If you are earning an income in a country then you are liable to pay tax on the same as per the income group you fall in. The government then uses this tax for the development and building of the nation. Every country has different rules and regulations related to tax rates and tax exemptions. It is very important to know all these slabs and exemptions and be a prudent citizen by paying taxes on time as the nation depends on it for further development. An individual, corporate, partnership, HUF, etc. are different status under which one may be taxed. Once you are clear about your status the next thing to find is the source of your income. In India, there are five major heads of income which are taxed under the India Income tax Act 1961.
Source of Income
1. Salaried Person
A salaried person’s main source of income is his salary which he/ she receives from the employer. These include gratuity, annuity, PFs, leave encashment, commission, bonus, etc. The total of these components is charged under the head ‘Income from Salary.’ A person may claim deductions and exemptions in the form of standard deduction (Rs. 50,000), house rent allowance, leave travel allowance, tax deduction, tax rebate/ relief, etc. Usually, the employer deducts tax at source and makes the payment. The employee can adjust the same from tax and accordingly pay or claim a refund from the IT department.
2. Business Man
Income from business is the next head of Income. The owner shows all the sales and earnings of its business and can deduct all valid business expenses from the gross amount to arrive at net earnings on which he is liable to pay the income tax.
3. House / Property Owner
A person can be taxed under this head if he is earning out of a let-out property/ land. He/ she can claim deduction for interest on loan taken for the purpose of purchase, construction, and repair of the property. A homeowner can claim two properties (maximum) as self-occupied and remaining house as let out for Income tax purposes. Rent income is the main income under this head of income. Property taxes/ standard deductions are allowed as a deduction from this income.
4. Capital Gain
Any person who earns a profit from the sale of any capital assets, like house property, stocks and shares, jewellery, gold, etc. is liable to pay capital gain taxes. This can be long term or short-term capital gain depending upon the period you held the capital asset before selling. One can also adjust loss on sales from gains to arrive at the net income under this head.
5. Other sources
Any income that is not covered in any of the above heads is shown under income from other sources. For example, winnings from lottery, puzzles, horse races, card games, game shows, etc.
Tax Slabs & Rates 2021-22
India has a slab system for taxation. The current slab rates apply to
- Individuals below 60 years of age
- Individuals in the 60-80 years age bracket
- Individuals more than 80 years of age.
These individuals can be taxed under old regime or new regime. If a tax payer chooses the option to pay taxed under the new regime, he has to forego certain standard deductions like 80C, 80D, 80TTB, HRA. So according to one’s age, he can choose the slab rates and pay income tax accordingly. Surcharge and cess are also levied under both the regimes. You can refer to any taxation website for relevant rates for the three different slabs. Income of up to Rs. 2.5 lakhs is exempt under all scenarios.
Best Ways to Save Tax
An individual can save taxes under Section 80C by investing in Life insurance / health insurance plans. You can claim a maximum deduction of Rs 1,50,000 per annum against the premiums paid for life insurance policy. You can claim a deduction on premiums paid for oneself, spouse or dependent child.
2. Mutual Fund
There are many tax saving mutual funds, under which an assessee can invest to claim tax deduction under section 80C. These funds are subject to a lock-in period, ie. Once invested you cannot get out before a lock-in period of 3 years. As these funds mostly invest in equities, it is a good way to stay put to reap longer term returns.
One can claim income tax deduction on repayment of the principal amount of home loans on either self-occupied or let out properties. One can also invest the sale proceeds of a prior house in buying or in construction of a new property. In that case, the invested portion of the sale proceeds won’t be taxable.
Equity linked saving scheme is another option where tax payers could invest to claim tax deduction under Section 80C. Many prominent fund houses have several products in this category. These also have a lock-in period of three years.
One can claim deductions of up to Rs. 1.5 lakhs by investing in the government’s Public Provident Fund. The interest and maturity amount are both exempt from tax. Generally, the PPFs have a lock-in period of 15 years.
Sukanya Samriddhi Yojana is another investment option to claim tax deductions under section 80C for upto Rs. 1.5 lakhs. The scheme pays an interest of 7.6% per annum and one can invest from Rs. 250- Rs. 1.5 lakh per annum. This scheme has a lock-in period of 21 years.
7. Pension Scheme
A salaried person can claim tax deduction on any voluntary or defined contribution pension/ retirement scheme, one that is regulated, for upto Rs. 1.5 lakhs (under section 80CCC).
8. Rooftop Solar
You can also claim income tax benefits by installing solar panel system at your establishment. Solar producers can claim upto 33% of their total expenses (accelerated depreciation) over a period of three years. There are anti-dumping inclusions as well as excise and custom duty exemptions on solar parts and products. Then there are capital subsidies (40% subsidy on benchmark capital costs on offer for units of up to 3KW capacity, and 20% for larger units up to 10 KW) which the government grants for installing solar systems at your homes/ office, etc. Also, there is income-tax benefit for loan-purchase of electric vehicles.
Donations to several NGOs qualify for tax exemption under Section 80G for upto 10% of your gross income. Some donations are 100% exempt while others are upto 50% exempt.
Paying taxes on time is one of the main duties as the citizen of any country. The government utilizes these taxes for the betterment and development of the nation. It is also important to know about the different options available to tax payers to save taxes like savings schemes, mutual funds, etc. Recently, solar installation is gathering a lot of momentum given the nation’s focus on reducing the overall carbon-footprint. The government has therefore, enabled tax saving option on the same to encourage more installations in the country. Hence, installing a solar system on one’s rooftop has also become an attractive option to save taxes and add to the property value in the long run.