Written by : DG Gupta

A financial professional, qualified Chartered Accountants and Company Secretary examinations and enriched with experience of all types of accounting, taxation and compliance of Manufacturing as well as Service Industries

Tax Planning for Salaried Individuals In India

DG Gupta
DG Gupta, CA, CS

Sep 3, 2021 00:27

Simply put, Income tax is the tax on the income you earn. Taxes are unavoidable and it is a certain amount that you have to pay back to the Government.The higher your earn lands you in higher tax brackets.

Now, is it possible to pay less tax? and the answer is yes by all legal means but what is required is some tax planning exercise.

Tax planning is a well-thought-out plan or a strategy to look into the system for legal ways to pay less tax but at the same time adhering to Income Tax Act, 1961 thereby having more income at your disposal.

Tax saving is just one part of the puzzle. Savings on tax payments or having more net pay is just half the work done and one should be judicious to utilize those extra funds to put into investment tools for life betterment and meeting financial goals.

A typical salaried person pays tax every month in the form of TDS. Tax Deducted at Source (TDS) is the amount that gets deducted from your salary and paid to the Government every month by an employer. At the end of the financial year, an employer provides you the TDS certificate that is also known as Form16. Form16 provides the details of total income earned and total tax deducted for that financial year. Any discrepancy in Form16 results in a tax refund or additional tax payment when you do Tax return filing.

Salary slip is a reflection of basic income plus deductions and contains details about how your salary is structured under different categories often known as salary components. Not all components within the salary slip are exposed to the same tax treatment.

Understanding these nuances will help any salaried person to take benefits from the various available tax deductions.

You can take advantage of the various allowances, exemptions, and deductions to minimize your tax liability in a financial year.

1. House Rent Allowance (HRA):

It is a type of allowance that an employee receives as a part of monthly salary for expenses incurred for paying rent on accommodation. For salaried individuals, HRA falls under section 10(13A) of the Income Tax Act, 1961. It is important to note that you cannot claim HRA exemption if you are not paying any rent or staying in your own house. Lastly, to claim this exemption, you have to provide the rent receipts or rent agreement as proof.

2. Leave Travel Allowance(LTA)

As a salaried individual, you can claim this allowance on your family trips. This exemption falls under section 10(5) of the Income Tax Act, 1961. The exemption claim is valid when:

a. Travel is within India
b. A claim is done for two trips in 4 calendar years.
c. Claim cost only contains travel costs and not food, hotel accommodation, etc.
d. A claim is against your travel or travel with your family (Spouse, children, and parents).

To claim this exemption, you must provide appropriate travel tickets as proof.

3.Standard Deduction

Standard deduction now covers the conveyance allowance and medical allowance. Flat Rs.50,000 deduction can be claimed by a salaried person and it is not required to provide any proof of actual expenses incurred on medical or conveyance.

4. Professional Tax

Professional tax is a tax charged by a state government and applies to every earning individual. Tax amount may vary from state to state but it has a maximum cap of Rs.2,500 per year. Please note that not all state governments or union territories charge professional tax. According to section 16(iii) of the Income Tax Act of 1961, Professional tax paid is eligible for deduction. It is generally deducted and deposited by the employer to the state government.

5. Deductions u/s 80C

Section 80C of the Income Tax Act enables annual deductions up to Rs.1.5 lakh. It provides tax deductions on certain expenditures and investments. Aplethora of investment options are available under this section.The various investment options available for investment are as follows:

• National Saving Certificate (NSC)

NSC is a fixed deposit investment scheme. This service is available through any Indian post office.You may have to consider the below things before choosing this option:

a. Minimum investment: Rs.100
b. Maximum investment: No Limit
c. Lock-in period: 5 years

• Public Provident Fund (PPF)

This is probably the most popular and first investment choice salaried people make for tax benefits. It provides a deduction of up to Rs.1.5 Lakh and assured interest every year according to the interest rate set by the government. Please check the below details.

a. Minimum investment: Rs.500 at least once a year
b. Maximum investment: Rs.1.5 Lakh
c. Lock-in period: 15 years but partly withdrawal is possible starting 7th year from the account opening date.
d. Additional benefits: Interest earned every year on this investment is compounded annually. Interest earned each year plus the total accumulated corpus at the end of maturity is tax exempted.

Proof of PPF investment needs to be submitted at the time of filing a tax return.

• Sukanya Samridhi Yojana(SSY):

This yojana or scheme is meant for a girl child. Investments made under this scheme are eligible for deduction under section 80C. Account for this scheme can be opened anytime from childbirth time till she turns 10. Please find below details.

a. Minimum Investment: Rs.1000 at least once a year
b. Maximum Investment: Rs.1.5 Lakh in a financial year

c. Additional Information: SSY account can be opened for a maximum of two girl children.
• Provident Fund:

This refers to the Employee Provident fund. You may see a deduction under this component in your salary slip which is a contribution from you and your employer. Employee contribution is eligible for deduction whereas employer contribution is tax exempted.

