Introduction: The Finance Bill, 2020 has come up with a lot of benefits for small and medium taxpayers in such a way that, even those earning Rs. 7.25 Lacs a year need not shell out a single rupee of tax provided they make some eligible investments.

Calculation:

As we all aware that, Finance Bill, 2020 gave two options to the tax payer.

  • Option 1 is opt for normal tax rate same as earlier year with availing all exemptions and deductions
  • Option 2 is opt for concessional tax rate without obtaining any exemptions and deductions as mentioned in that particular section.

Today, I am solving this example of Nil tax on income of Rs 7.25 lacs by using Option 1.

Now as everyone knows a rebate upto Rs. 12,500/- is allowable to resident taxpayers for earning net taxable income up to Rs. 500,000/-. Generally, in broader way there are two category of taxpayers i.e Salaried and Non Salaried.

Now talking about Non Salaried tax payers first, effectively for a person earning up to a Net Taxable income of Rs. 5 Lakhs need not pay any tax. Further, if the person is opting for Option 1, he is also allowed a deduction under Chapter VI-A. If we consider normal investments which mostly all taxpayers will consider like Rs 1,50,000 for Section 80C, Rs 50,000 for NPS under section 80CCD(1B) and Rs 25,000 for Mediclaim under section 80D totalling to Rs 2,25,000.

As a result, normal Non Salaried tax payers can earn a gross total income of Rs. 725,000/- (Rs. 500,000 Net Total income + Rs 225,000/- deductions) and still eligible for Nil tax.

Further, for salaried taxpayers, you can add Rs 50,000 additionally since they are getting standard deduction, many people also get some other allowances like HRA, etc so they can add such amount in this basic figure of Rs 7,25,000 and plan their tax accordingly.

How to do your tax planning?

If you are Non salaried person and you are earning Rs. 60,000/- a month, do the following to ensure that you need not pay any tax.

1. Make sure to have deductions under Section 80C at least up to Rs. 150,000. This may consist of deduction made by employer towards Provident fund contribution, Life insurance premium, Principal repayment of housing loan, Investment in PPF (Public provident fund) or maybe education fees of children. These are the most commonly taken options.

2. An additional amount of Rs. 50,000/- is allowed as a deduction for investment in National pension scheme. You can approach your bank for more information on the same.

3. Taking medical insurance of your family is extremely important as a precautionary measure. Additionally, as a tax incentive a deduction up to Rs. 25,000/- is allowed against payment of medical insurance premium provided such payment is made by a mode other than cash. Also please keep in mind that any Mediclaim for senior or super senior citizen can allow deduction upto Rs 50,000.

The following table makes it very easy  to understand the above

Gross Income 7,25,000
Less Deductions U/C VIA
80 C EPF/LIC / PPF etc 1,50,000
80CCD(1B) NPS 50,000
80 D 25,000 2,25,000
Taxable Total income 5,00,000
Tax on the above 12,500
Less Rebate u/s. 87 A 12,500
Total tax payable  Rs      NIL

So better planning on investment can save your tax in best way.

Disclaimer: This write up is not intended to be a professional advice to anyone, therefore neither the Author nor the Organization he represents accepts any responsibility whatsoever and hence no liability can arise for any losses, claims or due to the contents of this write up. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. The opinion is the personal opinion of the author and the firm P P Jayaraman & Co will not in any way be responsible for any claim etc.

(Republished with amendments by Team Taxguru)

Author Bio

Qualification: CA in Practice
Company: PP JAYARAMAN & CO
Location: THANE, Maharashtra, IN
Member Since: 11 Sep 2019 | Total Posts: 8
The author, Aravind Jayaraman is a Chartered Accountant in Practice based in Thane, Maharashtra. View Full Profile

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6 Comments

    1. caaravindj777 says:

      Yes. For salaried persons, standard deduction of Rs. 50,000/- can also be taken. This article was not meant specifically for salaried employees but in general. Hence the same was not considered.

    1. caaravindj777 says:

      Yes. In case you are a salaried employee, you can definitely claim HRA as per the prescribed limits in Sec 10(13A) of the Income Tax Act. Further, in case you earn rent, you can surely claim 30% standard deduction. However one thing to note is that to avail these deductions (including the ones mentioned above), you need to opt for the old rate scheme.

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