With the tax-saving season in full-swing, here’s what young taxpayers must know in order to take full advantage of all the deductions and benefits that are available to them under the Income-tax Act, 1961
A first job is rightfully considered an important milestone in one’s life, and with the tax-saving season in full-swing, here’s what young taxpayers must know in order to take full advantage of all the deductions and benefits that are available to them under the Income-tax Act, 1961.
It should be noted that earning a salary which is over the exemption limit makes one liable to pay income tax and file an income tax return.
And when it comes to young professionals, experts believe they can save on taxes by simply understanding their tax bracket and making informed decisions.
“Young professionals can take advantage of tax-deferred retirement accounts, enrol in income-driven student loan repayment plans, utilise tax-free benefits, such as flexible spending and health savings accounts to reduce their taxable income among other things,” says Nivedita Kannan, head of people’s function, Mudrex, a crypto investment platform.
Tax-Saving Investment Options Available Under Section 80C Of Income-Tax Act, 1961
When selecting a tax-saving investment option, one must consider personal financial goals and risk tolerance for better planning. It is equally important to remember that the maximum limit available for tax deduction under Section 80C of the Income-tax Act, 1961 is Rs 1.5 lakh in a year.
For youngsters, the options available under Section 80C include the Public Provident Fund (PPF), National Savings Certificate (NSC), equity-linked savings scheme (ELSS), life insurance premiums, five-year fixed deposits with banks or post offices, and unit-linked insurance plans (Ulips), among others.
Fortunately, there are several other tax-saving options available in the country apart from Section 80C and these include “tax benefits for health insurance premiums, education loan interest, charitable donations, rent paid, individuals with disabilities, long-term capital gains, home loan interest, and contributions to the National Pension System (NPS),” says Kannan.
Tax Deductions Youngsters Must Know About
For the young taxpayer new to the workforce, there are important tax deductions they must remain informed about.
Sandeep Setty, vice president, human resource at Pazcare shares in detail the tax deductions youngsters should know about in order to reduce their taxable income:
Home loan principal repayments through equated monthly instalments (EMI) are eligible for tax deductions under Section 80C.
Investments in ELSS are eligible for tax deductions under Section 80C.
Stamp Duty and Registration Charges paid for transferring property are eligible for deduction under Section 80C.
Premiums for health insurance paid for self, spouse and children qualifies for income tax deduction under Section 80D for up to Rs 25,000. For senior citizens, this is Rs 30,000.
Deduction for preventive health check-up for up to Rs 5,000 is available under Section 80D for amount spent for preventive health check-up for self or family.
One can also avail of deductions under Section 80CCF by investing in infrastructure bonds.
Charitable donations are eligible for deductions under Section 80G, but the contributions must be declared before December 31 each year.
Interest paid on education loan is eligible for a tax deduction under Section 80E. The loan can be taken to pursue higher education by the borrower, spouse, children, or a student they are the legal guardian of.
Who Can Claim HRA Exemption?
Employees who receive house rent allowance (HRA) can claim so by furnishing a proof of payment of rent.
One can claim exemption on the lowest of the three:
Actual HRA received.
10 per cent of the basic salary minus total rent paid.
50 per cent of the basic salary is eligible for HRA deduction if the individual is living in a metro city, and 40 per cent if living in any other city.
Changes In Union Budget 2023-24
In the recent Union Budget 2023-24, the government has announced a slew of changes in personal income tax, with a major emphasis on the new tax regime.
Now, individuals with a taxable income of Rs 7 lakh will not have to pay any tax under the new tax regime. Earlier, this limit was Rs 5 lakh.
The government has also introduced new small savings scheme, the Mahila Samman Savings Certificate (MSSC), which will offer a rate of interest of 7.5 per cent for a maximum deposit of Rs 2 lakh. The scheme will be available for years up to March 2025.
The government has also announced new tax slabs under the new regime: They are as follows
For incomes up to 0-3 lakh, the tax will be nil. Earlier, this limit was Rs 2.5 lakh.
For the Rs. 3-6 lakh limit, the tax rate is 5 per cent, for Rs 6-9 lakh, it is 10 per cent. For Rs 9-12 lakh, it is 15 per cent, and for Rs. 12-15 lakh, it is 20 per cent. For incomes above Rs. 15 lakh, it is 30 per cent.
This will provide a major relief to tax payers in the new tax regime. Those with a taxable income of Rs 9 lakh will now have to pay a tax of Rs 45,000 as against Rs 60,000 earlier. Likewise, an individual with a taxable salary of Rs 15 lakh will now have to pay a tax of Rs 1.5 lakh or 10 per cent of the income as against Rs 1,87,500 now.
The government has also introduced the Standard Deduction of Rs 50,000 to salaried individuals in the new tax regime.