BAJAJ BROKING
July 25, 2024
10 mins read
Discover essential strategies to minimise your income tax liability in India. In this comprehensive guide, we define tax liabilities and cover tips on maximising your deductions, exemptions, and tax-saving investments to help you legally reduce your tax burden and ensure timely compliance with income tax laws.
Every year, filing an income tax return is an important step for all taxpayers in India. It specifies the amount of money earned throughout the fiscal year and the taxes imposed on it. However, some provision of the income tax law helps in reducing this tax liability. It saves a significant portion of your tax liability if you plan it in advance.
Planning your taxes ahead of time involves taking into account deductions and exemptions available under different sections of the Income Tax Act. It may be in the form of either investing in specified instruments or spending within the prescribed limits.
In this blog, we will discuss the definition of tax liability, while providing you with tips and tricks on how best to minimise it. Whether you are following the new regime or the old one, this blog has all the necessary tips that come in handy while computing your tax liabilities. Let us begin!
The phrase ‘income tax liability’ means the sum of money that an individual assessee or a business owes to the government based on their earnings. Tax liability is calculated in accordance with the provision of the Income Tax Act. It includes net tax on salaries, profits from businesses, capital gains, and other sources of income, after considering applicable deductions and exemptions.
The formula used for calculating tax liabilities depends on the rates applicable under various slabs. For individuals aged below 60 years falling under the old scheme, there is no tax payable if taxable income does not exceed ₹2.5 lakhs; between ₹2.5 lakhs and ₹5 lakhs, it attracts 10% tax, between ₹5 lakhs and ₹10 lakhs, it attracts 20% tax and above ₹10 lakhs, it attracts 30% tax.
Under the new scheme, no tax is charged where total income is below ₹3 lakhs. Between ₹3 to ₹6 lakhs, it attracts 5% tax, between ₹6 to ₹9 lakhs, it attracts 10% tax, between ₹9 to ₹12 lakhs, it attracts 15% attracts, between ₹12 to ₹15 lakhs, it attracts 20% tax and above ₹15 lakhs, it attracts 30%. These slabs are reviewed in each Finance Budget.
Failure to settle all tax obligations on time attracts penalties. Hence, it is advisable to clear your dues before the due date. Deadlines for making advance payments are scheduled on June 15, September 15, December 15 and March 15h of each financial year. The due date for filing an ITR is July 31 for non-audit cases, October 31 for audit cases, and November 30 for transfer pricing cases.
In India, the two main categories of tax are direct and indirect taxes. Let’s look at them briefly.
Direct Taxes
These taxes are levied directly on a person's income or wealth. They cannot be transferred to another person as a tax burden. These include:
Income Tax: Income tax is a direct tax levied on the income of individuals, HUFs and businesses based on a progressive slab system, with rates ranging from 5% to 30%.
Corporate Tax: Imposed on company profits, influencing business profitability and investment decisions. This has a direct impact on foreign investments as lower rates can attract more of it and boost economic growth.
Capital Gains Tax: This direct tax impacts investment decisions and strategies as it is levied on gains made from selling assets such as properties or shares.
Securities Transaction Tax (STT): Securities Transaction Tax is a tax levied on the purchase and sale of securities listed on recognized stock exchanges. The rates vary, with 0.1% for delivery-based equity trading and lower rates for derivatives.
Professional Tax: It is a state-level tax levied on individuals earning an income from salary or practising a profession, such as lawyers, doctors, and accountants. The tax amount varies by state but is capped at a maximum of ₹2,500 per year.
Indirect Taxes
These taxes apply to goods/services but can be passed onto consumers. Some examples are:
Goods and Services Tax (GST)
Customs Duty
Excise Duty
Taxes play an important role in economic development through financing government projects or services. A well-structured tax system ensures a reliable source of inflow necessary for planning & development at all levels of governance.
There are two major types of tax liabilities - current and deferred. Both are important for financial planning and compliance by individuals as well as organisations.
Current Tax Liability
This refers to the amount of tax that should be paid within a year, thus considered a short-term obligation. It includes various forms such as:
Income Tax: This is imposed on individuals or businesses based on their taxable income.
