New Delhi: While the tax exemption limit is Rs 2.5 lakh, if your taxable income is above Rs 5 lakh, you can avoid paying income tax by investing in certain investment instruments. If your annual taxable salary is Rs 5 lakh, you can earn a full rebate on your tax liability of Rs 12,500
According to the existing income tax laws, there are three tax slabs depending on your income. If your salary is Ra 2.5 lakh or less, you are not liable to pay any tax. If your taxable income is between Rs 2.5 and Rs 5 lakh, you will be taxed at 5%. If your taxable salary is over Rs 5 lakh and less than Rs 10 lakh, you are liable to pay Rs 12,500 plus 20% of your income over Rs 5 lakh as tax. If your income is more than Rs 10 lakh then you will be taxed at 30%.
For the current financial year, if your salary is Rs 5 lakh, you can earn a full rebate on your tax liability of as in the interim budget, the then finance minister Piyush Goyal had increased the rebate amount from the Rs 2,500. It may be noted that this rebate is not a tax exemption so you will still have to file your returns.
The tax slab on income above Rs 2.5 lakh continues for those who earn above Rs 5 lakh. This means that if your taxable income is Rs 6.5 lakh, you still have to pay tax based on slab rate and you don’t get the rebate.
However, if your taxable income is above Rs 5 lakh, you can avoid paying tax by investing your money in certain investment instruments. While this is not applicable to all income categories, there are some individuals who can save tax this way. In case your taxable income is Rs 8.5 lakh and your standard deduction is Rs 50,000, your gross income would be Rs 8 lakh.
The income tax payable along with cess according to the slabs will be around Rs 75,400. However, if you have a home loan and you can claim a deduction of Rs 1.5 lakh as interest paid on housing loan, which can bring down your taxable income to Rs 6.5 lakh. You can further invest in investment instrument listed under section 80 C of the income tax Act with a limit of Rs 1.5 lakh to bring your taxable income down to Rs 5 lakh. This will make your tax liability go down to Rs 12,500 from Rs 75,400.
Further, you can reduce your tax liability to nil after claiming a rebate of Rs 12,500 under section 87A of the I-T Act. There are a set number of investment instruments that you can consider in order to get this tax benefit. As per the act, deduction of up to Rs 1.5 lakh for investments made under section 80C includes investments in public provident fund (PPF), EPF contribution, LIC policy premium, ELSS of mutual funds, NPS contribution, five-year FDs and national savings certificate (NSC).
You can also claim the deduction under the limit of Rs 1.5 lakh on payments made for tuition fees of children and repayments of housing loan. Altogether, you can save up to Rs 3 lakh and bring your income down to Rs 5 lakh from Rs 8 lakh. However, it is to be mentioned that while investing in tax-saving instruments, the only parameter should not be avoiding tax. Focus on your overall financial portfolio before investing in any of these instruments.