How to Calculate & Reduce Tax on ₹10 Lakh Income in 2024-25
Introduction
Understanding how income tax is calculated on an annual income of ₹10 lakh is crucial for individuals to ensure that they are paying the least possible tax. With the right knowledge, you can leverage available exemptions, deductions, and strategies to minimize your tax liability. Whether you are filing taxes for the first time or are looking to optimize your tax-saving strategies, this guide will help you navigate the process in the most effective way.
In this blog, we will discuss the essential steps in calculating your income tax, choosing the best tax regime for your financial situation, utilizing various exemptions and deductions, and identifying tax-saving investments. By the end of this post, you will be equipped with practical knowledge and actionable tips to reduce your tax on ₹10 lakh income for FY 2024-25.
1. Understanding the Basics of Income Tax for ₹10 Lakh Income
What is Taxable Income?
Your taxable income is the portion of your total earnings that is subject to income tax after deductions, exemptions, and the standard deduction are applied. The first step in calculating your income tax is determining your taxable income. For salaried individuals earning ₹10 lakh annually, the process can be broken down as follows:
- Total Income: This includes your salary, any rental income, income from other sources, etc.
- Deductions: After applying eligible deductions (such as investments under Section 80C, insurance premiums, etc.), your taxable income is reduced.
- Exemptions: Certain income, such as House Rent Allowance (HRA) or Leave Travel Allowance (LTA), may be exempt from tax, which further reduces taxable income.
Income Tax Slabs for FY 2024-25
In India, the tax system is progressive, meaning that the more you earn, the higher the percentage of tax you pay on your income. There are two regimes under which you can pay taxes: the old tax regime and the new tax regime.
Old Tax Regime
Under the old tax regime, you can avail yourself of various exemptions, deductions, and rebates. The tax slabs for the old regime are as follows:
- Up to ₹2.5 lakh: No tax
- ₹2.5 lakh – ₹5 lakh: 5%
- ₹5 lakh – ₹10 lakh: 20%
- Above ₹10 lakh: 30%
New Tax Regime
The new tax regime, introduced in the 2020 Budget, offers reduced tax rates but eliminates most exemptions and deductions. The tax slabs under the new tax regime are:
- Up to ₹2.5 lakh: No tax
- ₹2.5 lakh – ₹5 lakh: 5%
- ₹5 lakh – ₹7.5 lakh: 10%
- ₹7.5 lakh – ₹10 lakh: 15%
- ₹10 lakh – ₹12.5 lakh: 20%
- ₹12.5 lakh – ₹15 lakh: 25%
- Above ₹15 lakh: 30%
Basic Exemption Limit and Standard Deduction
For individuals earning ₹10 lakh annually, the basic exemption limit is ₹2.5 lakh, meaning that any income up to ₹2.5 lakh is not taxed. Additionally, there is a standard deduction of ₹50,000 that applies to all taxpayers, which effectively reduces your taxable income.
Example Calculation: Old Tax Regime
Let’s take an example of someone earning ₹10 lakh annually:
- Salary: ₹10,00,000
- Standard Deduction: ₹50,000
- Taxable Income: ₹10,00,000 – ₹50,000 = ₹9,50,000
Now, let’s calculate the tax based on the old tax regime:
- ₹2.5 lakh * 0% = ₹0
- ₹2.5 lakh * 5% = ₹12,500
- ₹4.5 lakh * 20% = ₹90,000
- Total Tax = ₹12,500 + ₹90,000 = ₹1,02,500
This is the tax you would owe if you don’t make use of any exemptions or deductions.
2. Choosing Between the Old and New Tax Regimes
Choosing between the old and new tax regimes is a crucial decision that can significantly impact your tax liability. Each regime has its own set of advantages and disadvantages. Here’s how you can decide:
Old Tax Regime: Suitable for Taxpayers with Deductions
The old tax regime is best suited for individuals who have significant investments or expenses eligible for deductions and exemptions. These include investments in:
- Section 80C (e.g., PPF, ELSS, life insurance premiums, etc.)
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Interest on Home Loans under Section 24(b)
If you’re someone who has availed of these tax-saving opportunities, you will likely benefit from the old tax regime, as the deductions will reduce your taxable income, leading to a lower tax liability.
New Tax Regime: Simplified and Lower Tax Rates
On the other hand, if you don’t have significant tax-saving investments or if you find the old regime’s deductions confusing and cumbersome, the new tax regime may be a better option. While it doesn’t allow for deductions, it does offer lower tax rates, and filing taxes under this regime is simpler.
Example: Comparing Both Regimes
Let’s assume you don’t have any deductions or exemptions and your taxable income remains ₹9.5 lakh:
- Under the Old Tax Regime, the tax would be ₹1,02,500.
- Under the New Tax Regime, the tax would be calculated as follows:
- ₹2.5 lakh * 0% = ₹0
- ₹2.5 lakh * 5% = ₹12,500
- ₹2.5 lakh * 10% = ₹25,000
- ₹2.5 lakh * 15% = ₹37,500
Total Tax (New Regime) = ₹12,500 + ₹25,000 + ₹37,500 = ₹75,000
In this case, the new tax regime results in a lower tax liability, but if you have eligible deductions, the old tax regime may provide a better deal.