• Tax saving Fixed Deposit Scheme:

This is a type of fixed deposit scheme available through banks and post offices. This is a one-time lump sum deposit scheme and you can claim a tax deduction of up to Rs.1.5 Lakhs. Please find below details

a. Minimum Investment: Rs.10,000
b. Maximum Investment: Rs.1.5 Lakh
c. Lock-in period: 5 years
d. Additional Information: Interest earned is taxable. Pre-maturewithdrawals are not permitted.

• Life Insurance:

It is one of the most popular investment tools to get tax deductions. An individual can claim a deduction on the premium paid up to a maximum limit of Rs.1.5 lakhs.

• Equity Linked Savings Scheme (ELSS)

ELSS is a tax-saving mutual fund investment scheme. You can invest a lump sum amount or through SIP mode. Please find below details

a. Minimum Investment: Rs.500 for SIP mode and Rs.5000 for lumpsum mode.
b. Maximum Investment: No Limit but the claim is eligible only up to Rs.1.5Lakh.
c. Lock-in period: 3 years
d. Additional Information: If you invest through SIP mode, please take into consideration that 3 year lock-in period is applicable for every installment made.

• Tuition Fees:

The tuition fee is a fee charged by schools/colleges for the course undertaken in their institution. The payment made for tuition fees of children's education is eligible for tax deduction up to Rs.1.5 Lakh. The deduction is available for a maximum of two children's tuition fees. Only tuition fees paid are eligible for deduction and other expenses like private tuition fees, extracurricular activity fees, etc, are not covered. The actual payment receipts need to submit as proof to claim the deduction.

• Stamp Duty and Registration Charges:

Stamp duty and the registration fee is the amount you pay when you buy a new home. This amount is eligible for a tax deduction.

• Home Loan Principal Payment:

If you are paying an EMI towards the home loan then the principal part of the EMI is eligible for a tax deduction of up to Rs.1.5 lakh. It is required that the house you own is either self-occupied or not rented to anyone.

Note: Maximum of Rs.1.5 Lakh deduction can be claimed under section 80C and above are the various options that you can choose to attain this limit.

6. Deduction under section 24:

• Home Loan Interest:

If you are paying an EMI towards the home loan then the loan interest part of the EMI is eligible for a tax deduction of up to Rs.2 Lakhs for a self-occupied house under this section

7. Deduction u/s 80D:

If you are paying for medical insurance for self, spouse, and dependent children then up to Rs.25000 is eligible for deduction u/s 80D.An additional deduction of up to Rs.25000 can be claimed if you are paying for the medical insurance of your parents provided they are less than 60 years or a deduction claim of up to Rs.50000 can be made if one or both the parents are more than 60 years. Preventive health checkup expenses made up to Rs.5000 can also eligible for deduction (Please note that this is not up and above the limit mentioned earlier).

8. Deduction u/s 80DD:

The expenses incurred towards the maintenance of a disabled dependent family member who requires absolute support can be claimed u/s 80DD.
The maximum amount eligible is:

a. Up to Rs.75,000: If the disability is a minimum of 40%
b. Up to Rs.1,25,000: If severe disability

9. Deduction u/s 80E:

If you have taken an education loan for yourself, your spouse, or your children then the loan interest part is eligible for a tax deduction u/s 80E from the point when you have started the loan repayment and can be claimed for a maximum of 8 repayments.

10. Deduction u/s 80TTA:

It is good to know that interest on savings accounts is tax-free up to Rs.10,000 per year and you can claim a deduction under this section.

11. Deduction u/s 80U:

If you are a taxpayer and possess any kind of disability then you are eligible to claim a deduction u/s 80U.
The maximum amount eligible is:

a. Up to Rs. 75,000: If the disability is a minimum of 40%
b. Up to Rs. 1,25,000: If severe disability (80% or more)

Finally, it is important to understand that not all salaried people are taxed with a flat tax rate. Your taxable income amount decides which tax slab you fall into and will be taxed accordingly. Further, Please remember the below points while you are doing your tax planning:

a. Understand which tax-slab applies to you
b. Look for lock-in duration on tax-saving investments
c. Get a good grasp of the difference between tax exemption and tax deduction.

Importantly, Tax planning should not be done at the last minute and you should carefully weigh the options that can help you achieve your long-term financial goals.

At GoTaxFile we have a team of experts who can assist you in doing tax planning and any tax-related guidance. Please feel free to ring us to discuss this in detail with our expert team.

Summary: This blog is intended for salaried individuals to help choose from different tax planning options and provide information about various exemptions and deductions within the Income Tax Act, 1961.

DG Gupta
DG Gupta, CA, CS

Sep 3, 2021 00:27

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