If you are earning more than 20 lakhs per annum in India, you might be wondering How To Save Tax For Salary Above 20 Lakhs ?
The Income Tax Department follows a progressive tax regime that increases the tax rate with the rise in an individual’s income. As a result, people belonging to high-income groups generally bear a higher taxation rate. While those belonging to the low or middle-income group have to bear a lesser one.
However, there are several legitimate ways to save tax on salary above 20 lakhs in India.
In this article, we will discuss the various methods that can be used to effectively save tax on salary above 20 lakhs in India.
Read on to find out how you can reduce your taxable amount and maximize your savings!
Tax slabs under old tax regime vs new tax regime
For the financial year 2022-23, the tax rates for individuals earning more than 20 lakhs are as follows:
|Income Slab||Old Tax Regime (Up to AY 2021-22)||New Tax Regime (AY 2022-23)|
|Up to Rs. 2.5 L||Nil||Nil|
|Rs. 2.5 L – 5 L||5%||5%|
|Rs. 5 L – 7.5 L||10%||10%|
|Rs. 7.5 L – 10 L||15%||15%|
|Rs. 10 L – 12.5 L||20%||20%|
|Rs. 12.5 L – 15 L||25%||25%|
|Above Rs. 15 L||30%||30%|
Under the old tax regime, taxpayers could avail various deductions and exemptions to lower their taxable income. However, under the new tax regime, these deductions and exemptions are not available, and taxpayers have to pay tax based on the new tax slabs.
It’s essential to calculate which tax regime is more beneficial for you based on your income and deductions.
How much tax will be deducted for 20 lakhs?
Here’s a table comparing the tax payable for an individual earning a salary of Rs. 20 lakhs under the old and new tax regimes:
|Income Tax Regime||Taxable Income||Tax Payable|
|Old Regime||Rs. 20 lakhs||Rs. 2,75,000|
|New Regime (without exemptions and deductions)||Rs. 20 lakhs||Rs. 3,40,000|
Let me explain this in more detail:
Under the old tax regime, an individual earning a salary of Rs. 20 lakhs would fall under the tax bracket of 30%. This means that they would have to pay a total tax of Rs. 2,75,000, calculated as follows:
- Income up to Rs. 2.5 lakhs is tax-free.
- Income between Rs. 2.5 lakhs and Rs. 5 lakhs is taxed at 5% = Rs. 12,500
- Income between Rs. 5 lakhs and Rs. 10 lakhs is taxed at 20% = Rs. 1,00,000
- Income between Rs. 10 lakhs and Rs. 20 lakhs is taxed at 30% = Rs. 1,62,500
Therefore, the total tax payable under the old regime is Rs. 2,75,000.
Under the new tax regime (without exemptions and deductions), an individual earning a salary of Rs. 20 lakhs would fall under the tax bracket of 30%. However, the tax rates are different in the new regime and there are no exemptions and deductions available. This means that they would have to pay a total tax of Rs. 3,40,000, calculated as follows:
- Income up to Rs. 2.5 lakhs is tax-free.
- Income between Rs. 2.5 lakhs and Rs. 5 lakhs is taxed at 5% = Rs. 12,500
- Income between Rs. 5 lakhs and Rs. 7.5 lakhs is taxed at 10% = Rs. 25,000
- Income between Rs. 7.5 lakhs and Rs. 10 lakhs is taxed at 15% = Rs. 37,500
- Income between Rs. 10 lakhs and Rs. 12.5 lakhs is taxed at 20% = Rs. 50,000
- Income between Rs. 12.5 lakhs and Rs. 15 lakhs is taxed at 25% = Rs. 62,500
- Income between Rs. 15 lakhs and Rs. 20 lakhs is taxed at 30% = Rs. 1,52,500
Therefore, the total tax payable under the new regime (without exemptions and deductions) is Rs. 3,40,000.
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How To Save Tax For Salary Above 20 Lakhs ?
Here are some tips that you can follow:
Choose The Right Tax Regime
As per the new income tax guidelines, you can opt for either the new or the old regime while filing your taxes. The new regime offers lower tax rates but does not allow any deductions or exemptions. The old regime offers higher tax rates but allows various deductions and exemptions.
