• Notification Date: 19-01-2024
• Notification No: N/A

Tax Saving Tips: Zero Income tax for Rs 12 lakh Per Annum Salary

It's the time of year when your employer asks for your investment proofs and other tax-related documents. Based on these papers, your employer calculates your income tax for the rest of the financial year and disburses your monthly salary. 

Though the final income tax is determined by the Income Tax (I-T) department after you file the income tax return for a financial year. 

The I-T Department either deducts tax from your financial year earnings or sends you a tax refund. 

Either you submit your tax-saving documents to your office or to the income tax department, one common question that strikes your mind is how I can save income tax, especially if you have opted for the old tax regime. 

This question is more important if your salary falls outside the tax exemption of Rs 5 lakh after a tax rebate of Rs 12,500 under Section 87A of the Income Tax Act. 

In this write-up, through an expert's calculations, we will show you how you can save your 100 per cent tax even if your annual gross salary is Rs 12 lakh. Every salaried individual is subject to tax as per the slab rate depending on their total taxable income, including other income, i.e., interest, dividend, rent. etc. 

When you file your income tax return (ITR), you have to pick between the old and new tax regimes. 

If you have invested in tax-saving schemes, the old tax regime will provide you with tax deductions. But before that, when you embark on your journey of tax saving, one thing that you should keep in mind is that you need to invest your money or claim deductions in a way that brings your taxable income below Rs 5 lakh. 

Aastha Dhowan, Partner, Direct Tax, N.A. Shah Associates, said, "Employees need to efficiently utilise the available deductions and exemptions under the IT Act in order to bring their taxable income below Rs. 5,00,000/- (by opting for the old tax regime), so that there is no tax after considering rebate u/s 87A up to Rs. 12,500/-." 

Dhowan gives a list of general deductions available to salaried employees selecting the old tax regime (this is after assuming that their other income is NIL): 

1. A standard deduction of Rs. 50,000 under Section 16 of the Income Tax Act. 

2. Deduction under Section 80C of the IT Act of up to Rs. 1,50,000 towards payments made to Life Insurance Premium, Provident Fund, National Savings Certificate, Housing Loan Principal, Children’s School fees, etc. 

3. Deduction under Section 80CCD (1B) of the IT Act of Rs. 50,000 on contribution to the National Pension Scheme notified by the Central Government. 

4. Deduction under Section 80D of the IT Act up to Rs. 25,000 towards payments made to Medical Insurance Premium for self, spouse, and children. Additionally, Rs. 50,000 can be claimed in respect of the medical insurance premium paid for senior citizen parents. 

5. Deduction under Section 24(b) of the IT Act with regards to interest on housing loans up to Rs. 2,00,000 per year. 

Apart from the above, other exemptions such as HRA, LTA, children’s education allowance, meal allowance, reimbursement towards mobile bills, etc., are also available to employees selecting the old tax regime, depending on the component of their salary structure. 

How to Nullify Income tax on Rs 12 lakh Salary: 

Now comes the most important part: how can you bring your income tax down to zero if your annual gross salary is Rs 12 lakh? 

For that, you can ask your company's human resources department to structure your salary in a tax-friendly way. 

At the same time, you need to make investments, claim HRA and Leave Travel Allowance (LTA), get telephone bill reimbursement, pay health insurance premiums, and take advantage of standard deductions and the tax rebate so that you can keep your salary below Rs 5 lakh. Know how it can be done. 

If your gross salary is Rs 12 lakh, you can structure it in such a way that your HRA will be Rs 3.60 lakh, your LTA will be Rs 10,000, and reimbursements for phone bills will be Rs 6,000. 

On this gross salary, you will get a standard deduction of Rs 50,000 under Section 16; you can claim exemption for profession tax of Rs 2500; HRA of Rs 3.60 lakh under Section 10 (13A), and LTA of Rs 10,000 under Section 10 (5). 

With these deductions, your taxable salary will come down to Rs 7,71,500. 

If you have made investments in LIC, PPF, EPF, or if you have paid your child's tuition fee, you can get a further deduction of Rs 1.50 lakh under Section 80C. 

Those who have invested in a National Pension Scheme's Tier-1 plan are eligible for a further deduction of Rs 50,000 under Section 80CCD. 

After these two deductions, your taxable income will be Rs. 5,71,500. 

Section 80D allows you to claim tax exemptions for the premiums paid on health insurance policies. 

While you can claim Rs 25,000 for yourself, your spouse, or your children's health insurance premium, you can claim a further Rs 50,000 exemption for the premium paid on your senior citizen parents' health policies. With a Rs 75,000 deduction, your income will come down to Rs 4,96,500. With that income, you don't have to pay any tax. 

With the expert formula, you can reduce your income tax to zero even after earning Rs 12 lakh a month. For example, an employee having Gross Salary 12,00,000/- can structure his salary as under and pay zero tax on it after opting for the old tax regime. 

Exemptions for taxpayers under New Tax Regime: 

Dhowan said that employees who have opted for the new tax regime need to bring their income down up to Rs.7,00,000 after claiming a standard deduction of Rs. 50,000. "Certain deductions and exemptions such as HRA, LTA, etc. are not available in the new tax regime. Salaried employees can claim deductions in respect of interest paid on housing loans up to Rs. 2,00,000/- in new tax regime," said Dhowan.