3 minsFebruary 06, 2017
Many of you might be expecting a hike in salary for the year and some lucky ones may have already received. While getting an increment fills us with happiness and zest, an important thing that must be borne in mind is tax planning. If not planned
well, taxes can reduce a noticeable portion of take home pay.
Structure your salary
You must discuss with your employer if the salary structure can be amended to include more allowances. Including allowances in greater proportion would facilitate you to reduce your tax outgo.
Let us look at some of the components of salary which can help you save tax…
- Basic salary:
- Basic salary often constitutes about 30%-40% of your Cost-to-Company (CTC). It is necessary to have an optimal basic salary. While having a very high basic component might result in high tax liability, reducing your basic component significantly
might also reduce the benefits that you receive from other components such as House Rent Allowance (HRA), Leave Travel Concession (LTC), superannuation benefits and so on.
- House Rent Allowance (HRA):
- If you live in a rented house and your organisation provides you HRA benefits, this can be used for lowering your tax liability. If you are staying with your parents in an accommodation owned by them, you could pay them a rent. This can
help you reduce tax outflow while in receipt of HRA. However in order to obtain an exemption, you are required to submit appropriate and adequate proof of payment of rent for the entire period for which you want to claim exemption.
If you are paying an annual rent of more than Rs 1,00,000 or Rs 8,333 per month, then you will have to report the Permanent Account Number (PAN) of your landlord to the employer. And in case if your landlord does not have a PAN then
you need to file a declaration to this effect from your landlord along with the name and address of the landlord.
- The maximum amount that can claimed under HRA is the least of…
- Actual HRA,
- Rent paid in excess of 10% of basic salary + Dearness Allowance (DA) if in terms of service or
- 50% of basic salary + DA in case of Chennai, Delhi, Kolkata, Mumbai (40% of salary + DA in case of other cities).
- Here a noteworthy point is, if your rent is very high and if you are not fully covered by the HRA limit, then it would be wise to pick a company leased accommodation (if the company in which you work in offers so), as this company leased
accommodation would constitute to be the perk value and would be taxed @ 15% of your gross income. Sure, the perk value is taxable but it still works out to be more effective for tax planning, than opting for a HRA that doesn’t
fully cover your rent.
- Leave Travel Concession (LTC):
- LTC can be claimed for any journey which you have made either alone or with your dependent family members in India. The maximum amount that can be claimed is the least of - i) the amount actually incurred or ii) the amount of LTA allowed.
The exemption extended to you is for 2 journeys performed in a block of 4 calendar years. The current block of 4 calendar years ends on December 31, 2017. It is vital note that the amount of exemption is restricted only to expense
incurred on travelling to the destination and does not include expenses such as hotel bills, food, etc.
- Transport allowance:
- Expense incurred for commuting between your home and work place is also exempt from tax. The maximum amount that is exempt was increased in the Union Budget 2015 from Rs 800 per month to Rs 1,600 per month. You need to ensure that the
enhanced limit is part of your compensation.
- Medical reimbursement:
- Expenses incurred by you or your family for medical purposes can also help in reducing the tax liability. A maximum of Rs 15,000 can be claimed every financial year on account of medical expenses. But to claim the same, you are required
to submit, to your employer, the medical bills for the financial year stating the amount in total which you intend to claim.
- Similarly, it is noteworthy that if your medical insurance premium is paid by the employer or reimbursed, then that too will
not be subject to tax. Also if your employer is providing medical facility in hospital or clinic owned by him, local authority, Central Government or State Government then medical expenditure incurred under such a hospital too, would
not be subject to any tax.
- Similarly, it is noteworthy that if your medical insurance premium is paid by the employer or reimbursed, then that too will not be subject to tax. Also if your employer is providing medical facility in hospital or clinic owned by him,
local authority, Central Government or State Government then medical expenditure incurred under such a hospital too, would not be subject to any tax.
- Meal allowance:
- If your employer provides you the benefit of food coupons / food cards, this too can help in reducing your tax liability. The maximum amount that is allowed to be exempted is Rs 2,500 every month.
Apart from optimally utilising the allowance to reduce your tax outgo, as an assessee you should also be effectively using the provisions of the following sections of the Income-Tax Act, 1961.
[Also Read: Income Tax Slabs of India]
- Section 80C
- Section 80C provides the benefit of reducing your tax liability by investing in tax saving instruments. A maximum of Rs 1,50,000 p.a. can be allowed as a deduction under this section for investments made in -
Public Provident Fund (PPF) , Employees’ Provident Fund (EPF), 5 year fixed deposits with banks and post
office, life insurance premium, Equity Linked Saving Schemes (ELSS), principal repayment on housing loan , Unit-Linked Insurance Plans (ULIPs), tuition fees paid for children’s education (subject to a maximum of 2 children) etc.
- Section 80CCD
- After the announcement in the union budget 2015, you can benefit from an additional deduction of Rs 50,000 p.a. available by investing in the National Pension Scheme (NPS),
apart from the Rs 1,50,000 p.a. available under section 80C. It should be noted that 10% of the salary (i.e. basic salary + DA) contributed towards NPS is eligible for a tax deduction up to Rs 1,50,000 lakh under section 80CCD of the
Act. Contributions by your employer are tax deductible in NPS under Sec 80CCD(2).
- Section 80D
- Premiums paid by you on medical insurance policy for covering yourself, your spouse and / or dependent children can be claimed as a deduction under section 80D. The maximum amount that can be claimed as deduction is Rs 25,000 p.a. (or
Rs 30,000 p.a. in case you are a senior citizen). Moreover, if you also pay the medical insurance premium for your parents then you will be eligible for an additional deduction of Rs 25,000 p.a. (or Rs 30,000 p.a. in case your parents
are senior citizens).
- Section 80G
- Our Income Tax Act considers the humane side of our life, and so if on humanitarian grounds you donate to certain specified funds, charitable institutions, approved educational institutions etc., the donation amount qualifies for deduction
under this section. The maximum amount that can be claimed as deduction for these funds or institutions is either 50% or 100% of your donation, subject to the stated limits as provided under this section.
- Section 24(b)
- Interest on loan taken for the purchase of a house property is available for deduction under section 24(b) of the Income Tax Act. The maximum amount available for deduction is Rs 2,00,000 in case this property is occupied by you (i.e.
Self-Occupied Property), while it is not subject to any limit for deduction under this section if the property is let out but limited to the actual interest paid.
Similarly, if you have taken a loan for repairing, reconstructing or renewing a property, the maximum amount eligible for deduction under section 24(b) will be restricted to Rs 30,000, whether you stay in it or let it out on rent.
It must be borne in mind that these are not the only options available for reducing your tax liability and a holistic assessment should be done to save tax optimally and legitimately.