Namaskar, my name is Rupesh Jadhav, and you are welcome to the Rupeshfinancialexpert.in, Where I unlock the knowledge of finance. When somebody says, ‘Tax Returns’ our brain switch just turns ‘off’, because who will do all that paper-work?! plus it’s so complicated to understand. But think about it, we are already paying so many taxes… Taxes on food, taxes on clothes, taxes on travel, taxes on movies! So, my dear friends, it is time to turn that switch back ‘on’, because by doing our taxes we can save a lot of money and that intern will get us more money. It’s just like setting up a money tree. I know the concept is sounding like a fraud but…Trust me! In this blog I am going to tell you 5 Legal ways of saving your taxes and growing your money automatically. So, in this blog we are going to see a. What is Tax and how much are we paying? b. 5 Legal Ways of saving taxes, but most importantly, towards the end, as a Bonus Tip I’ll show you how to do your tax calculations? so that you pay the least tax possible. And I am going to do all of this without boring you to death! But before that, if you like me or if you like my work make sure you do the ‘Comment and Share with your Friends’, because that motivates me to make more blogs.
Now, what is Income Tax? Suppose you are earning ‘X’ amount of money. Out of that, you have to give away some to the government, so that it can use it for public services. Now we can’t control how and where our government is using our money, but the Income Tax Department of India gives us back our money, if… we save more money. Isn’t that great? Before I tell you how, let’s first understand how much you are paying in the first place. It all depends on the tax slab you fall into. If your income is less than 2.5 Lakh per annum, then you pay 0% tax on your income. If it’s between 2.5 L to 5 L then you have to pay 5% tax on your income after you deduct 2.5 L from it. For example, suppose you are earning 4.5 L per annum. Subtract 2.5 L from it because for 2.5 L you don’t have to pay any taxes. What’s remaining? 2 Lakh. Now you have to pay 5% of 2 L, which is Rs.10,000 and that is the income tax you are paying. If your income is between 5 L – 10 L per annum, then you need to pay Rs.12,500 + 20% income tax. And for more than above 10 L, it is Rs.1,12,500 + 30%. This tax slab is different for senior and super-senior citizens. So as you can see, 30%, 20% and even 5% is too much.
Especially, when we are paying GST for everything… food, clothing, travel, petrol, internet, electricity, movies; it’s like we are paying taxes for breathing! So, if the Income Tax Department itself is giving you back your money i.e. rebating your money, then why won’t you take back your own money?
Now, how to get back your money? There are 5 ways to do it. The first method involves spending money a certain way and the rest 4 are by saving it. Let’s start with spending money. The Income Tax Department will give you back your money, if you spend it on the following things.
a. First, House Rent Allowance In your salary slip, you would’ve noticed there is something called ‘HRA’, House Rent Allowance. If you are paying rent, then under Section 10(13A), you get an exemption of an amount that is equal to the minimum of these 3.
1. Your HRA from your salary slip.
2. 50% of your basic (if you are living in a Metro) or 40% of your basic (if you are living in a non-metro) or 3. The rent paid by you – 10% of your Basic.
To simplify this, let’s take an example…Suppose you earn Rs.50,000 per month. Your Basic is Rs.25,000. And according to your company policy, your HRA is 40% of your Basic, which is Rs.10,000. So, we are assuming that this is how your salary slip looks like. So, Option 1 is direct. HRA is Rs.10,000 which we directly picked up from your salary slip. Option 2 is same as Option 1 because your company decided that your HRA is 40% of your Basic, which is what most companies do. Time to calculate Option 3. Let’s assume you pay Rs.7000 per month as rent. So, 7000 – 2500 (10% of your Basic) = Rs.4,500 Now among 10K, 10K and 4,500, which is minimum? Obviously, Rs.4,500. So, 4,500 X 12 = Rs.54,000 is your tax-exemption. Now remember this Rs.54,000 because towards the end in the Bonus Tip, I will show you how this Rs.54,000 will reduce your taxes.
b. Second, Moving from rent to home loan. Suppose you are living in your own house and have a home loan on it, then congratulations because you can claim both principal and interest. Under Section 80C, you can claim the principal and the max limit of 80C is Rs.1,50,000. Under Section 24, you can claim the interest and the max limit is up to Rs. 2,00,000.
c. Third expense, Provident Fund. This is something, you have to contribute in, while you are working. The best part is it comes with a tax exemption under 80C. So, your PF is usually 12% of your Basic. If we take the example of this salary slip, then 12% of Rs.25,000 will be Rs.3,000. Multiply that by 12, you get Rs.36,000. Remember this Rs.36,000 also because towards the end I’ll show you, how this will also reduce your tax.
d. Fourth, and the most important expense, education. Under 80E, suppose you or your spouse or your children, take an education loan, then you can claim the interest until it is fully paid or for 8 years, whichever is sooner. Which means, suppose you took a loan for doing your engineering, then you can claim it even while you are doing your job. 80E is for education loan but under 80C, you can also claim the tuition fees of your children. Only for the first 2 kids, ok? Because, ”Hum do Hamare do!”
e. Fifth, And finally, under 80G, you can file returns for a maximum of Rs.10,000 for contributions made to charitable institutions, relief funds. So if you have contributed to Chief Ministers Relief Fund, Maharashtra. then you can claim it now. So as you can see, there is so much tax returns you can file by spending money. But if you are not doing any of these then don’t worry. Because Government of India allows Tax Exemption even when you save money also. To help you decide which of these 4 saving options is best for you.
