Personal Finance

Mission ₹5 lakh — how to get there?

Anand Kalyanaraman | Updated on February 15, 2019 Published on February 10, 2019

You can get rebate and avoid tax by using deductions and other breaks

The morning after the Interim Budget 2019 on February 1, Aadith was grumpy. “Why so glum?” asked Shreyas, his bestie. With a long face, Aadith replied, “I always seem to end up getting the short-end of the stick. This time, in the Budget too.” “How so?”, prodded Shreyas.

Aadith explained: “Yesterday, Piyush Goyal announced that individual taxpayer having annual taxable income of up to ₹5 lakh will get full tax rebate and so will not have to pay any income tax next year onwards. Did you know, that could mean tax savings of up to ₹13,000 a year? But if the taxable income is anything above ₹5 lakh, there is no rebate benefit. So, if the taxable income is ₹5,00,010, the tax liability is ₹13,002. Imagine, just because taxable income is ₹10 more than ₹5 lakh, one will end up paying around ₹13,000 as tax. The trouble is I earn around ₹10 lakh a year from salary and other sources — so no tax rebate for me. To cut a long story short, the tax relief I was hoping for in this Budget has again not come.”

With an understanding nod, Shreyas said, “Ah, so that’s the matter. But Aadith, did you notice the word “taxable” before income? Taxable income can be very different from what one earns as gross income. So, while you may be earning ₹10 lakh a year, your taxable income can be much lower.” Explaining this further to a puzzled Aadith, Shreyas continued, “Taxable income is the income after considering all deductions and tax breaks from the gross income. The taxman is kind and provides many such avenues. If you can use these benefits and get your taxable income down to ₹5 lakh or less, you can get the tax rebate benefit announced in the recent Budget and avoid paying tax.”

Deduction under Sec 80C

“Really?” Aadith perked up, “Can you tell me exactly how?” “Of course, what are friends for?”, smiled Shreyas. “To begin with, make sure you invest and claim the ₹1.5 lakh deduction available annually on Section 80C instruments. This will bring down your taxable income to ₹8.5 lakh. You have a wide choice here — home loan principal repayments, tuition fee payments for children, premium on insurance plans, and also a host of investments such as Employees Provident Fund (EPF), Public Provident Fund (PPF), Voluntary Provident Fund (VPF), long-term bank and post office deposits, pension plans, national savings certificates, senior citizen savings schemes (SCSS), Sukanya Samriddhi Yojana, equity-linked savings schemes (ELSS) and National Pension Scheme (NPS) – Tier I.”

“Next, invest at least ₹50,000 a year in the NPS – Tier I. This will not only help you save for pension after retirement, but will also get you a tax break of ₹50,000 beyond the ₹1.5 lakh available under Section 80C. With this, your taxable income will be down to ₹8 lakh.”

All ears now, Aadith asked, “But what about the remaining ₹3 lakh?” Shreyas said calmly, “There’s much more. Make sure you take adequate medical insurance cover for yourself and family and also for your parents. Not only will this give you essential protection against medical emergencies, but the health insurance premium is also eligible for deduction under Section 80D. You get a deduction of up to ₹25,000 a year for the premium you pay to get health insurance for yourself, your spouse and your dependent children. This goes up to ₹50,000 if any of the policy holder is a senior citizen. Besides, if you pay the health insurance premium to cover your parents, you get an additional deduction of ₹25,000 a year; this goes up to ₹50,000 if either of your parents is a senior citizen. Since you are still young and your parents are still not senior citizens, you can factor in a total deduction of ₹50,000 — comprising ₹25,000 each for yourself and your parents. So, now that brings down your taxable income to ₹7.5 lakh.”

“That is still ₹2.5 lakh short of Mission ₹5 lakh”, reminded Aadith. Thinking a bit, Shreyas said, “Ok. There is another big tax break that can bring you closer to the magic number. Haven’t you taken a home loan to buy your new house?” “Yes”, replied Aadith. “Nice. In that case, the interest on the home loan can bring down the taxable income too. While the principal amount on the home loan is allowed as deduction under Section 80C, the interest is allowed under Section 24. For self-occupied homes, the interest deduction is up to ₹2 lakh a year, while for let-out and deemed let-out properties, the overall loss from house property cannot exceed ₹2 lakh a year. Besides, you get deduction on the interest payable on the loan till the house is acquired or constructed. This can be claimed in equal instalments for five years from the year in which the property is acquired or constructed. This deduction though is subject to the ₹2 lakh limits mentioned above.” Aadith piped in, “Hey, I live in that house and easily pay more than ₹2 lakh a year as interest on the loan.” Shreyas replied, “So, with ₹2 lakh deduction, your taxable income is now down to ₹5.5 lakh.”

Factor in medical cover

Shreyas continued, “Besides this, under Section 80E, you can also claim deduction of the entire interest paid on loans to fund your education or that of your spouse, children or someone you take care of as a legal guardian. The loans must fund a Government-recognised course of study, and the deduction is allowed if the loan is taken from an approved financial institution or an approved charitable institution. You can claim the tax break for eight years most.” Aadith said, “I am paying around ₹30,000 as interest on my education loan. So, that brings down my taxable income to ₹5.2 lakh. Almost there!”

“Do you earn any interest from your savings banks accounts balances?,” asked Shreyas. “Yes,” replied Aadith, “about ₹12,000 a year that I declare as income.” “Ok, of this, ₹10,000 can be claimed as deduction under Section 80TTA. For senior citizens, this deduction under Section 80TTB goes up to ₹50,000 a year and includes interest from fixed deposits too,” says Shreyas.


Donate to charity

Shreyas continued, “For the remaining ₹10,000 deduction to get your taxable income to ₹5 lakh, I suggest you donate to charity. Donations to institutions and funds approved by the Government gets you deduction under Section 80G. Give money. You won’t get the benefit if you give in kind. While what you give to many Government-run entities may be entirely tax deductible, the deduction is limited to 50 per cent of the donation to most non-Government entities. This tax break may be further limited to 10 per cent of your gross total income.”

“Wow”, a visibly pleased Aadith said. “From ₹10 lakh gross income to ₹5 lakh taxable income – that’s quite something.”

Shreyas signed off, “There’s more Aadith. One, the standard deduction on salary has been increased from ₹40,000 to ₹ 50,000 a year in this Budget. This additional ₹10,000 effectively reduces your taxable income. Next, there are tax breaks available on the house rent allowance (HRA) if you pay rent, leave travel allowance if you submit travel bills, medical expenses incurred for specified critical illnesses or on disabled dependent relatives, and on contributions to political parties. Keeping note of all these and claiming them can help many avoid tax altogether.” 

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