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Every year, when it’s tax paying time, several salaried employees start cracking their brains over how to save taxes on their annual income. It is a question rather too important to be solved because it is their hard-earned money for the whole year after all. And it’s only in their interest that it be saved to the maximum. While tax deductions and exemptions on a certain income tax bracket are not unheard of, what if we were to tell you that you could actually end up paying zero tax on your income of over 20 lakh rupees? If you find it hard to believe, continue reading to learn more about how to calculate income tax on salary with example.
But first, let’s understand a little more about income tax on salary and why it is mandated by law.
The term salary has come to be understood over the years as any form of fixed and predefined compensation assured to an individual in return for the services they render. These can be services offered to another individual or to an organization at large. The individual and the organization in this case both are obligated to return the favor to the first individual by providing them with a benefit (generally monetary in nature) in the form of a salary.
Now, the Indian law under the Income Tax Act of 1961 mandates individuals on a fixed salaried income falling under a specific income tax bracket (usually Rs. 2.5 lakh and above) to pay income tax to the government. This is used by the government of India to fund various public service and social welfare projects for the country, say building of roads, infrastructure facilities, hospitals, schools, and the like.
Income tax therefore refers to the tax that you are required to pay on the annual income earned. As per the Indian taxation law, a person is eligible to be levied income tax on salary if he/she was in India for at least 182 days during the previous tax year. Alternatively, if the person had been residing and earning in India for at least 1 year during the last 4 years, he/she becomes liable to pay taxes to the Indian government.
Read More: Income Tax Slabs and Rates for FY 2022-23
Depending on the total income that you earn in one financial year, you will be levied taxes accordingly. In other words, tax rules are never the same for all individuals in the country alike. For instance, as per the Indian taxation system, individuals in India earning less than Rs. 2.5 lakh are exempted from paying any tax. This means that only certain people falling under a specific defined income tax bracket are required to pay income tax.
These tax slabs are revised every year by the Finance Ministry of India and announced in the annual budget. Every salaried employee eagerly awaits the news on tax revisions in the hope that he/she may be able to save more money on their hard-earned income. The good news always is that the government does make certain provisions to allow salaried employees to save taxes on their salary.
Before moving on to learning about tax-saving, it is important to understand first what exactly is your tax slab, meaning under which income tax bracket does your salary fall. Based on that, you will be able to determine the exact amount of tax payable and correspondingly, how to save taxes. Moreover, you should also be aware of the breakup of your salary components. This would further assist you in determining where exactly there is scope for deductions in the taxes.
Also Read: Is LIC Maturity Amount Taxable?
As stated above, there are certain permissible deductions that a salaried employee can claim in their payable taxable income while declaring income tax every year. These deductions help the employee save taxes on their salaried income. Here is a list of the various deductions that are allowed to be claimed for tax-saving:
These are some of the deductions that help reduce your overall taxable income to the government. Making use of these deductions from time to time can be highly beneficial for you. We will discuss how to make use of these deductions in your tax return filing in the next section.
Also Know: How to Save or Reduce TDS On Salary
Now that we have a fair idea about the meaning of income tax, why it is levied and how to save taxes in general on your salaried income, let us proceed with the big question that we started writing this blog with – How to Save Tax on a Salary Income of 20 lakhs and Above? Is it even possible to have zero tax on a 20+ lakh salary?
The answer to this question is, you sure can end up paying zero taxes for your CTC of 20+ lakh. And to help you understand this better, we will explain this with the help of an example.
We already learned above that the best way to save taxes on salaried income is to avail maximum deductions on your taxable income. Going with the same concept, the following table enlists the maximum number of deductions that are permissible and that you can claim during your Income Tax Returns (ITR) filing. Note that this example shares the deductions to be claimed for an employee filing ITR for FY 2022-23 for a CTC of up to Rs. 2,00,000.
|Deductions Permissible on Income Tax||Total Amount Permissible (In Rs.)|
|House Rent Allowance (HRA)||6,00,000|
|Interest on home loan||2,00,000|
|Exemption under Section 80(C) of the ITA||1,50,000|
|Education for children; Leave Travel Allowance (LTA); reimbursement on mobile phone and internet bills; newspaper allowance; uniform allowance; gift vouchers||1,25,000|
|EPF contributed by employer||1,25,000|
|NPS contributed by employer||1,00,000|
|Gratuity (which is a component of CTC but not a part of the salary and is exempted from tax)||50,000|
|NPS tax exemption under Section 80CCD(1B)||50,000|
|Health Insurance (both for self and for parents)||50,000|
|Meal coupons like Sodexo offered by the employer||25,000|
|Maintenance of car||25,000|
|Total Taxable Income After Deductions (Under Section 87A, Zero tax up to Rs. 5,00,000)||4,50,000|
As can be seen from the table above, after claiming the maximum deductions in the ITR, the total taxable income for the FY 2022-23 for a CTC of Rs. 20 lakhs comes to Rs. 4,50,000, which is exempted from tax payment under Section 87A of the Income Tax Act (falling in the tax bracket below Rs. 5,00,000). Hence, the individual with a CTC of 20 lakhs would have to pay zero taxes or no taxes in this case.
Knowing about the various deductions permissible in the Indian taxation system can go a long way in claiming the maximum tax relief in your taxable income. For more information about taxes payable and the various deductions that can be claimed under the Income Tax Act, visit PayBima.
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If your taxable income is up to Rs. 15 lakhs, you can claim tax deductions worth Rs. 10,000 on the interest earned on savings banks account. This is as per Section 80TTA of the Income Tax Act. You can avail a number of tax deductions under Section 80(C) of the ITA: A tax of Rs. 3,51,000 is levied on a gross salary of Rs. 20,00,000 as per the new tax regime in India. The new regime will be advantageous when total deductions are less than Rs. 1.5 lakhs. When total deductions exceed Rs. 3.75 lakhs, the old regime will be much beneficial.
FAQs on How to Pay Zero Tax on Salary Income INR 20+ Lakhs for FY 2022-23
How to save tax for salary above 15 lakhs?
How to save tax on 12 lakhs salary?
Investment in ULIPs
Investment in Sukanya Samriddhi Yojana
Home loan repayment
Investment in National Savings Scheme
Investment in Public Provident Fund
What is the tax on 20 lakh salary?
Which tax regime is better for 20 lakhs?
If your taxable income is up to Rs. 15 lakhs, you can claim tax deductions worth Rs. 10,000 on the interest earned on savings banks account. This is as per Section 80TTA of the Income Tax Act.
You can avail a number of tax deductions under Section 80(C) of the ITA:
A tax of Rs. 3,51,000 is levied on a gross salary of Rs. 20,00,000 as per the new tax regime in India.
The new regime will be advantageous when total deductions are less than Rs. 1.5 lakhs. When total deductions exceed Rs. 3.75 lakhs, the old regime will be much beneficial.
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