I am going to compare them based on 3 parameters.
1. Lock-in period, which is how long you’ll have to wait before you take out your own money.
2. Average returns which is the % of interest you will get out of it. and,
3. Tax on Maturity which is the amount of tax you’ll have to pay on the final amount that you get at the time of withdrawing your money.
Let’s start with the option of Saving Money through PPF. PPF stands for Public Provident Fund which is basically a retirement fund. So, if you save your money through PPF, then you can save your taxes under Section 80C. The sad part is, the Lock-in Period of PPF is 15 years and if you are in dire need of money then you can withdraw only after 5 years, and only up to a certain percentage. So, withdrawal is definitely a problem with PPF. The average returns are around 8% but the good part is, you don’t have to pay any taxes on the final amount at the time of withdrawal.
Our next option is a Tax-Saving FD, which is basically a type of Fixed Deposit, that comes with a tax benefit under Section 80C. The best way to invest in a Tax-Saving FD is in a bank that has your salary account. Because that way you can automatically set up for the FD amount to directly move to your salary account, after maturity without you having to do anything. Our next saving option is Health Insurance. I know what you are thinking… ‘Nothing bad will happen to me.’ But bad luck doesn’t knock on the door before coming, and you wouldn’t want you or your family to spend all your savings or worse beg for money. The best part about Health Insurance is that it helps you save taxes. Under Section 80D, you can claim up to Rs.25,000 for yourself and your dependents and an additional of Rs.30,000 if both your parents are above the age of 60. If you want me to make a separate Blog about, ‘How to choose the best health insurance plan?’ then comment below and let me know.
Our last saving option of the day is, ELSS. Equity Linked Saving Scheme, which is basically an Equity Mutual Fund with tax-benefit under 80C. The Lock-in period of ELSS is just 3 years, average returns in the past have been between 15% to 18% and the returns generated are taxable. One of the best ways to invest in ELSS is through an app called, ”Angel-one“. I’ll tell you more about it later. But before you invest, always remember “Mutual Funds are subject to market-risk. Please read the offer document carefully before investing.”
Apart from these, there are other tax-saving options also, like…EPS, NSC, Term Insurance, NPS … but for now we are sticking to the basics that are more than enough to get you started. Now coming to the Bonus Tip. How to do your tax calculations and pay the least tax possible? Now before I tell you that, make sure you ‘Recommend’ to my website, and do the ‘Comment & Share’ so that I know you like me! And also, because I make Career and Finance blogs every week.
Now comes the most interest part… How to divide your money into these options, so that you pay the least tax possible. For that, let’s take an example. Suppose Rupesh is a bachelor, earning Rs. 6 Lakh per annum and paying a rent of Rs.7,000 per month. He is covered in his company’s health insurance plan. Now let’s see how he can divide his money so that he pays the least tax possible. With an annual income of Rs. 6 Lakh per annum, Rupesh falls into the 3rd slab (Remember the tax slabs from before?) Now, 6 minus 2.5 gives you 3.5 Lakh. He has to pay 5% tax on this 3.5 Lakh, which is equal to Rs.17,500 which is a lot of money.
Now let’s see what he can do to reduce this amount.
1. You remember in the HRA section, we discussed how under Section 10(13A), for a rent of Rs.7,000, Rupesh can claim up to Rs.54,000. Let’s keep this aside for a second.
2. Under 80C, the maximum tax exemption limit is Rs.1,50,000. Now let’s see what all Rupesh is spending money on, that can be claimed under 80C.
A: Children Tuition Fees, he doesn’t have any.
B: Home Loan Principal, he doesn’t have one.
C: His PF contribution as we calculated earlier, is Rs.36,000.
So, under 80C, you can claim up to a max of Rs.1,50,000 but Rupesh is only spending Rs.36,000. So Rs. 1.5 Lakhs – Rs.36,000 gives you 1.14 Lakh per annum, which is still left. So Rupesh decides that he will invest this Rs. 1.14 Lakh in either a Tax-Saving FD or ELSS. Based on these parameters, you decide, which tax-saving option is best for you, and if you think ELSS is your choice, then check out the Angel-One app. and the reason why I agreed is, because not only they help you select the best mutual fund, but they also give you the ’80C Investment Proof’ that you can submit to your HR and your savings can start from the same month. If you want to know how to use the Angel-one app then read this blog, and I’ve left the Angel-One app’s link in the mentioned below. Download it for free and check it out yourself.
https://angel-one.onelink and use my Referral code RU37784KVZ
As you can see, all of Rupesh’s investments are done. Now let’s see how it reduces his taxes. To do that, we need to subtract all of this from his annual package. So 6 Lakh per annum – 1.5 Lakh (under 80C) – 54,000 (from HRA) gives you Rs.3,96,000. So now he has to pay taxes only for Rs.3,96,000 instead of 6 Lakh. So 3.9 L – 2.5 L (because you have to pay 0% tax on 2.5 L), gives you 1.46 L and 5% of 1.46 Lakh is Rs.7,300. So instead of paying Rs.17,500 with no investments, now Rupesh is only paying Rs.7,300 + he has made investments that will get him more money. So he has saved money by investing money and this cycle will generate more money automatically. So hasn’t Rupesh built himself a money tree like we were talking about earlier? And if he can, then what’s stopping you? On that note, I promise to see you again next blog, Till then keep learning, keep earning, and be happy.
