How Much Income Tax You Can Save in FY 2020?

A common query among a lot of people who have recently joined the Indian workforce is how much income tax they can save in FY 2020. While there is no single answer as tax savings depend on several factors, a brief overview of how tax deductions work could make things easier.

The tax-saving frenzy is at its best between January and March every year. Salaried employees start looking for investment options that could help them reduce their income tax liability.

Many people with years of work experience now understand taxation and how to make the best use of the available deductions. But people who have recently started working are often found struggling. To begin with, most of them don’t know how much income tax they can save in a financial year.

While there is no easy answer to this question, a basic understanding of how taxation and deductions work for salaried employees could make things easier. To understand taxation and tax savings better, let us consider a salaried employee with an income of Rs. 7.75 lakhs in FY 2020.

Income Tax Liability of the Employee

As per Budget 2020 and the proposed income tax brackets, annual income of Rs. 7,75,000 will fall under the 15% tax bracket. This means that the income tax liability of the employee having an income of Rs. 7,75,000 in FY 2020 will be Rs. 1,16,250.

This is where the tax deductions and exemptions get into the picture. This employee can take advantage of the available tax deductions and reduce the taxable income to up to Rs. 5 lakhs, which is tax-exempt.

Income Tax Deductions

While there are different types of tax deductions, like under Section 80C, Section 80D, Section 80E, and Section 24, we are considering only the popular deductions to help reduce the income tax liability.

  •      Standard Deduction

For FY 2020, salaried employees are eligible for a standard deduction of up to Rs. 50,000. The Interim Budget in 2019, increased the Standard Deduction limit from Rs. 40,000 to Rs. 50,000. So, from Rs. 7,75,000, the taxable income falls to Rs. 7,25,000 after claiming this deduction.

  •      Tax Deduction Under Section 80C

Section 80C of the IT Act has several different investment options and expenses that are eligible for tax savings. This includes PPF, EPF, ULIP, Tax-Saving 5-Year FDs, and more. Even tuition fees paid for children are eligible for this deduction.

These investments and expenses are eligible for tax deductions of up to Rs. 1,50,000 in a financial year. By investing in these options and claiming deduction of Rs. 1,50,000, the taxable income will fall to Rs. 5,75,000.

  •      Tax Deduction Under Section 80CCD(1B)

NPS investment is eligible for an additional tax deduction of Rs. 50,000 per year as per Section 80CCD (1B) of the IT Act. By investing in NPS and claiming this deduction, the taxable income will be reduced to Rs. 5,25,000.

  •      Tax Deductions Under Section 80D

Under Section 80D, health insurance premiums of up to Rs. 25,000 paid in a financial year are eligible for tax deductions. One can purchase the medical insurance policy for themselves, their spouse, or even children. This will bring down the taxable income to Rs. 5,00,000, which is tax-exempt.

Income Tax Savings for FY 2020

Tax savings is all about how well you make use of all the available tax deductions and exemptions. As you can see, it is possible for a salaried employee with an income of Rs. 7,75,000 to reduce his taxable income to Rs. 5,00,000 which is tax-exempt.

While manual calculations are complicated, it is recommended that taxpayers should make use of an income tax calculator online to calculate their tax liability. In case of any queries, one should also consider professional help to avoid making costly mistakes.

Also, rather than waiting for the January-March period to invest, start your tax planning in advance so that you can select tax-saving options that best suit your requirements and goals.

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