The Income Tax Act 2023 has specified the amount of tax rebate you will get to reduce your tax liability. But your investment allowance is not specified.

Investment allowance is very important for an individual taxpayer because an individual taxpayer's tax liability is calculated on his taxable income after deducting the allowable exemptions that he earned throughout the income year. And tax rebate is one of the ways to save a taxpayer's tax.

If a taxpayer wants to reduce the tax by availing the tax credit, he has to invest or donate in the particular areas cited in the Income Tax Act. If the investment or donation is as per income tax law, it is considered an investment allowance. And on this amount, an individual taxpayer gets the tax rebate facility, which is deducted from the tax liability.

So, an individual taxpayer keeps small investments or donations in the specified sectors throughout the year. Therefore, if the amount of investment allowance is known at the beginning of the year, the taxpayer can plan and invest or donate throughout the income year.

Now the question is: how much you can invest or donate for tax-saving?

As I said at the beginning, the Income Tax Act 2023 does not specify the amount of investment allowance. Previously, the investment allowance was mentioned, and then in the second step, the taxpayer could calculate tax credit amount using the tax rebate rates.

But the Income Tax Act 2023 specifies how much tax rebate an individual taxpayer will get. So, first figure out the tax rebate amount and then figure out the investment allowance.

The lower amount of the following three figures shall be the tax rebate of an individual taxpayer: 3 percent of taxable income; 15 percent of actual investment; or Tk 10 lakh.

So, you know that the lower amount among the three numbers mentioned above will be your tax rebate. Now we will find out how much you can invest to reduce your tax.

The law says that you will get 15 percent tax credit on your actual investment. So first calculate 3 percent of your taxable income. Suppose your taxable income is Tk 10 lakh. Then 3 percent of this taxable income is Tk 30,000. This amount is your tax rebate amount that will be deducted from your tax liability.

This shows you have got a big amount to save your tax and your investment will give you a better return at maturity. Therefore, investment is very important.

Now calculate the investment amount by dividing the Tk 30,000 by the tax rebate rate 15 per cent or 0.15, and the amount will be Tk 2 lakh. This is your investment allowance which shall be invested or donated in the specified areas per income tax act.

Jasim Uddin Rasel is the author of Smart Money Hacks