The Indian population faced severe cash crunches after Prime Minister Narendra Modi announced demonetization on 8th November 2016. Long queues at the banks to deposit high currency notes and withdraw cash had become a usual sight.
It has now been over two months since this announcement and the infusion of new currency notes has eased the difficulties faced by the people. Moreover, there is a lot of speculation on the next Union Budget, slated to be announced on 1st February 2017.
After demonetization, the cash in the Automated Teller Machines (ATMs) was inadequate and there were long waits at banks. All these factors may result in the reduction of current income tax slabs in the upcoming Union Budget.
Here is an overview of the existing tax slabs for individual taxpayers.
- Income up to INR 2.5 lakh per annum - NIL
- Income between INR 2.5 lakh and INR 5 lakh – 10% of the annual income
- Income between INR 5 lakh and INR 10 lakh – 20% of the annual income
- Income exceeding INR 10 lakh – 30% of the annual income
Five states with a total voting population of around 250 million are soon going to polls. The Union Budget may soon be announced after these polls. Tax incentives would help reduce the disillusionment prevailing among the Indian population post demonetization.
Here are the expectations on the revision of the income tax slab in the next Union Budget.
- Income up to INR 4 lakh – NIL
- Income between INR 4 lakh and INR 10 lakh – 10% of the annual income
- Income between INR 10 lakh and INR 15 lakh – 15% of the annual income
- Income between INR 15 lakh and INR 20 lakh – 20% of the annual income
- Income exceeding INR 20 lakh – 30% of the annual income
In addition to lowering the tax rates, individuals may reduce their liabilities by investing in some of the best investment options. Some of these include Public Provident Fund (PPF), National Pension System (NPS), and pension plans.
Here is an insight into these three financial instruments.
- Public Provident Fund
Individuals invest their money in the PPF account for 15 years to build a corpus. The current interest rate on this account is 8.1% per year. Individuals may open this account with an initial deposit of INR 100. The annual investment allowed in a PPF account is between INR 500 and INR 1.5 lakh.
- National Pension System
NPS provides the regular deduction of INR 1.5 lakh under section 80C of the Income Tax Act. An additional tax benefit of INR 50,000 is available under section 80CCD of the Income Tax Act, thereby making NPS a popular option. Account holders may accumulate a retirement corpus in their NPS accounts. This corpus may be partially withdrawn when they retire and balance may be converted to an annuity to earn regular income after retirement.
- Pension plans
A type of life insurance, online retirement plans are primarily beneficial to build a retirement corpus. Policyholders deposit an annual amount in these plans during the accumulation period. On maturity, one-third of the maturity amount is tax-free and the balance is taxed at a nominal rate. Pension plans not only offer tax benefits but also ensure individuals receive regular income after they retire.
There are several other instruments that offer tax savings. Individuals must choose from the different options as per their personal needs, financial situation, and long-term goals. Seeking expert advice is also beneficial to maximize the available benefits.