How to Save Tax for Salary Above 7 Lakhs?

If your salary exceeds ₹7 lakhs, you’re probably aware of the tax implications that come with it. However, with careful planning and strategic use of tax-saving tools, you can significantly reduce your tax liability and keep more of your hard-earned money. From leveraging deductions under various sections of the Income Tax Act to exploring tax-saving investments, there are several strategies you can use to keep more of your hard-earned money.

Tax Slabs as per the Old and the New Tax Regime

When it comes to filing income tax in India, one of the key decisions you’ll face is choosing between the old tax regime and the new tax regime. Both regimes offer different tax slab rates and benefits, and understanding these can help you make a more informed choice.

Old Tax Regime

New Tax Regime

What are the Ways to Save Tax on 7 Lakhs Salary?

Earning a salary of ₹7 lakhs per annum is a significant achievement, but it also brings with it the responsibility of managing your taxes efficiently. Understanding the various ways to save on taxes can help you maximize your savings and reduce your tax liability.

Part 1- Exemptions

The new tax regime offers lower tax rates but includes fewer exemptions and deductions compared to the old regime. However, a key benefit is the Section 87A rebate, which eliminates tax liability for individuals with income up to ₹7 lakhs, making them exempt from paying income tax.

Part 2- Deductions

Standard Deduction

Under the new tax regime, salaried employees are entitled to a standard deduction of ₹50,000. This deduction is automatically applied to your income, effectively reducing your taxable salary by ₹50,000 without requiring any additional documentation or claims.

Transport Allowance

For specially-abled employees, there is a tax exemption on transport allowance, which can go up to ₹3,200 per month. This helps to ease the financial burden of daily commuting expenses.

Daily Allowance

When you’re traveling for official purposes, any allowance provided to cover your daily expenses is exempt from tax. This allowance is designed to ensure that your work-related travel costs don’t add to your tax liability.

Section 80CCD(2) - National Pension System (NPS)

If your employer contributes to the National Pension System (NPS) on your behalf, you can claim a deduction of up to 10% of your salary (inclusive of basic pay and dearness allowance) under Section 80CCD of Income Tax Act. This not only helps in building your retirement corpus but also offers significant tax savings.

Example on Calculation of Tax under New and Old Tax Regime

When it comes to filing your income tax return, one of the key decisions you’ll need to make is whether to opt for the old tax regime or the new one. Both have their pros and cons, and the best choice often depends on your specific financial situation.

Meet Raj: A Salaried Employee

Let’s understand how Raj, a salaried employee with an annual income of ₹12 lakhs can make the right choice between the old and new regime to minimize his tax liability.

Old Tax Regime

Under the old tax regime, Raj can take advantage of various deductions and exemptions. Here’s a breakdown of his tax calculation:

• Basic Income: ₹12,00,000
• Standard Deduction: ₹50,000
• Section 80C Deductions (e.g., PPF, ELSS): ₹1,50,000
• Section 80D (Health Insurance Premiums): ₹25,000
• Home Loan Interest (Section 24): ₹2,00,000

Total Deductions:

• ₹50,000 (Standard Deduction)
• ₹1,50,000 (Section 80C)
• ₹25,000 (Section 80D)
• ₹2,00,000 (Home Loan Interest)
• Total Deductions = ₹4,25,000

Taxable Income:

• ₹12,00,000 - ₹4,25,000 = ₹7,75,000

Tax Calculation Under Old Regime:

• Income up to ₹2.5 lakhs: No tax
• ₹2.5 lakhs to ₹5 lakhs: 5% of ₹2.5 lakhs = ₹12,500
• ₹5 lakhs to ₹7.75 lakhs: 20% of ₹2.75 lakhs = ₹55,000
• Total Tax Payable = ₹12,500 + ₹55,000 = ₹67,500

So, under the old tax regime, Raj’s total tax liability would be ₹67,500.

New Tax Regime

Now, let’s see how Raj’s tax calculation changes under the new tax regime. Here, the focus is on lower tax rates but without the benefit of most deductions and exemptions.

• Basic Income: ₹12,00,000
• Standard Deduction: ₹50,000

Taxable Income:

• ₹12,00,000 - ₹50,000 = ₹11,50,000

Tax Calculation Under New Regime:

• Income up to ₹2.5 lakhs: No tax
• ₹2.5 lakhs to ₹5 lakhs: 5% of ₹2.5 lakhs = ₹12,500
• ₹5 lakhs to ₹7.5 lakhs: 10% of ₹2.5 lakhs = ₹25,000
• ₹7.5 lakhs to ₹10 lakhs: 15% of ₹2.5 lakhs = ₹37,500
• ₹10 lakhs to ₹11.5 lakhs: 20% of ₹1.5 lakhs = ₹30,000
• Total Tax Payable = ₹12,500 + ₹25,000 + ₹37,500 + ₹30,000 = ₹1,05,000

So, under the new tax regime, Raj’s total tax liability would be ₹1,05,000.

Final Words

By making smart investments, taking advantage of deductions, and planning your expenses wisely, you can significantly reduce your tax liability. Remember, tax planning isn’t just about saving money today; it’s about securing your financial future as well. Whether you choose to invest in PPF, ELSS, or health insurance, every bit counts towards lowering your taxable income.

FAQs on How to Save Tax for Salary Above 7 Lakhs