3. Maximizing Tax Deductions and Exemptions
Once you’ve chosen your tax regime, the next step is to make use of deductions and exemptions to further reduce your taxable income. Here’s a breakdown of the most popular options available to taxpayers:
Section 80C: Tax-Saving Investments
Section 80C is one of the most commonly used sections for tax-saving investments. Under this section, you can claim deductions up to ₹1.5 lakh in a financial year on investments in:
- Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- Life Insurance Premiums
- National Savings Certificate (NSC)
- Tax-Saving Fixed Deposits (FDs)
- Equity-Linked Savings Schemes (ELSS)
If you invest ₹1.5 lakh in any of the above options, you can reduce your taxable income by ₹1.5 lakh.
Section 24(b): Home Loan Interest
Under Section 24(b), you can claim a deduction of up to ₹2 lakh per year on interest paid on home loans. This is especially beneficial for individuals who have taken home loans for buying or constructing a house.
Section 80D: Health Insurance Premiums
Section 80D allows deductions on premiums paid for health insurance policies. The maximum deduction available is:
- ₹25,000 for premiums paid for yourself, your spouse, children, or parents (below 60 years of age)
- ₹50,000 for premiums paid for senior citizens (above 60 years of age)
Section 80E: Education Loan Interest
If you have taken an education loan for higher studies, you can claim a deduction under Section 80E on the interest paid on the loan. This deduction is available for a maximum of 8 years or until the interest is paid, whichever is earlier.
Other Deductions and Exemptions
- House Rent Allowance (HRA): If you live in a rented house, you can claim HRA exemptions to reduce your taxable income.
- Leave Travel Allowance (LTA): You can claim tax exemptions on travel expenses incurred on vacations within India.
- Donations under Section 80G: Donations to charitable organizations eligible under Section 80G can be deducted from your taxable income.
Example of Maximizing Deductions
Let’s assume you have the following deductions:
- ₹1.5 lakh invested in PPF (under Section 80C)
- ₹50,000 paid in health insurance premiums (under Section 80D)
- ₹1 lakh in home loan interest (under Section 24)
Your total deductions will amount to ₹3 lakh, which will bring your taxable income from ₹9.5 lakh down to ₹6.5 lakh.
Now, you would calculate the tax on ₹6.5 lakh under the applicable tax regime.
4. Effective Tax-Saving Strategies for FY 2024-25
Apart from the standard deductions and exemptions, there are various strategies you can use to save more on taxes:
Tax-Saving Mutual Funds (ELSS)
Investing in Equity-Linked Savings Schemes (ELSS) is an excellent way to save tax while also potentially benefiting from market returns. ELSS investments qualify for deductions under Section 80C and have a lock-in period of 3 years.
National Pension Scheme (NPS)
Contributing to the National Pension Scheme (NPS) offers an additional deduction of ₹50,000 under Section 80CCD(1B), which is over and above the ₹1.5 lakh limit of Section 80C.
Considerations for Senior Citizens
If you are a senior citizen, be aware of additional exemptions, such as the higher deduction limits for health insurance premiums under Section 80D and a higher basic exemption limit for income.
Tax-Saving through Charitable Donations
Donating to charitable organizations eligible under Section 80G not only supports a good cause but also reduces your taxable income. Donations can be either 100% or 50% deductible, depending on the organization.
Tax Planning Throughout the Year
Tax planning shouldn’t be left to the last minute. Throughout the year, keep track of eligible investments, expenses, and potential deductions. Regularly review your financial situation to ensure that you are on track to optimize your tax savings.
5. Filing Your Income Tax Returns (ITR): A Step-by-Step Guide
Once you have calculated your tax liability and made the necessary investments, the next step is filing your income tax return (ITR). Here’s a detailed guide:
- Collect Necessary Documents:
- Form 16 from your employer
- Bank statements and investment proofs
- Details of your income and deductions
- Login to the E-Filing Portal:
- Visit the Income Tax Department’s e-filing portal (https://www.incometax.gov.in/iec/foservices/#/login).
- Select the Correct ITR Form:
- For salaried individuals, ITR-1 (Sahaj) is typically the correct form.
- Fill in Your Details:
- Complete the ITR form with your personal details, income sources, deductions, and exemptions.
- Validate and Submit:
- Verify all the details and submit the form electronically.
- Verify Your ITR:
- After submission, you must verify your ITR. This can be done via Aadhaar OTP, e-verification code, or by sending a signed ITR-V to the Income Tax Department.
Common Mistakes to Avoid While Filing Your Return
- Not declaring all income sources
- Failing to claim deductions
- Providing incorrect details in your ITR form
6. Common Questions About Income Tax on ₹10 Lakh Income
What is the Tax Liability on ₹10 Lakh Income under the Old Tax Regime?
The tax liability would be ₹1,02,500 after applying the standard deduction and the tax slabs under the old regime.
Can I Switch Between Old and New Tax Regimes While Filing My Return?
Yes, you can switch between the two tax regimes each year, but once you choose a regime, you must stick to it for that financial year.
What Investment is Best for Saving Taxes on ₹10 Lakh Income?
Investments in PPF, ELSS, NPS, and life insurance premiums are some of the best options for reducing your taxable income.
Learn more about the tax system in our The Indian Tax System: What You Need to Know.
Conclusion
Understanding your tax obligations and optimizing your financial strategy is essential when earning ₹10 lakh per annum. By choosing the right tax regime, maximizing deductions, and making smart tax-saving investments, you can significantly reduce your tax liability for FY 2024-25. It’s essential to plan ahead and review your financial situation throughout the year, ensuring that you take full advantage of available benefits.
