The Income Tax Department follows a progressive tax regime that increases the tax rate with the rise in an individual’s income. As a result, people belonging to high-income groups generally bear a higher taxation rate. While those belonging to the low or middle-income group have to bear a lesser one.
Individuals with a high yearly income generally look for tax-saving measures to reduce their tax burdens. If you are looking for how to save tax on 20 lakhs salary, check out all the tax saving options you need to know.
As per the new income tax guidelines, you can opt for either the new or the old regime while filing your taxes. Here is a difference between the two:
Individual’s Annual Income | Old Tax Regime | New Tax Regime |
Up to Rs 2.5 lakhs | Nil | Nil |
>2.5 lakhs – Rs 5 lakhs | 5% (however full rebate) | 5% |
>5 lakhs – Rs 7.5 lakhs | 20% + Rs 12,500 | 10% + Rs 12,500 |
>7.5 lakhs – Rs 10 lakhs | 20% + Rs 12,500 | 15% + Rs 37,500 |
>10 lakhs – Rs 12.5 lakhs | 30% + Rs 1,12,500 | 20% + Rs 75,000 |
>12.5 lakhs – Rs 15 lakhs | 30% + Rs 1,12,500 | 25% + Rs 1,25,000 |
>15 lakhs and above | 30% + Rs 1,12,500 | 30% + Rs 1,87,500 |
If you file your taxes according to the new regime, you cannot avail any tax benefits. Therefore, the deductions you will read about in the article are all applicable if you file your taxes according to the old regime.
To calculate your tax liability using both the regimes, you may use the old vs new tax regime calculator.
Before you know the ways to save on taxes, it is essential for you to understand how much tax will be deducted for 20 lakhs yearly income.
Here is an example for better understanding.
Gross Salary | 20,00,000 |
Less: | |
HRA | (2,00,000) |
LTA | (40,000) |
Reimbursements | (25,000) |
Children education and hostel allowance | (10,500) |
Standard Deduction | (50,000) |
Professional Tax | (2400) |
Taxable Salary Income | 16,72,100 |
Less: Deductions | |
80C (Refer Note below) | (1,50,000) |
80D | (50,000) |
80E | (25,000) |
Net Taxable Income | 14,47,100 |
Tax on the above income | 2,46,630 |
Rebate u/s 87A | Not applicable |
Total Tax | 2,46,630 + 4% cess |
Apart from this, you can also claim these tax deductions if eligible:
Interest on home loan EMIs under Section 24b | (2,00,000) |
Principal amount of the home loan under section 80EEA | (1,50,000) |
National Pension Scheme (NPS) investments u/s 80CCD(1B) | ( 50,000) |
It may be so, that you do not have a home loan or any investments that fall under Section 80C. Under such circumstances, you can avail these investment options to utilise the exemptions under Section 80C:
In case you file your taxes as per the new regime, your tax on Rs 20 lakh salary will be
Gross Salary | 20,00,000 |
Less: | |
Standard Deduction | (50,000) |
Taxable Salary Income | 19,50,000 |
Less: Deductions | |
80C | ❌ |
80D | ❌ |
80E | ❌ |
Net Taxable Income | 14,47,100 |
Tax on the above income | 2,85,000 |
Cess @4% | 11,400 |
Total Tax | 2,96,400 |
Now that you have a clear idea of how to calculate income tax on a salary above 20 lakhs, let’s move on to the tax-saving measures.
There are many components in your salary that are exempted from taxes. Furthermore, you are liable for several deductions if you opt for the old tax regime. Thus, your net taxable income will be as follows:
Take a look at them below:
Salary Components | Taxability |
Basic Pay | Fully-taxable |
Dearness Allowance (DA) | Fully-taxable |
House Rent Allowance (HRA) | Exemption up to a certain limit. Calculate now |
Leave Travel Allowance (LTA) | Actual travel ticket expenses exempt for 2 trips in 4 years under 10(5). Read more |
Mobile/ Internet reimbursement | Exempt if: – used predominantly for office purposes – proofs/bills submitted |
Children’s Education and Hostel allowance | Rs 4800 per child (max 2 children) |
Food Expenses | Rs 50 per meal (max 2 meals a day)Annual= Rs 31,200 (50*2*26 days*12 months) |
Standard Deduction | Rs 50,000 (Will be given to all without any restrictions) |
Professional Tax | Generally Rs 2,400 (Varies from state to state) |
Moreover, when you are tax planning for salary above 20 lakhs, you can get deductions on the following:
Paying health insurance policy premium (Section 80D) | Self, your spouse, and your dependent children: Rs 25,000 (Rs 50,000 if aged 60 and above) Parents: Rs 25,000 (Rs 50,000 if aged 60 and above) |
Opting for an education loan (Section 80E) | Interest deduction for 8 years from the year of repayment of loan taken for the higher education of yourself, your spouse, dependent children, or a student of whom you are the legal guardian |
Donating to charity (Section 80G) | 50% or 100% of the eligible amount |
Investing in tax saving instruments (Section 80C) | Tax benefit of Rs.1,50,000 per year. You can invest in the following options: – Employees’ Provident Fund (EPF) – Public Provident Fund (PPF) – Equity Linked Saving Scheme funds (ELSS) – Home loan repayment and Stamp duty – Sukanya Smriddhi Yojana (SSY) – National Savings Certificate (NSC) – Fixed Deposit for 5 years, and more |
Costs to treat disabled dependents (Section 80DD) | If you have disabled dependents for whom you bear medical expenses, you are eligible for the tax relief: – 40% disability: Rs.75,000 – 80% disability: Rs.1,25,000 |
Deductions on home loan payments | Principal amount: Upto Rs 1.5 lakhs u/s 80C Interest amount: Upto Rs 2 lakhs paid u/s 24b |
Maturity amount of a Life Insurance Policy | Maturity proceeds are tax exempt if the sum assured is ≤: – 20%: policies issued before 1 April 2012 – 10%: policies issued after 1 April 2012 – 15%: policies issued after 1 April 2013 for a person with disability or disease. |
These are some of the ways in which individuals who earn above Rs 20 lakhs per annum can save on income tax. However, make sure to accurately calculate your tax liability and applicable deductions.
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