No one teaches you how to manage your taxes. You either learn it by experience, or by a hefty cut in your salary.
-Waiss Kharni SM
My Personal Back Story
My Journey started the same way as how most middle class graduates get into their first job. I started my career with an average paying salary where I was least concerned about Tax Declarations or Proof Submissions because truth be told, my taxable Income didn’t fall in the Income Tax Slab. I had zero Income tax for my first 2 years. As my experience and salary grew, I started realizing a new component added in my monthly Pay slip, ‘Income Tax’ that was slowly and exponentially eating away most of the hikes and appraisals I received. Like every other person, I started googling about what Income Tax is and what are the ways I can reduce the deductions that I was getting on my monthly pay slip. It took me a long time and multiple articles to get to a small understanding. This blog is mainly written with that thought in mind that you never have to go through the same. I will keep this blog as clear and simple as possible. For more detailed information on each topics, you can always use Google. So yes, let’s dive in.
The Three Phases on Income Tax
There are three stages of Income Tax for a financial year (April-March), (i.e.)
- Income Tax Declaration (April – May)
- Tax Proof Submission (November – December)
- Income Tax Returns(ITR) Filing (Next Year June tentatively)
Income Tax Declaration
As the term suggests, this is the stage where you declare what are all the ways you are going to save Taxes. This usually happens in the first two months of the financial year or at the first two months at your new Company when you switch. Your Employer, cuts Income Tax from your salary every month and the term for this is called Tax Deduction at Source (TDS). There are two Tax Regimes : Old Tax Regime(recommend) and New tax Regime. Based on your Tax Regime that you chose, there are different ways how we can reduce our TDS. I will cover on how Taxable Income and TDS is calculated in a separate blog. For Tax Deductions and Savings, the Government provides various options on how you can save Taxes, here is the overview for it.
| Section | Tax Exemptions with Meaning | Limit |
| 80 C | 1. Mutual Funds (ELSS – 3 Years Lock-in) – 18% avg. returns 2. Fixed Deposit (Bank – 5 Years Lock-in) – 5 – 6% avg. returns 3. Public Provident Fund (15 Years Lock-in) – 6 – 7 % avg. returns 4. Employee’s Provident Fund (12% of Basic Pay) 5. Premium paid towards Term Insurance | ₹150,000.00 |
| 80 CCD(1B) | 1. National Pension Scheme ( Until Retirement) – 12 – 14% avg. returns | ₹50,000.00 |
| 80 D | 1. Medical Insurance for Self & Parents (upto 25000 under 60) 2. Medical Insurance for Self & Parents (upto 50000 above 60) | ₹50,000.00 |
| 80 DD | 1. Amount for a Dependent who is physically challenged (upto 75000 to 125000) | ₹75,000.00 |
| 80 DDB | 1. Amount paid for Dependants suffering from particular diseases * Dementia * Dystonia Musculorum Deformans * Motor Neuron Disease * Ataxia * Chorea * Hemiballismus * Aphasia * Parkinson’s Disease | ₹40,000.00 |
| 80 E | Educational Loan taken for Higher Studies (available for 8 years from the time of initiation) Note : No Limit for Deduction (Entire Interest component of loan can be shown for Tax Saving) | |
| 80 EE | Home Loan / Property Loan (Only Interest Component Calculated) Note : Property Value < 50 lakhs and Loan amount < 35 lakhs | ₹50,000.00 |
| 80 EEA | Home loan – First Time Home Buyers – (Only Interest Component Calculated) – upto 1.5Lakhs over and above 2 Lakhs deduction for interest payments under Section 24 | ₹350,000.00 |
| 80 EEB | Deduction made for purchase of Electric Vehicle | ₹150,000.00 |
| 80 G | Contribution to relief Funds or Charitable trusts. (Max 2000 if paid by cash. Else chance of 100% deduction). Required Form58 / Receipt of payment with Pan, Address and registration number of trust | ₹10,000.00 |
| 80 GGC | Contributions paid towards political parties or electoral trusts – 50% to 100% deduction on total amount | |
| 80 GG | Deduction towards rent paid for residence if HRA not mentioned in CTC. Min(25% of income, Rs. 5000/- per month, Rent less than 10% of income) | |
| 80 RRB | Royalty Payments received provided only for Indian Residents who hold original Patent registered under Indian Patent Act | ₹300,000.00 |
| 80 TTA | Tax Deduction on Income earned as interest from either: * Savings account with Bank * Savings account with cooperative society that function as bank * Savings account with Post Office | ₹10,000.00 |
| 80 TTB | Senior Citizens claim deduction for their gross total income earned in that financial year | ₹50,000.00 |
| 80 U | Deduction if Individual suffering from disability, 75000 limit and 1.25lakhs for severe disability | |
| 10 (13A) | House Rent Paid monthly, this is taken from the (House Rent Allowance)HRA component from your CTC. Limit: Up-to Total HRA provided to you | |
What Happens during Tax Declaration Phase?
