Make the most of salary income! Public Provident Fund to NPS – 10 things employees should know in 2021

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Updated: March 25, 2021 11:47 AM

Salary income planning 2021: For those on salary income, tax planning is one of the most crucial aspects of financial planning. But not many employees are aware of the range of tax-saving avenues available to them.

salary incomeWhile salary is taxed, allowances and coupons (food coupons, shopping coupons, etc.) are not considered as salary and hence, not taxed. Representative image/Pixabay

Salary income planning: Gone are the days when not having a financial plan and being casual with tax worked for salaried employees, especially the millennials. The Covid-19 pandemic and the subsequent tsunami of job losses and salary cuts have taught us hard that every penny counts and needs to be saved for the worst days.

For those on salary income, tax planning is one of the most crucial aspects of financial planning. But not many employees are aware of the range of tax-saving avenues available to them. FE Online talked to several experts in the industry to find out 10 things employees should know to save tax and make the most from their salary income.

Harsh Jain, Co-founder and COO, Groww said that while Section 80C investments are the most popular ones, there are various other ways in which an employee can maximise tax savings. Since a penny saved is a penny earned, saving tax offers you more funds to invest and reach your financial goals faster.

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“Salaried employees usually tend to think about saving tax towards the end of the financial year when they have to submit proofs of tax-saving investments to their employers. This leads to a rush to make those investments and hence, doesn’t leave them with time to research and understand all avenues. And so, we decided to create a cheat sheet to help you maximise the tax benefits available to you,” said Jain.

10 things to do to make the most from salary income

1. Invest in Employee Provident Fund (EPF): Anish Sarkar, CEO, Sodexo BRS, said EPF is one of the most popular tax saving options for salaried people. Under this, both the employee and employers contribute to the Fund. On their contribution, the employee receives interest at a specified rate. The contribution made under this scheme is entitled to deduction under section 80C. Based on continuous service (not less than 5 years), the EPF balance withdrawn remains tax -free for the employee.

2. Invest in Public Provident Fund (PPF): PPF is a tax saving option that provides a return on investments, which are free from tax. PPF enables them to plan for creating a corpus for retirement and earn guaranteed returns. The amount invested under PPF is tax-deductible under section 80C and thus, helps in tax planning for salaried employees, said Sarkar.

3. Understand Taxable & Non-Taxable Income: Jain said that the first step to maximising your tax benefits is to understand how much of your income is taxable. This is important because the government defines non-taxable categories of income. As a salaried employee, your salary consists of various components including taxable and non-taxable parts. Hence, before you begin planning your tax, spend some time studying your payslip. Get a clear idea about what are the sections under which your employer is paying you and which of those are exempted from tax. The payslip usually carries all such information and shows you how the taxable income was calculated. You can also seek assistance from the HR team of your organization for understanding the same.

4. Claim House Rent Allowance (HRA) benefit: The government allows individuals to claim tax exemption on the amount paid by them towards rent for the place they live. This means that if you claim this exemption, then the rent amount is deducted from your overall taxable income bringing your tax liability down, said Jain.

However, it is important to remember that there is a limit on the amount that you can claim as HRA. This is usually specified on the salary slip or the information is available with the HR team of your organisation. If you are living on rent, then this can be a great way to reduce your tax liability. However, ensure that you keep all your rent-related documents handy to avail of this benefit, he added.

5. Understand different sections of the Income Tax Act that offer tax benefits: It is important to understand various sections that offer tas benefits. Jain said that Section 80C is fairly popular among people for tax-saving investment options. However, there are other sections like 80D, 80EE, 80G, etc. that offer tax benefits too. To maximise your tax benefits understanding all these sections is important as it can help you create a tax-saving plan to reduce your tax outgo.

6. Some expenses offer tax benefits too: According to Jain, the government offers tax benefits on a pre-approved list of expenses like the tuition fees of your child, insurance premium, a donation to an approved charitable institution, etc. Hence, it is important to ensure that you are aware of all these exemptions as they can help you reduce your tax liability too.

“In the current times with information being readily available at our fingertips, lack of awareness should not be a roadblock in your journey to achieve financial freedom. Hence, ensure that you dedicate some time to create an efficient tax-saving plan and maximise the tax benefits from your salary,” he said.

7. Start making small investments in tax-saving instruments: Jain says that even if you have just started earning, you can start a SIP of say Rs.1000 per month in an ELSS scheme. This way, you will have some tax-saving investment by the end of the year.

Some other tax-saving instruments you can explore are the following:

  • Open Tax saving bank Fixed Deposit/post office: Sarkar suggests that tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled to tax deduction under section-80C.
  • Sukanya Samridhi account: It can be opened for girl child below 10 years of age and maximum for 2 girl children. The contribution made under this account are eligible for deduction under section 80C. Further, interest accrues against this account or proceeds received on maturity/withdrawals are also tax-free.
  • Repayment of Home Loan: The deduction up to INR 1,50,000 is allowed on the principal repayment of the housing loan. Further interest paid for the year can be claimed as a deduction from the total income of the said year.
  • Invest in NPS: By investing in the National Pension System (NPS), you can make an additional tax-saving of Rs 50,000.

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8. Understand allowances and coupons: Sarkar said that based on salary components offered by the employer, tax planning can be possible

Jain said that while salary is taxed, allowances and coupons (food coupons, shopping coupons, etc.) are not considered as salary and hence, not taxed.

“Many employers offer these coupons to their employees offering an opportunity to reduce their taxable income while earning a similar amount. This can only be beneficial if you can fully utilize the coupons. Hence, if your employer is offering avenues to accept alternative modes of remuneration like allowances/coupons, etc. to reduce your taxable income, ensure that you are not losing more money in the process.” he concluded.

9. Leave Travel Allowance: Rachit Chawla, Founder and CEO, Finway FSC says Leave travel allowance (LTA) is often salaried individuals’ first brush with tax savings. LTA entitles salaried individuals to claim expenses incurred towards domestic vacations. Note that this mostly covers the cost of travel and not of miscellaneous expenditure during the trip. LTA is available for two trips in a time frame of four years. There is also a provision to carry one trip over if you weren’t able to claim it in the previous block.

10. Leave encashment: According to Chawla, leave encashment is another way of saving taxes for salaried individuals. If you do not use all the leaves you’re entitled to, then organisations (depending on whether they’re private or state-owned) will offer you compensation for those days. The amount that you will receive is taxable. However, there are conditions under which it is tax-exempt. While Central and State government employees are always eligible for leave encashment, private employees are eligible for exemption under certain specific conditions only.


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