Corporate Tax: Levied on the net earnings of companies.
Advance Tax: Paid in instalments during the year depending upon estimated incomes.
Self-Assessment Tax: Paid before filing ITR if there is any remaining tax after considering advance tax and TDS.
Deferred Tax Liability
It is the outcome of temporary differences between accounting income and taxable income which leads to future tax payments. Deferred tax liabilities arise due to:
Temporary Differences: These occur when there exists a disparity between the balance sheet value of an asset or liability vis-à-vis its tax base. E.g., when depreciation rates vary for accounting and tax purposes. Future tax payments arise as a result of those temporary differences.
A rupee saved is a rupee earned. It is needless to say we all want to save more money out of our earnings. Whether you follow the old or new tax regime, the following table will help you save more by helping you reduce your income tax liability.
The table highlights various deductions available under the Income Tax Act that you can use to reduce your tax liability.
Old Tax Regime | New Tax Regime |
Home Loan Tax Benefits (Sections 80C, 24(b), and 80EEA) Tax benefits on home loans include deductions up to ₹2 lakh on interest payments. Renting out the home allows a full interest deduction from rental income, with a ₹200,000 limit for offsetting losses. First-time homeowners can claim additional deductions under Section 80EEA. | Employer Contribution to NPS under Section 80CCD(2) Salaried government employees can claim deductions for employer contributions to NPS up to 14% whereas non-government employees can deduct up to 10%. The total limit for contributions is ₹750,000. |
Health Insurance (Section 80D) Deductions for health insurance premiums are ₹25,000 for self and family, and ₹50,000 for senior citizens. For parents, the limits are the same. Preventive health checkups allow ₹5,000, and senior citizen parents without insurance can claim up to ₹50,000. | Agniveer Corpus Fund under Section 80CCH(2) Contributions to the Agniveer Corpus Fund are deductible under this section. This fund provides benefits such as allowances for ration, risk, hardships, travel, and compensation for death or disability. |
Investment Options (Section 80C) Popular options include FDs, PPF, NSC, NPS, ELSS, ULIPs, SSY, and SCSS. Total deductions up to ₹1.5 lakh per year. | Interest on Home Loan for Let-out Property (Section 24) Interest paid on home loans for let-out properties is deductible under this section without any upper limit, unlike self-occupied properties, which are prohibited. |
Life Insurance (Sections 80C and 10(10D)) Life insurance premium payments are deductible under Section 80C up to ₹1.5 lakh. For policies bought after April 1, 2012, premiums must be less than 10% of the sum assured to qualify. For those bought before this date, the limit is 20%. ULIP exemptions under Section 10(10D) apply if premiums are below ₹250,000 annually, and other policies if below ₹500,000. Section 80CCC and 80CCD(1) also offer deductions for specific pension plans. | Transport and Conveyance Allowance Physically challenged employees can claim a transport allowance exemption of up to ₹3,200 per month for commuting, subject to the actual expenditure incurred. |
Other Deductions You can claim various other deductions such as for charity made to institutions under section 80G and for interest paid on education loans under section 80E. | Exemptions Under Section 10 for the New Tax Regime The new tax regime allows certain exemptions under Section 10. Voluntary retirement scheme benefits up to ₹5 lakh are exempt. Gratuity is fully exempt for government employees, with private employees' exemptions depending on the Payment of Gratuity Act. Leave encashment up to ₹25 lakhs is exempt upon retirement or resignation. |
A tax liability exemption allows you to have full or part of the income exempt from taxes. This means you won't have to pay any tax on the exempted income. Most taxpayers are eligible for various exemptions that reduce the taxable income. Some individuals and organisations might even be entirely exempt from paying taxes.
In India, the government provides various tax exemptions to encourage investments and support specific economic activities. For instance, there are exemptions on insurance premiums to motivate more people to buy life insurance. Other incomes that may be exempt include agricultural income, pensions, and certain allowances.
These exemptions help reduce the tax burden on individuals and promote economic growth by encouraging spending and investment.