The Payroll portal in your Company has a Tax Declaration section that opens up and your employer will send you an email to declare your Tax Deductions for the Financial Year. You will have to head over to the ‘Tax Declaration’ Page and enter the details as mentioned above for various sections. The below sections that I am sharing is a ‘must have’ option in your Yearly Taxes. Please do not skip any of the below mentioned Tax Sections and invest in all of them.
Saving Tax Using Section 80C
Like I mentioned previously, the various options under Section 80C (1.5 Lakhs) is
- Fixed Deposit in Bank
- Tax Saving Mutual Funds
- Employee Provident Fund
- Term Insurance
- Public Provident Fund
Personally, I would recommend you to invest money in Mutual Funds and Term Insurance, because it has the highest returns and Insurance is a ‘must‘. If you do not have a Term Insurance, better get one Immediately.
Employee’s Provident Fund
Let’s assume that your Basic Pay is 5 Lakhs, the PF allocated in your Offer letter must be 12% of Basic Pay (i.e.) 60 thousand. There are two PF’s, Employer Provident Fund and the Employee Provident Fund. The Employee Provident Fund will be deducted from your Salary monthly (5000 monthly). Out of 1.5L, 60k is already available and needs to be declared. For the remaining 90K, invest it Mutual Funds and Term insurance.
Term Insurance
This is solely a Financial backup option for your dependents incase of a sudden death. The Insurance that you apply for is a Backup option for your family so that they have some source of income even if you are not there to take care of them. After quite a study and personal research, I recommend Max Life Insurance, you can take a Cover of 1 Crore, until the age of 60 years and please mention all the details correctly (Tabacco Usage / Annual Income / Personal Details). This will help your dependents to easily claim the Insurance money and the chances of your Insurance claim to be accepted is higher if you do not hide any information with the Insurance Company. Don’t get worried about the calls that you might get from agents. They might suggest you to include ‘Add-on’ options. Do not take it. Do yearly premium payment and checkout. Let’s assume that your yearly premium is 15k(1250 monthly) which can be declared, out of 90k, remaining 75k can be directly invested in Mutual Funds.
Mutual Funds
I would recommend you to take Axis ELSS Mutual Fund (Lock-in period of 3 years) for the remaining amount to fill up your limit for Sec. 80c. Here 75k yearly means you can invest 6250 monthly. Do a ‘SIP‘(Systematic Investment Plan) investment which means you will pay the premium monthly. It gives you a better profit even if the funds are going down. You will have allocated Stocks/Assets based on the Premium / NAV(Net Asset Value). For instance, if NAV is 40 and you invest 6250, 6250/40 = 156 stocks will be allocated for you. Now if the NAV goes down the second month from 40 to 38, when you invest the same 6250, 6250/38 = 164 stocks will be allocated.
Imagine, after three years you have planned to sell the stocks that you have(156+164=320 Stocks) and the NAV after 3 years is 52. The amount you will receive will be 320*52 = 16640. If you notice your profit is significantly higher than what you actually invested.
Fixed Deposit (Do Not Take this)
Every Bank account has an option to save your money in a Fixed Deposit with a Lock In period of 5 Years with a Interest return of max 5-6% (i.e.), if you invest 10k for 5 years with 5% interest, you will receive 12.5k in the 5th Year. I would not recommend FD because the yearly Inflation Rate is 8%(everything you buy becomes 8% costlier the next year) meaning, the amount kept on FD loses its value by 3% every year. You are basically making a loss.
Saving Tax using Section 80D
Under Sec.80D(25k for self under 60 years) Tax can be saved for the Medical Insurance premium paid. Most people wont look for an additional Medical Insurance because by default this is provided by the Company for the Employee and dependents (Parents/Wife). I would recommend having 2 medical insurances, keep the one provided by the company solely for your dependents because if you have to get one separately for your parents the premiums are very high. You can buy an external medical Insurance for yourself, where the premiums are much lower and can also be used for Tax Declarations.
After doing self research, I recommend taking Niva Bupa Health Insurance, Select the following options : Individual, Cover of minimum 20 lakhs and take the ‘ReAssure’ Package.
As on overview, you have one medical insurance provided by the company for your parents and the one purchased by you for yourself.
Note: Company provided Health Insurance covers are usually around 5 Lakhs, make sure you increase the limit. Your Employer will send you an email under the pretext of ‘Voluntary Top Up of Medical Insurance’.