To choose the right tax regime, you need to compare your tax liability under both regimes and see which one is more beneficial for you. You can use an online calculator to do this. Generally, if you have a lot of deductions and exemptions, you might be better off with the old regime.
Invest in Tax-Saving Instruments
One of the most popular and effective ways on how to save tax on salary above 20 lakhs is to invest in tax-saving instruments. There are several options available, such as Public Provident Fund (PPF), National Pension System (NPS), Equity-Linked Savings Scheme (ELSS), and tax-saving fixed deposits.
These instruments not only help you save tax on salary above 20 lakhs but also help you grow your wealth over time. You can claim a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act for investing in these instruments. Additionally, you can claim an extra deduction of up to Rs 50,000 for investing in NPS under Section 80CCD(1B).
Buy Health Insurance
Health insurance is a great way for those with a salary above 20 lakhs to save on their taxes. Health insurance not only protects you and your family from medical emergencies but also helps you reduce your taxable income.
You can claim a deduction of up to Rs 25,000 under Section 80D of the Income Tax Act for buying health insurance for yourself, your spouse, and your dependent children. If you are also paying for health insurance for your parents, you can claim an additional deduction of up to Rs 25,000 (Rs 50,000 if they are senior citizens).
Utilize the Benefits of NPS
National Pension Scheme (NPS) is a retirement-focused investment option that allows you to save tax and secure your future. Contributions made to NPS are eligible for tax deductions under Section 80C of the Income Tax Act. Additionally, contributions made by your employer are eligible for tax benefits under Section 80CCD(2).
Claim HRA exemption
If you are living in a rented accommodation, you can claim House Rent Allowance (HRA) exemption under Section 10(13A) of the Income Tax Act. HRA is a part of your salary that is given by your employer to help you pay rent.
The amount of HRA exemption depends on various factors such as your salary, rent paid, location of residence, etc. You can use an online calculator to find out how much HRA exemption you can claim. Generally, HRA exemption is the lowest of the following:
- Actual HRA received from your employer
- 50% of your basic salary if you live in a metro city or 40% if you live in a non-metro city
- Excess of rent paid over 10% of your basic salary
If you want to Calculate HRA – Click here
Claim Other Allowances & Reimbursements
Apart from HRA, there are other allowances and reimbursements that are given by your employer to help you meet certain expenses. Some of these allowances and reimbursements are exempt from tax up to a certain limit or on submission of bills.
For example, you can claim exemption for meal coupons up to Rs 50 per meal (22 working days), car maintenance allowance up to Rs 1,800 per month (Rs 2,400 for bigger cars) plus Rs 900 per month for driver salary, phone and internet bill reimbursement up to actual bills submitted, uniform allowance up to actual bills submitted, children education allowance up to Rs 100 per month per child (maximum two children), etc.
Claim Deductions for a Home Loan | Invest in a Second Home
Claiming deductions for home loans can be a great answer to your question on how to save on taxes if your salary is above 20 lakhs. If you have taken a home loan for buying or constructing a house property, you can claim a deduction for the principal repayment of the loan under Section 80C of the Income Tax Act. The maximum amount of deduction that you can claim is Rs 1.5 lakh per annum.
Additionally, you can claim a deduction for the interest paid on the loan under Section 24(b) of the Income Tax Act. The maximum amount of deduction that you can claim is Rs 2 lakh per annum. However, if you have taken the loan after April 1, 2019, and the value of the property is less than Rs 45 lakh, you can claim an extra deduction of up to Rs 1.5 lakh under Section 80EEA of the Income Tax Act.
Invest in NPS
Investing in the National Pension Scheme (NPS) is an effective way to save tax on salary above 20 lakhs in India. NPS offers several attractive tax benefits, such as exemption from capital gains on withdrawal and deduction of up to 10% of one’s income under Section 80C.
Moreover, you can claim an additional deduction of up to Rs 50,000 under Section 80CCD(1B) of the Income Tax Act for investing in NPS. This is over and above the limit of Rs 1.5 lakh under Section 80C. NPS also helps you build a retirement corpus that can provide you with regular income after retirement.
