Paying taxes is not a pleasant experience for anyone. It becomes more and more painful as your income rises because your tax liability also rises with your income. If you are a salaried individual earning more than Rs 10 lakh in a year, the current income tax rates might scare you. It’s because your income enters the slab with the highest tax rate. Even though the I-T Act allows various tax-saving exemptions and deductions, rarely a person is able to use them optimally.
“Broadly speaking, there are two major ways to reduce your tax liability. Firstly, you can get your salary restructured in such a way that you can avail maximum tax benefits of all the allowances and perquisites which are part of your salary. Secondly, you make use of all the tax-saving investment options offered by the I-T Act. In fact, if you carefully plan your taxes well in advance, you can efficiently minimise your tax liability or even bring it down to zero even if your income exceeds Rs 10 lakh,” says Chetan Chandak, Head of Tax Research, H&R Block India.
Tax saving through salary restructuring
The easiest way to save your taxes is to get your salary restructured from your employer so that you have to pay as less TDS as possible. Let’s have a look at various components of the salary of a typical individual to understand how each component can help you reduce your tax outgo.
House Rent Allowance: Rs 1.2 – Rs 1.5 lakh
If you are working at a place where you do not own any house and are staying in a rented house, you can include HRA as a part of your salary. Assuming you fall in the Rs 12-lakh tax bracket, you can easily get HRA tax exemption in the range of Rs 1.2 to Rs 1.5 lakh.
Transport Allowance: Rs 19,200
This is a common allowance which is part of the CTC of most of the salaried taxpayers. “This allowance can reduce your taxable salary by up to Rs 19,200. So, you can ask your employer to allocate at least Rs 1,600 for transport allowance from your monthly salary,” says Chandak.
Medical Reimbursement: Rs 15,000
Almost similar tax benefits can be availed from medical reimbursement as well. Income tax laws make medical reimbursements up to Rs 15,000 exempt from tax. In a year, your medical bills can easily cross this threshold. So, make sure to submit such bills to your employer and claim full benefit.
Leave Travel Allowance: Rs 30,000 – Rs 40,000
LTA is one component of the salary which does not come with any monetary cap on the maximum permissible deduction. However, “you can claim it only twice in a block of four calendar years for domestic travel. So, this allowance can easily save Rs 30,000 to Rs 40,000 of your salary from tax net in a year,” informs Chandak.
Food Coupons/Meal vouchers: Rs 12,000 – Rs 26,400
If you receive some form of food and non-alcoholic beverages or meal vouchers from your employer, you can save up to Rs 50 from tax per meal. If the value of meal exceeds Rs 50, such excess amount becomes taxable. Depending on your employer’s policy, you can easily save between Rs 1,000 – Rs 2,200 p.m.
Travel and Fuel Reimbursement: Rs 1.5 lakh
An allowance to the extent actually incurred to meet the cost of travel on tour or on transfer; expenses incurred on conveyance in the performance of official duties are exempt. Again, the reimbursement figure is not determined by tax laws, but the actual expenses incurred by the employees. Here, Rs 1.5 lakh is assumed to be a reasonable estimate of conveyance expenses an individual is likely to incur in a year.
Reimbursement of Telephone Expenses: Rs 24,000
Actual expenditure incurred by employer towards the mobile or telephone facility provided to an employee including the one provided at his residence is tax exempt in the hands of employee. “Assuming a monthly telephone expenditure of Rs 2,000 if your employer provides this facility, you can claim the benefit of up to Rs 24,000 just by submitting the actual bills to your employer,” says Chandak.
Books and Periodicals: Rs 12,000 – Rs 24,000
If you purchase books or periodicals to keep yourself updated with the latest happenings in the field of your profession for which you get reimbursement from your employer, then you can claim tax exemption on such expenses.
Research Allowance: Rs 25,000 – Rs 50,000
Any amount spent & reimbursed by employer for academic research or other professional pursuits including training, short term / online course etc. by an employee is fully exempted from income tax on production of actual bills. This is known as research allowance and there is no upper limit on the tax exemption available on it under the I-T Act.
Gift made in cash or kind by the employer is exempt up to Rs 5,000 per year. Gifts may be received by the employee or by a member of the employee’s family.
Increasing your basic salary and PF contribution
Employer’s contribution to your PF account up to 12% of basic salary is exempt from tax and your own contribution is eligible for tax deduction u/s 80C subject to the overall limit of Rs 1.5 lakh. “By increasing your basic salary, you can increase the tax-free component of the employer’s contribution, which can help you reducing your tax burden. Though increasing basic salary can reduce your take home salary and the HRA exemption, it can be used in case if you are staying in your own house,” informs Chandak.
(Source: H&R Block India)
Tax Saving Investments under I-T Act
You can save taxes not just through salary restructuring but through smart investment as well. Let’s have a look at various tax saving investment options available at your disposal:
Tax benefits under section 80C: Rs 1.5 lakh
This is one of the most popular umbrella of tax-saving investment options under the I-T Act. You can invest in a number of instruments like ELSS, PPF, NPS, tax-saver fixed deposits, five-year post office deposits and Sukanya Samriddhi Yojana. Your mandatory EPF contribution is also a part of this section. You can also claim the tax relief on your life insurance premiums, children’s school tuition fees paid as well as repayment of your housing loan principal. Section 80C can help you reduce your taxable income by Rs 1.5 lakh.
Additional deduction for NPS: Rs 50,000
NPS offers additional tax deduction over and above the section 80C deduction. Under section 80CCD (1B), you can avail additional tax deduction of Rs 50,000 if you have invested in NPS.
Employer’s NPS contribution: Rs 80,000
NPS can get you one more tax break. You can claim deductions of up to 10% of your basic salary on your employers’ contribution on your behalf. You can ask your employer to switch to this approach to help you save some more tax.
Health Insurance Premium: Rs 40,000
You can save as much as Rs 60,000 on health insurance premiums paid for self, parents and immediate family. However, it would be unwise to buy large or multiple health covers just with the intention of saving taxes. The purpose of your health cover must be to clear your hospitalisation bills. Let’s assume that the total health premium paid by you is around Rs 40,000.
Interest on housing loan: Rs 2 lakh
You can save a massive amount of money from tax net if you have a home loan. “Interest paid on your housing loan can lower your taxable annual income by up to Rs 2 lakh under section 24. If you are a first-time home buyer, you can get an additional deduction of Rs 50,000 if your loan amount is less than Rs 35 lakh for a property worth not more than Rs 50 lakh. Those who live in rented apartments can claim house rent allowance (HRA) benefits under section 8. Even if you don’t get HRA, you can claim deduction for rent paid under section 80GG,” says Chandak.
Interest on education loan
Similar to a home loan, you can save taxes on the amount spent in repaying your education loan. You are eligible for deduction for interest paid on the loan under section 80E. The tax benefit can be availed if the loan is used to fund your education, your spouse’s education or your children’s education.
You may have been making donations towards various charities but never noticed the tax benefits under section 80G. “Many taxpayers are either unaware or simply ignore these tax benefits as the process of claiming them can be tedious. You can claim either 50% or 100% of the amount donated as deduction. Preserving donation receipts and taking time out to reproduce all details in your tax returns can help you limit your tax liability,” informs Chandak.
So, as you can see, properly planning your taxes by CTC restructuring and optimum utilisation of tax-saving investments can bring your tax liability down drastically.