The word ‘tax’ scares us. But if you understand the guidelines thoroughly, it will help you plan your taxes properly, and show you how to save tax for 20 lakh income easily.
The finance minister designed a progressive tax regime in Budget 2023-24. Under this system, individuals with a higher income will pay higher taxes progressively. This means that you must carefully plan your income, savings, and investments, to pay the least possible tax.
Here are a few ways to understand how to save tax for salary above 20 lakhs.
Old tax regime or new?
The new income tax guidelines give you a choice to file your taxable income under either the old or new tax regime.
The biggest change in the new tax regime is that individuals earning up to Rs. 7 lakhs need to pay no tax.
Under the old regime, the taxation bracket starts from Rs. 2.5 lakhs per annum, hence:
Up to Rs. 5 lakhs income - 5% tax
Rs. 5 lakhs to Rs. 10 lakhs - 20% tax
Rs. 10 lakhs and above - 30% tax
While income tax for Rs. 20 lakhs per annum stood at 30%, there were ample exemptions and deductions to reduce tax liability.
In the new regime, the slabs grow larger, so income up to Rs. 3 lakhs is exempt from tax. Thereafter:
Rs. 3 to 6 lakhs - 5% tax
Rs. 6 to 9 lakhs - 10% tax
Rs. 9 to 12 lakhs - 15% tax
Rs. 12 to 15 lakhs - 20% tax
Rs. 15 lakhs and above - 30% tax
The income tax for Rs. 20 lakhs per annum is still 30%, but with drastically lower number of exemptions and restructured deductions.
Factors to consider when choosing a tax regime
This guideline will help you choose the tax regime for income tax slab for Rs. 20 lakhs.
Your income: Do a careful study of the exact tax liability that your income will attract. Remember, a few exemptions have been removed under the new tax regime.
Your current savings: Many exemptions like HRA and LTA, Medical bills, and other have been removed from the exemption list. If you rely on these to save your tax, the old regime is a better option.
Deductions capacity:The deductions allowed under the new tax regime may not be feasible for everyone - like investing in donations or contributions to the Agniveer Corpus Fund, under section 80 CCH.
Your current age:Individuals who are 60 to 80 years will get tax exemptions of up to Rs. 3 lakhs, and above 80 years, up to Rs. 5 lakhs. There is also a provision of standard deduction on pension at Rs. 15,000 or 1/3rd of pension, whichever is lower.
So clearly, a pensioner will choose the new regime.
Here, however, experts have created a breakeven point in taxation. This point will be reached when the tax liability between the two regimes becomes the same, everything else considered.
This can help an individual below 60 years of age decide which regime is better:
Total deductions up to Rs. 1.5 lakhs? Opt for the new regime.
Total deductions exceed Rs. 3.75 lakhs? Opt for the old regime.
Deductions in between? Choosing a regime will depend on your income.
So, we conclude that the new regime is meant for individuals who want a simple taxation process. Consultants and other non-salaried earners are only eligible for a few deductions and prefer the new regime.
On the other hand, senior citizens whose income is largely from interest on investments would benefit from the new regime, with the new section 80 TTB. This allows them to claim Rs. 50,000 as an income tax deduction. But they may find the old regime safer.
Want to save tax on your income above Rs. 20 lakhs?
The old regime offered several exemptions from the salary, which made it easier to plan taxation. There were also standard investments like medical insurance, life insurance, NPS, PPF, and home loan payments, which could be worked around to provide the maximum possible deductions from taxable salary income. This would bring down the net taxable income to the minimum possible level.
So, under the old regime, the total tax for Rs. 20 lakhs income worked out to 2,46,630 + 4% cess. This could be further reduced by deductions from ULIP, EEPF, and home loan investments.
But the new tax regime has removed most of these deductions and exemptions, making an income of Rs. 20 lakhs attract a tax of Rs. 2,96,400.
Here is how you could save this:
Take a home loan: Section 24(b) allows you a tax exemption on the interest portion for up to Rs 2 lakh per year
Claim tax deductions under section 80D for a health insurance policy
Buy a life insurance plan for a tax deduction on the sum assured if disbursed, but the calculation is complex
Invest in Government investment schemes under Section 80C which allows for deduction up to Rs. 1.5 lakhs annually and are prudent lifelong investments. These are:
Senior Citizen Savings Scheme (SCSS)
Sukanya Samriddhi Yojana (SSY)
National Pension Scheme (NPS)
Public Provident Fund (PPF)
National Pension Scheme (NPS)
So, check out your planned investments, then start investing early in the year to get maximum tax benefit.
Filing taxes under the chosen regime: a step-by-step guide
Knowing how much tax will be deducted for Rs. 20 lakhs annual income is important.
Under the old regime:
A gross salary of Rs. 20 lakhs will work like this:
1. A standard deduction of Rs. 50,000
2. HRA (Rs. 2 lakhs pa)
3. LTA, (Rs 40,000)
4. Other reimbursements (up to Rs. 25,000)
5. Children’s education etc.
The taxable income works out to approximately Rs. 16.7 lakhs, approximately.
80C (up to 1,50,000),
80D (up to 50,000) and
80E (up to 25,000).
Then, the net taxable income will be about Rs. 14.4 lakhs.
On this, the tax burden will be about Rs. 2.4 lakhs per annum.
Under the new regime:
There is only a standard deduction of Rs. 50,000 on salary.
So gross taxable income is Rs. 19,50,000. Net taxable income (after basic exemption limit) 16.50 lakhs, attracting tax of Rs. 2,85,000.
Need help with these painstaking and long-winded calculations?
To get the exact amounts, the use of an Income Tax calculator will help, considering the amount of calculations involved. Entering all deductions, savings, and investments will show the correct tax amount.
To know more about an intelligent Income Tax calculator, click here.
While the new tax regime is progressive and supports lower-income individuals, the impact on higher incomes like Rs. 20 lakhs will be different. You will need to re-look your savings and investments to ensure minimal tax impact.
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