This would possibly turn out to be the best decision you would ever take with respect to wealth creation, tax evasion reduction, and above all, stimulating other people towards the savings culture, which most nations in their quest for promoting the savings tax-saving schemes that bring along specific tax benefits. Above all this, there should be sensitization on how one’s investment in these schemes impacts his tax liability. There is, hence, maximum tax advantage which can actually make your investment work for you.

What are saving schemes, and what is the tax advantage of saving through schemes?

Saving schemes are savings plans designed to save money towards some goals like retirement or for your children’s college education, for emergencies. The use of saving schemes to motivate people to save in many countries goes hand-in-glove with tax savings as well. These plans may be either government-insured or through private institutions.

Some of the popular saving schemes that also give tax benefits are mentioned below:

Public Provident Fund (PPF): A long-term, government-backed saving scheme in which one can invest for the long term and get tax benefit under Section 80C of the Income Tax Act of a country like India. Returns of PPF investment are totally tax-free.

  • National Saving Certificate: It’s a scheme launched by the government to save and hence also tax allowable under Section 80C. Here the interest amount so accrued is taxed, yet good investment in long-run.
  • EPF or Employee Provident Fund: For instance, when you work for somebody then both employer contribution towards EPF as well as the contribution that an employee pays can go in a row as part of eligibility to deduct your taxes.
  • Tax-Saving Fixed Deposits (FDs): There are fixed deposits with a minimum lock-in period of 5 years coming under the provisions of tax deductions under Section 80C.
  • Unit Linked Insurance Plans (ULIPs): These are products that serve as both insurance and investment options and there are some cases where tax relief can be obtained if ever money is paid as premium and it is also the tax-free amount as returns.
  • National Pension Scheme (NPS): It is a retirement-focused scheme that allows the members to claim additional tax advantages while making the payment under the scheme. As such, it is considered the best approach to achieve financial health during retirement age.

Income Tax Slabs

You need to know how much slabs of your income tax are before the calculation of tax liability after investments in savings schemes. Income slabs for tax decide rates at which your income will be taxed keeping in consideration the amount one earns within a particular financial year. As the more earning, higher is the slab of taxation on your earned income.

In most countries, the income tax slabs in India are progressive. That means your tax rate goes up as your income goes up. Income tax slabs for individual taxpayers usually look something like this: 

  • Income up to ₹2.5 lakh: exempt from taxation
  • Income between ₹2.5 lakh and ₹5 lakh: 5% tax
  • Income between ₹5 lakh and ₹10 lakh: 20% tax
  • Income above ₹10 lakh: 30% tax

These slabs differ from country to country, so you always check pertinent tax guidelines of the recent year of your area.

How Saving Schemes Affect your Tax Liability

When you save or invest in tax-saving schemes you can reduce your taxable income so that your overall tax liabilities are reduced. It largely depends on the schemes which are invested and the total sum to be invested within prescribed limits.

Here is a step-by-step guide on how you must calculate your tax liabilities after investing in saving schemes:

1. Gross income

Your first step to calculate the amount of tax liability is by calculating the total income of the year, which is comprised of the following:

  • Salary and Wages
  • Rental income
  • Interest or Dividends on investments
  • Freelancing and other business profits

2. Apply all available Tax Deductions

This would reduce your taxable income since investment deductions in saving schemes can be claimed. Deductions amount varies with the schemes chosen for investment and the applicable limits.

Example:

  • One is permitted to have a deduction for PPF, NSC, and tax-saving FDs under Income Tax Act of 80C. The highest limit for petitioning the deduction at the rate of ₹1.5 lakh.
  • You have the option of additional deduction of ₹50,000 under Section 80CCD(1B) for your contribution to the National Pension Scheme or NPS.
  • You are entitled to a benefit of a premium you have paid on health insurance under Section 80D.

Let’s suppose you have placed your ₹1,00,000 in the PPF and ₹50,000 in the NPS. Therefore the deduction amount is ₹1,50,000 from your income which will get taxed.

3. Calculate Your Net Taxable Income

You deduct all available deductions from your gross income to arrive at your net taxable income.

In our example:

  • Gross income: ₹12,00,000
  • Deductions (PPF + NPS): ₹1,50,000
  • Net taxable income: ₹12,00,000 – ₹1,50,000 = ₹10,50,000

4. Calculate Tax Liability Based on Income Tax Slabs

Now, you will be computing your tax on the basis of applicable income tax slabs. In our example, if your net taxable income is ₹10,50,000, then it will fall in the third slab, i.e., ₹5,00,001 to ₹10,00,000. And you will be levied with 20% as the tax on income over ₹5,00,000. 

5. Tax Credits and Other Deductions

Besides, you will be eligible for some more tax credit like Tax Rebate under Section 87A. When income is less than ₹5 lakh, so on, you may have the surcharges and Health as well as Education Cess levied on you.

Ways of Maximizing benefits with the help of savings scheme

Investment Decision can go in such way so as to maximize benefits: 

  • Invest up to the fullest limit available through saving scheme like PPF and NSC
  • Tax-saving FD can be invested in short-term goals
  • NPS is retirement savings long-term also allowing tax deduction and savings toward retirement
  • Monitor all tax slabs and schemes of saving and invest continually for all benefits available so that one can use it in entirety.

Conclusion

The calculation of tax liability after investing in saving schemes requires understanding the gross income, eligible deductions, and then the income tax slabs to determine how much tax is owed. Saving schemes not only provide a secure way to grow your wealth but also offer an opportunity to reduce your tax burden effectively. This would imply that the right choice of investment and information would help to optimize tax savings and that one gets on track to meeting their set financial goals.