Avail the Benefits of LTA and HRA
Leave Travel Allowance (LTA) and House Rent Allowance (HRA) are two popular tax-saving options for salaried individuals. You can claim tax deductions on LTA expenses twice in a block of four years. Additionally, HRA can be claimed as a tax exemption if you’re living in a rented accommodation and receiving HRA as a part of your salary.
Hope you are liking How To Save Tax For Salary Above 20 Lakhs? ….Read below for various options.
Make Charitable Donations
Making donations to charitable organizations is not just a noble act, but it can also help you save tax. Donations made to charitable organizations are eligible for tax deductions under Section 80G of the Income Tax Act. You can claim deductions up to 50% or 100% of the donation amount, depending on the type of organization.
Invest in a Pension Plan
Investing in a pension plan is another smart way to save tax and secure your future. Contributions made towards pension plans are eligible for tax deductions under Section 80CCC of the Income Tax Act. You can claim deductions up to Rs. 1.5 lakhs for investments made towards pension plans.
YOU CAN CALCULATE EPF PENSION CALCULATOR FOR PRIVATE EMPLOYEES – Click Here
FOR DETAIL PENSION PLANS YOU CAN READ MORE – Choose the Right Investment Option in Max NewYork Life Insurance Smart Invest Pension Plan.
Opt for a Salary Restructuring
Salary restructuring is a popular way to reduce your tax liability. You can opt for a salary restructuring by asking your employer to restructure your salary in a way that allows you to claim more tax deductions. For example, you can ask your employer to provide you with reimbursements for expenses such as telephone bills, travel expenses, and medical expenses.
Invest in a Tax-free Bond
Tax-free bonds are a great way to save tax and earn tax-free returns. These bonds are issued by government companies and offer tax-free interest income. You can invest up to Rs. 10 lakhs in tax-free bonds and claim tax deductions under Section 10(15)(iv)(h) of the Income Tax Act.
Make use of the Tax Exemptions available for Senior Citizens
If you’re a senior citizen, then you can avail of various tax exemptions and deductions. For example, you can claim tax deductions on medical expenses under Section 80DDB of the Income Tax Act. Additionally, you can claim a higher exemption limit on interest income earned from fixed deposits and savings accounts.
Here is a table that summarizes some of the tax-saving options for salary above 20 lakhs in India
|Tax-saving option||Section||Maximum deduction||Remarks|
|PPF||80C||Rs 1.5 lakh||Lock-in period of 15 years|
|NPS||80C and 80CCD(1B)||Rs 2 lakh (Rs 1.5 lakh + Rs 50,000)||Partial withdrawal allowed after 3 years|
|ELSS||80C||Rs 1.5 lakh||Lock-in period of 3 years|
|Tax-saving FD||80C||Rs 1.5 lakh||Lock-in period of 5 years|
|Health insurance||80D||Rs 50,000 (Rs 25,000 + Rs 25,000)||Covers self, spouse, children and parents|
|HRA exemption||10(13A)||Varies depending on salary, rent and location||Requires rent receipts|
|Other allowances and reimbursements||Various sections||Varies depending on the type and limit of allowance or reimbursement||Requires bills or proofs|
|Home loan interest||24(b) and 80EEA||Rs 3.5 lakh (Rs 2 lakh + Rs 1.5 lakh)||Applicable for loans taken after April 1, 2019 for property value less than Rs 45 lakh|
|Home loan principal||80C||Rs 1.5 lakh||Applicable for loans taken for buying or constructing a house property|
By following these tips, you can know How To Save Tax For Salary Above 20 Lakhs? and reduce your tax liability even if your annual salary is above 20 lakhs.
Saving tax on salary above 20 lakhs in India is not impossible if you plan your finances wisely and make use of the various tax-saving options available. By choosing the right tax regime, investing in tax-saving instruments, buying health insurance, claiming HRA exemption, claiming other allowances and reimbursements, and investing in NPS, you can reduce your tax liability significantly and save more money for your future goals.
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