How To Achieve Zero Tax Liability On Rs 18.5 Lakh Salary: Expert Tips
As tax season approaches, many individuals find themselves choosing between the old and new tax regime s. With the government’s recent adjustments to tax slabs, taxpayers now have an easier route to reducing their tax liabilities, especially if their annual income is under Rs 12 lakh. The revised tax regime has increased the tax-free income limit to Rs 12.75 lakh for salaried individuals, thanks to a standard deduction. However, many still prefer the old tax regime due to its numerous exemptions and deductions. If you're looking to make your annual salary of Rs 18.5 lakh tax-free under the old regime, here’s a detailed guide on how to leverage available deductions to reduce your tax liability to zero.
Understanding the Tax-Free Limits Under the Old Tax Regime
Under the old tax regime, individuals with an annual income up to Rs 5 lakh can enjoy a tax-free status, thanks to a rebate under Section 87A. This exemption makes the first Rs 5 lakh of income completely tax-free, which is a significant benefit for those falling under this income bracket.Popular Deductions Under the Old Tax Regime
The old tax regime allows individuals to claim a variety of deductions, making it an attractive option for many. Some of the most commonly used deductions include:- Section 80C: This is the most popular deduction, offering up to Rs 1.5 lakh in tax savings . You can claim deductions for contributions to EPF, PPF, ELSS, NSC, and more.
- Section 80D: This allows deductions for premiums paid on health insurance policies. For self and family, the maximum deduction is Rs 25,000, and for senior citizens, it’s Rs 50,000.
Breaking Down the Calculation for Tax-Free Income
Let’s consider a scenario where you earn an annual salary of Rs 18.5 lakh and explore how to reduce this amount to zero tax.Step 1: Salary Breakdown
Starting with a gross salary of Rs 18.5 lakh, the first step is to reduce it by the available deductions. Here’s how the process works:- Section 80C Deductions : First, you can claim Rs 1.5 lakh for investments in instruments like EPF and PPF. After this deduction, your taxable income becomes Rs 17 lakh.
Step 2: Medical Insurance Deductions
Next, under Section 80D, you can claim a deduction for medical insurance premiums. For a non-senior citizen individual, this deduction can go up to Rs 25,000. Subtracting this from your taxable income brings it down to Rs 16.75 lakh.Step 3: Parent’s Health Insurance Deduction
If your parents are senior citizens, you can claim an additional deduction of Rs 50,000 for their medical insurance premiums. With this, your income reduces further to Rs 16.25 lakh.Step 4: Home Loan Interest Deduction
A significant deduction under Section 24B allows you to deduct up to Rs 2 lakh for home loan interest. This reduces your taxable income to Rs 14.25 lakh.Step 5: Education Loan Interest Deduction
For education loans, Section 80E provides a full deduction on the interest paid. Let’s assume Rs 90,000 as your education loan interest deduction, reducing your taxable income to Rs 13.35 lakh.Step 6: Standard Deductions
The government also provides a standard deduction of Rs 50,000 for salaried individuals. Applying this deduction brings your taxable income down to Rs 12.85 lakh.Step 7: NPS Contributions
Both employee and employer contributions to the National Pension Scheme (NPS) are eligible for tax deductions under Section 80CCD. A self-contribution of Rs 50,000 and an employer contribution of Rs 1.08 lakh can reduce your taxable income further to Rs 11.27 lakh.Step 8: House Rent Allowance (HRA) Exemption
If you receive HRA, you can claim exemptions. Assuming you pay Rs 6 lakh in rent, and the maximum HRA deduction is Rs 4.8 lakh, this can reduce your taxable income to Rs 6.47 lakh.Step 9: Charitable Donations
Under Section 80G, you can claim deductions for donations made to eligible charitable institutions, up to 10% of your basic salary. For this example, a donation of Rs 40,000 brings your taxable income down to Rs 6.07 lakh.Step 10: Flexi-Pay and Other Allowances
You may also have additional allowances like meal or transport benefits. If your flexi-pay amounts to Rs 1.24 lakh, your taxable income reduces to Rs 4.82 lakh.Final Taxable Income and Zero Tax Liability
After applying all the deductions mentioned above, your final taxable income is Rs 4.82 lakh. Since income up to Rs 5 lakh is tax-free under the old tax regime, you will have no tax liability.Disclaimer: This guide is for informational purposes only and should not be considered as personalised tax advice. Always consult with a tax expert for advice tailored to your specific financial situation.
According to experts, leveraging the right mix of exemptions and deductions can significantly reduce your taxable income, even for higher salary levels like Rs 18.5 lakh. It’s essential to plan your taxes in advance and take full advantage of the deductions available under the old tax regime.