Taxes are an essential part of the healthy and successful functioning of any society, city, state or country. Broken down to its simplest terms, citizens of a particular area pay a certain amount of their earnings to the government. The government is then meant to spend this money in order to better the city, state or country, effectively using taxes paid by the people in order to benefit them. For instance, since you cannot go out and build roads by yourself, taxes you pay get redistributed to your local municipal corporation, which is then supposed to use those taxes to build the roads for you.
Paying your taxes on time is an important requirement. It ensures that you are doing your role as a responsible citizen, and will also help avoid any penalties for paying your taxes late, or legal trouble that you could invite by not paying your taxes if you do not have tax exemptions. However, while paying your taxes on time, it is also important to ensure you are getting the most out of your taxes. From returns to write-offs, there are a number of facilities available for citizens to employ in order to get the most out of their taxes. Here are 10 attributes of a tax-savvy Indian, one that knows the taxation system, pays their taxes on time and knows the various schemes they are eligible that can help them can get a return on their taxes.
Attributes of a Tax Savvy Indian
Understands the Taxation System
It is widely accepted and agreed upon that when it comes to a taxation system, a progressive taxation system is the best way to go. Put simply, a progressive taxation system puts more of the tax burden on the rich who can afford to pay those taxes, while those who are not as wealthy do not have to pay as much. Subsequently, India employees a progressive taxation system as well.
Those who earn an annual salary of below 2.5 lakhs enjoy tax exemptions and do not have to pay tax. Annual earnings between 2 to 5 lakhs are taxed at a base rate of 5%. For those who earn between 5 lakhs and 7.5 lakhs a year, they are required to pay 12500 rupees, in addition to a 10% tax on any earnings exceeding 5 lakhs. The 7 to 12 lakh income band attracts a 35,000 rupee tax over a 10% cut of earnings exceeding 7.5 lakhs Finally, those who earn above 15 lakhs have to pay 187500 in addition to a 30% tax on any earnings exceeding 15 lakhs. These parameters, however, refer only to income tax for individuals, or tax they pay on the money they earn. However, there are a number of other taxes that a tax-savvy Indian should know about.
Taxes are split into two categories, direct taxes and indirect taxes. Direct taxes focus on taxing income/money that you earn/possess, whereas indirect taxes are levied instead of the purchase of products and services. Income tax, therefore, is a form of direct tax. Other similar forms of direct tax that you should be aware of as a tax-savvy Indian include Wealth tax, which thus charges individuals whose net worth exceeds 30 lakhs, after which a 1% tax is charged, and a 12% tax is charged for those who earn over 1 crore a year. Another sort of Tax is ‘Capital gains tax’ which is focused on taxing the appreciation in the value of an investment, once an investor sells it. For instance, your return on the sale of investment such as a stock is taxed tax when you sell it.
Pays Taxes on Time
Before you begin figuring out where you can save taxes, tax saving schemes you can invest in and various other intricacies of the taxation system, you must first be eligible to avail of these schemes. And the only way to ensure that you are eligible and are on your way to becoming a tax-savvy Indian is to pay your taxes on time. This way, you ensure that you are exempt from any additional charges or penalties, rendering any savings you make genuine, and not mitigated by the penalties you had to pay.
Income tax returns vary from entity to entity. For instance, for Indians who are residents of the country, they are required to include their entire corpus under the tax bracket and are taxed accordingly. There are a number of factors that are accounted for under income tax returns, namely the income you earn as salary, income from any other sources (investments etc as well as income you earn on the property you own, alongside income from your business, or capital gains.
Knows how to save
Investing in tax saving schemes in a prime attribute of tax-savvy Indian and is one of the best ways to be able to get maximum returns or tax exemptions or deductions under the taxation system. Section 80C is a prime example of a tax saving scheme in India. Under section 80c, individuals are allowed deductions of up to 1.15 lakhs on specific investments. These investments include public provident funds, the purchase of life insurance, and saving schemes for senior citizens. Additionally, individuals can claim savings on their principal payments towards their home loan. By investing in the tax-saving scheme under 80c, or a variety of other tax-saving schemes such as section 80cc, you can ensure any payments you are making towards the necessities are also accounted for, and you are compensated for them in the form of savings accordingly.
For example, those who are salaried workers can invest in employee retirement plans to reduce the current taxes they have to pay, while simultaneously increasing their retirement fund. Here’s how that works.
An employee retirement fund has employees put away parts of their savings into a fund, on which they earn interest. In return, when they retire, they receive this amount that they have saved up, plus the interest this money collected. Given that these funds are accounted for before salaries are paid out, increasing the amount you invest in these funds will result in you technically earning a lower salary.
This could land you in a lower tax bracket, resulting in you having to pay a lower amount of taxes. Meanwhile, the money you put away might not be available to you in the short run, making this more of a long term investment, but you will get it back eventually alongside interest. This method ensures that you invest in your savings while making how you pay taxes more efficient as well.
Despite the fact that many views paying taxes and the taxation system as a hindrance or unnecessary, it is an integral part of the successful functioning of a country. As responsible citizens, it is our duty to ensure we pay our taxes on time. However, while you must pay your taxes on time, you would also benefit from getting the maximum returns from paying your taxes. A tax-savvy Indian keeps track of all their taxes, when they are due, and makes use of all opportunities to make payments efficient and maximise returns.