in 2020
How to Save Income Tax on salary in 2020?
Things have to be rationalized and optimized to maximize tax saving. One could make better tax planning for 2020 if the previous years’ plan were not effective. This is possible by understanding the:
- Tax laws and tax slabs for the assessment year
- Taxable and non-taxable components of salary
- Elements on which rebates are allowed or can be claimed
- Gaining knowledge on the life insurance plans and other tax-saving investments for which an expert can also be consulted.
Filing of annual income tax return is prestigious as it is a pride for someone that he or she is a taxpayer, but saving tax to the possible is not a bad idea because the savings someone makes will be helpful for rainy days.