Basics of Income Tax
Tax! It's such a little word. But the best of us find it terrifying. Perhaps it's because we know so little about it. While we fulfil out tax obligation every year, we also owe it to ourselves to make the most of tax savings and create real wealth for the future.
Your tax bracket
It is but obvious that everyone who earns income has to pay tax. But how much – that is the questions that your tax bracket answers. Your 'taxable income' or 'Income after deduction' defines your tax bracket.
There are three categories of individual taxpayers:
1. Individuals (below the age of 60 years) which includes residents as well as non-residents
2. Resident Senior citizens (60 years and above but below 80 years of age)
3. Resident Super senior citizens (above 80 years of age)
|Part I||Part II||Part III|
|Citizens below 60 Yrs of Age||Senior Citizens (60 Yrs to 80 Yrs)||Senior Citizens (80 Yrs Old & Above)||TAX Level|
|Income up to 2.5 Lakh||Income up to 3 Lakh||Income up to 5 Lakh||No Tax|
|Income from 2.5 Lakh to 5 Lakh||Income from 3 Lakh to 5 Lakh||--||5%|
|Income from 5 Lakh to 10 Lakh||Income from 5 Lakh to 10 Lakh||Income from 5 Lakh to 10 Lakh||20%|
|Income more than 10 Lakh||Income more than 10 Lakh||Income more than 10 Lakh||30%|
• @4% Health and Education Cess for individuals in the Tax
• Surcharge: 10% of income tax, where total income exceeds Rs 50 lakh up to Rs 1 crore.
• Surcharge: 15% of income tax, where the total income exceeds Rs 1 crore to Rs 2 crore
• Surcharge : 25% of income tax, where the total income exceeds Rs 2 crore to Rs 5 crore
• Surcharge : 37% of income tax, where the total income exceeds Rs 5 crore
• Rebate under section 87A : The rebate is available to a resident individual if his total income does not exceed Rs 5 lakh. The amount of rebate shall be 100% of income tax or Rs 12,500 whichever is less.
Determine your tax-saving instrument
While Section 80C of the Income Tax Act offers you a range of options for tax saving such as Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), National Pension Scheme (NPS) and National Savings Certificate (NSC) etc., your choice must depend on your income, risk appetite and return expectations.
Life insurance basically safeguards you against risk, except for Unit Linked Insurance Plans (ULIPs), which invest a part of the money into markets and the other part is dedicated to insurance, which does not earn any return. Fixed rate interest bearing instruments such as PPF and NSC are better suited for risk averse investors since they are backed by the government or by established financial institutions. However, they may not be able to beat inflation in the long term.
An Equity Linked Saving Scheme, however, is a pure equity option, which invests in the stock market and provides capital gains over the long term.
A mantra that precedes every investment plan – start early. Most investors start the hunt for tax saving instruments during the end of the financial year, when the fear of tax hits them. Investments in tax saving instruments demand attention and research. Starting early can help you make better choices, save tax more efficiently and capitalize on the investment returns.
Planning to reduce taxes is a critically important piece of the overall financial planning process. In order to minimize the anxiety associated with the time of tax filing and avoid surprises, adding a financial advisor could be beneficial.
An Investor Education Initiative
Disclaimer –This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. This document provides general information on performance; financial planning and/or comparisons made are only for illustration purposes. The data/information used/disclosed in this document is only for information purposes and not guaranteeing / indicating any returns. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing. Recipient should also understand that any reference to the indices/ sectors/ securities/ schemes etc. in the document is only for illustration purpose and should not be considered as recommendation(s) from the author or L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates. Recipient of this information should understand that statements made herein regarding future prospects may not be realized or achieved. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.