Paying your tax liability when filing your Income Tax Return (ITR) involves several steps. First, calculate your tax liability by determining your total taxable income, subtracting any deductions and exemptions to find your net taxable income, and then applying the applicable tax rates. Subtract any tax credits to get your net tax liability. You can also use a tax liability calculator to compute the tax liability.
For payment, you can use the Income Tax Department’s e-filing portal to pay online through net banking, debit card, credit card, or UPI. Alternatively, you can pay offline by filling out Challan 280 and paying at designated banks.
When filing your ITR, log in to the e-Filing portal, select the appropriate ITR form based on your income sources, fill in the necessary details, upload the required documents, and include the details of your tax payment.
After filing, verify the ITR via net banking, Aadhaar OTP, or by sending a signed copy to the Centralised Processing Center (CPC). Once verified, you will receive an acknowledgement from the Income Tax Department confirming the receipt of your ITR.
The following are some of the severe consequences of not paying income tax liabilities.
Income Tax Notice: You may receive an income tax notice with a deadline to respond. In such cases, quick action is necessary. Consulting a tax expert is advised.
Loss of Benefits: If you fail to file your taxes on time, you will not be able to carry forward losses to offset taxable income in future years.
Penalties: Late filing of tax returns attracts a penalty of ₹5,000, even if the income tax liability is nil because of exemptions and deductions.
Interest Charges: Under Section 234A, you will have to pay 1% interest per month on outstanding tax beyond the due date.
Prosecution: Failure to file your taxes can lead to prosecution under Section 276CC. That entails imprisonment for three months to seven years or a fine, or both as applicable.
Therefore, it is better to avoid such a situation by filling ITR before the due date. For AY 2024-25, ensure to file your ITR latest by July 31, 2024, and avoid any of the above consequences.
The minimum income liable for income tax depends on the selected regime and age category. Individuals below sixty years following the old tax regime for FY 2023-24 have a threshold of ₹2,50,000. Whereas senior citizens (aged between 60 to 80) and super senior citizens (aged 80+) are taxed only above ₹3,00,000 and ₹5,00,000, respectively.
Under the new regime, every individual has a threshold of ₹3,00,000. Moreover, any person who falls into this bracket but has net taxable income less than or equal to ₹7,00,000 shall receive tax rebate u/s 87A, resulting in zero-tax liability.
To effectively manage your finances, it is crucial to understand and plan for your tax liability while ensuring compliance with income tax laws. Along the way, you can make the best use of all the applicable deductions, exemptions, and tax-saving investments to reduce your tax burden.
Whether you are following the old or new tax regime, being informed about the applicable tax slabs and available benefits allows you to optimise your tax liability. Further, you must timely file your ITR to avoid penalties and legal consequences. Strategic tax planning not only helps in saving money but also promotes financial stability and long-term growth.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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In India, individuals, Hindu Undivided Families (HUFs), companies, firms, associations of persons (AOPs), bodies of individuals (BOIs), local authorities (LAs) and any other artificial juridical person are liable to pay income tax if their total income exceeds the minimum exemption limit
Yes, there is a difference in how an individual’s income is taxed and how a firm or company’s income is taxed. While an individual’s tax rates vary according to income slabs, for firms, it is a flat rate ranging from 22% – 40%.
For FY 2023-24, under the old regime, the minimum threshold limit above which one becomes liable to file a return is ₹2.5 lakh for individuals below 60 years; ₹3 lakh in case of senior citizens (aged between 60-80 years) and ₹5 lakhs for super senior citizens (above 80 years). In the new regime, it is ₹3 lakh for all individuals.
Tax liability represents the total amount of taxes which should be paid by you on your earnings, whereas tax payable refers to the actual outflow after considering deductions, TDS, advance taxes, etc.
A tax asset can be described as something that will reduce future payments such as prepaid or overpaid taxes. On the other hand, tax liability is the amount of tax owed to the government based on your income and other taxable activities.
Yes, if the taxpayer pays more than the tax liability, meaning the amount you paid is more than the amount you owe, then a refund may be claimed by filing an ITR.
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