Saving Tax using Section 80CCD(1B)
In Sec. 80CCD(1B) Section you can save up-to 50k yearly under National Pension Scheme. The amount that you invest here will however be available only after you retire (60 years) but, it has a returns of 12-14%. This is your backup savings that you will have when you retire so please create an NPS account and invest monthly on it. In the eNPS Portal, Click ‘National Pension System’ > ‘Registration’ and fill the following details.
- Account Type : Individual Subscriber
- Status of Applicant : Citizen of India / NRI / Overseas Citizen of India
- Register with : Aadhar
- Account Type : Tier I Only
- Enter Aadhar Number
After you complete your registration you will receive a PRAN number for your NPS account. Save the details.
Overview of Must have Tax Declarations
| Section | Investments | Limit |
| 80 C | 1. Term Insurance 2. Mutual Funds 3. Employee Provident Fund | ₹150,000.00 |
| 80 CCD | National Pension Scheme | ₹50,000.00 |
| 80 D | Medical Insurance (below 60 years) | ₹25,000.00 (Self) |
| 10 (13A) | Monthly Rent Paid. Provide PAN details of Owner |
After you declare your Taxes, your employer will use these declarations to calculate your Taxable income. Your Yearly Income Tax will be calculated based on the Tax Bracket in which your Taxable Income falls.
| Taxable Income Slab | Tax Deduction |
| ₹0 – ₹2,50,000 | 0% |
| ₹2,50,000 to ₹5,00,000 | 5% of taxable Income |
| ₹5,00,000 to ₹10,00,000 | ₹12,500 + 20% of (taxable Income – ₹5,00,000) |
| More than ₹10,00,000 | ₹1,12,500 + 30% of (taxable Income – ₹10,00,000) |
For example, if your taxable income is ₹6,50,000 then the Income tax calculated for the year will be
= ₹12,500 + 20% of (6,50,000 – 5,00,000) = 12,500 + 20% of 1,50,000 = 12,500 + 30,000
Income tax for the Year = ₹42,500 (₹3,542 Monthly will be deducted as TDS)
Tax Proof Submission
This is the phase where you will be asked to provide proof for the Tax Declared previously. Tax Proof Submission phase is usually done in the month of November – December during which a mail will be sent by your Employer with a link to the Payroll Portal where you must submit the proofs of whatever you have declared earlier.
| Section | Investments | Proof |
| 80 C | Term Insurance | Login to Insurance Portal and download statement, attach it |
| 80 C | Mutual Funds | Login to Mutual Fund Portal, View Portfolio, download Statement and attach it |
| 80 CCD | National Pension Scheme | Login to NPS Portal, Select ‘National Pension System’ > ‘Annual Transaction Statement on Email’. Download Statement and attach it |
| 10 (13A) | Monthly Rent Paid. | Download Rent Receipts shared by Employer, fill details and get it signed from Owner. If rent is more than 10k, you will need to provide Owner’s PAN Card Number too. |
| 80 D | Medical Insurance | Login to Insurance Portal and download statement, attach it |
After you submit all your proofs, a Document named ‘Form 12BB’ will be generated in the Payroll portal which is essentially a summary document of your Income, Taxable Income, Tax Deductions, etc. Download the document, print it, review all the particulars mentioned, sign the document, scan and upload it back in the portal.
Income Tax Returns (ITR) Filing
This is the last phase of the Income Tax journey where we file for the returns for Income Tax in the ITR Portal. The ITR filing starts after the financial year is over, for example for the Year April 2021-March 2022, ITR filing will begin around the month of June 2022. In some cases, the TDS deducted by your employer might be more than the actual Taxable Income for the Year due to various reasons. In such cases, the excess amount that was deducted from you will be returned when you file for your taxes in the ITR portal.
An important document for Filing ITR is the ‘Form 16’ that will be provided by your employer in the Payroll Portal. For filing your Returns in the ITR Portal you will have to go to eFile > Income Tax Returns > File Income Tax Returns. Enter the Financial Year for which you are applying. If you are applying for Financial Year 2021-2022 then your Assessment Year for the same will be 2022-2023.
Review all the Particulars mentioned with the Form 16 document that you have, modify it and submit the document. After your ITR filing is complete, by next few weeks the excess amount that was deducted will be transferred to your Bank Account.
Why is ITR Filing Important?
Irrespective of whether your Income Tax slab is lower or the TDS is correct for the Financial Year, it is important to file your ITR because of the following reasons:
- ITR Filing creates a valid proof of income
- It is used for applying any loans in the future
- Banks require ITR for applying credit cards
- ITR is required for VISA applications etc.
I hope this blog has helped you understand everything you need to know about taxes. It is human nature to forget parts of the details over a period of time, you can revisit this blog any number of times for a quick refresh.
The Art of Saving Money is not by saving after what you spend, but by spending after what you have saved.
– Waiss Kharni SM
Waiss Kharni 
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