Tax Saving Guide: Understanding the Tax System in India

Every year you get a reminder from your chartered accountant or your employer that it is time to plan your taxes. Let’s face it – we are all unhappy about paying taxes and at some point dreamed of a world where our income is not taxed at all.

You may think of taxes as a financial burden. However, they are your obligation towards the state who uses the tax money to make various provisions for you, such as building roads and highways, developing rail networks, educational institutions, and a lot more.

So rather than stressing yourself about the tax season, it is time to gain more knowledge about tax saving methods that can help you turn your finances around through planning and investment.

Once you understand how taxes work, you will be able to choose various tax-saving investmentsthat not only reduce your tax liability but also help create wealth for you in the long run. So, use this tax-saving guide to educate yourself about the tax system in India.

Different types of taxes

According to the Indian constitution, the government is authorized to levy taxes as per the Indian tax system. As per the directives, the government collects taxes from the citizens of this country to generate income and improve India’s economy.

The Indian tax system is highly robust that allows you to plan your tax saving investmentsto earn benefits and leverage exemptions.

But before we dive into its impact on your income, let us understand different types of taxes in India and their purpose.

The taxes in India are divided into two categories:

  1. Direct taxes
  2. Indirect taxes

Let us discuss each in detail.

  1. Direct Taxes

These taxes are the ones that are directly payable by you by taxing your income. These taxes are to be borne by you and cannot be transferred to any other individual or legal entity.

Some common type of direct taxes include:

  • Income tax: The tax that gets levied to your annual income or profits earned by you or an entity is called income tax. Therefore, the income tax applies to both salaried and self-employed people. However, as a tax-saving measure, you can avail exemption up to Rs. 2.5 lakhs per annum on your income if you are below 60 years and Rs. Three lakhs if you are above 60 years but less than 80 years. The tax slabs vary with income.
  • Securities transaction tax: This tax gets levied on stock and securities trading. It is imposed on the price of share and securities traded on the Indian Stock Exchange.

Other direct taxes include wealth tax, gift tax, and expenditure tax, to name a few.

  1. Indirect taxes

These taxes are imposed on you through the purchase of products and services. The sellers collect these taxes under the Indian tax system. It is over and above the original price of the product or service, thereby increasing its overall cost. Some standard indirect taxes include:

  • Goods and Services Tax (GST): This is a consumption tax imposed on goods and services and has entirely replaced the previous system of indirect taxes. With GST in place, charges like Value Added Tax, OCTROI, and Central Value Added Tax is no longer applicable. There are a few items, however, which are tax exempt under GST, such as electricity, alcohol, and petroleum products.

Some other taxes that fall under indirect tax category include property tax, professional tax, entertainment tax, road tax, education cess, and toll tax to name a few.

How tax affects your income?

Tax is often treated as a burden as it can chip away at your hard-earned income if you do not plan your tax-saving instruments carefully. By being smart about your investments and planning them wisely, you can save much tax every year. Even though they are difficult to avoid, you can employ various strategies to limit their impact on your income.

Tips to Save Income Tax

The most popular tax saving option available for you in and HUFs in India is to exploit the provisions of section 80C of the Income Tax Act. Under this section, various tax saving investments can help you save up to Rs. 1.5L in a given financial year.

Let us discuss some of these instruments in detail:

  1. National Pension Scheme (NPS): This tax saving investment is eligible for deduction under Section 80CCD up to Rs. 50,000 for contributions to NPS. The money invested in this product helps you pay for debt and equity funds that allow you to build a retirement corpus. This amount can be withdrawn when you turn 60 years.
  2. Deduction on home loan interest: Your home loan can also save you some money. If you have an ongoing home loan, then the interest payable on it is eligible for tax deduction under Section 24 of the Income Tax Act. You can benefit from tax deductions up to Rs. 2 Lakh per annum under this provision on the interest paid.
  3. Put money in a savings account: All theinterest earned by your savings in the savings account are eligible for tax exemption up to Rs. 10,000 per year u/s 80TTA.
  4. National Saving Certificate (NSC): This tax-saving instrument comes with a fixed rate of interest for a period of 5 years. The interest earned on NSC is tax exempted up to Rs. 1.5 Lakh per annum u/s 80C.
  5. Health insurance: Take a health insurance policy if you haven’t already. The premium paid towards your health insurance makes you eligible for a rebate of Rs. 25,000 for family and parents each as per section 80D.
  6. Charity: Contributions made to relief funds and charitable organizations are deductible under section 80G.
  7. Life insurance: Now is a good time as any to invest in a life insurance policy to not only save taxes on the premium paid under Section 80C but also to secure your family’s future, in case of your untimely demise.

This list is not exhaustive, and there are many more ways to save taxes. However, this can be a good starting point to increase your wealth and disposable income without neglecting your tax duties!

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