Tax Planning for Salaried Individuals

Payment of taxes wipes out a huge portion of one’s savings. This is especially true when one is not aware of the benefits that can come from tax planning. Tax planning helps to reduce the tax liability and in turn saves your hard earned income. It is a completely legal process but involves several steps which can sometimes be a challenge for many. 

There is not much you can do about the tax liability of the previous financial year as it is gone. Most taxpayers procrastinate till the last quarter of the year, resulting in hurried decisions. Instead, if you plan at the start of the year, your investments can compound and help you achieve long-term goals. Rather than wait until March, plan for the current year well in advance so that by December you can submit the relevant documents to your employer and thus reduce your tax liability.

Remember, “A penny saved is a penny earned!”

Here are a few tips to help you plan your tax saving journey for FY 21-22. 

Choose the right Tax Regime

The Budget 2020 saw the Finance Minister Nirmala Sitharaman announce a new tax regime with more tax slabs and lower tax rates. The taxpayers were given a choice between the new regime and existing one, leaving it to them to decide which they would like to opt for. This has led to more confusion than convenience to many. And if you are wondering how to go about figuring out whether you should opt for the new or the old tax regime, you can use this calculator to determine your tax liability as per both regimes and know which one saves you more money.

Salary Optimization is Key

One must know how to optimize one’s salary along with the standard deductions and exemptions to reap the maximum benefits of tax planning. To do that one needs to know what is the difference between exemptions and deductions. 

Income – Exemptions = Taxable Income

Taxable Income – Deductions = Net Taxable Income

So, in order to save your taxes you need to make the most of your exemptions and lower your taxable income. Once this is done then, deductions should be used judicious;y to bring down your Net Taxable  Income.

How much can you claim in exemptions?

  1. HRA [Section 10-13A]
  1. Leave Travel Allowance [Section 10(5)]

It is an exemption for allowance/assistance received by the employee from his employer for travelling on leave. This exemption is available for only two journeys performed in a block of four calendar years.

The exemption is available only on the actual travel costs i.e., the air, rail or bus fare incurred by the employee. The exemption is also limited to LTA provided by the employer.

For example, if the LTA granted by the employer is Rs 30,000 and actual eligible travel cost incurred by the employee is Rs 20,000, exemption is available only to the extent of Rs 20,000 and balance Rs 10,000 would be included in taxable salary income.

In case an employee has not availed exemption with respect to one or two journeys in any of the block of 4 years, such exemption can be carried over to the next block provided she/he avails this benefit, in the first calendar year of immediately succeeding block.

  1. Children Education and Hostel Allowance [Section 10(14)]

You can claim the following as well

  • Children’s Education Allowance: INR 100 per month per child up to a maximum of 2 children.
  • Hostel Expenditure Allowance: INR 300 per month per child up to a maximum of 2 children.

It amounts to Rs.9600 annually which can be claimed against such expenditure  made. 

  1. Reimbursement

You can claim reimbursement of expenses made by you on behalf of the company you work for by submitting the original bills to the employer. Such payments should be taken as reimbursement and not as special allowance. As such reimbursements are tax exempt. 

Meal coupons provided by the employer are tax exempt u/s 17(2)(viii). The value of such coupons should not exceed Rs 50 per meal and can be given for two meals per working day.  

A calculation based on 22 working days and 2 meals a day results in a monthly benefit of Rs 2,200. The annual allowance for meal coupons works out to be Rs 26,400 and is tax-exempt in the hands of the employee.

Deductions that will bring down the Net Taxable Income 

  1. Standard Deduction

The Indian Taxation System allows a flat deduction to salaried employees and taxpayers receiving a pension. You can claim a flat Rs. 50,000 deduction without the need not submit any disclosures for investment proofs to avail this deduction.

  1. Investments 
SectionInvestmentUpper Limit
80CPPF EPFULIPs NPS ELSS Principal portion of the EMI paid against home loanChildren Tuition FeesMaximum Rs. 1.5 lac (aggregate of 80C, 80CCC and 80CCD)
For tuition fees a maximum of 4 children’s deduction can be claimed, i.e. 2 by each parent.
80CCCPension funds (annuity plan by a life insurance company)Maximum Rs. 1.5 Lakhs (aggregate of 80C, 80CCC and 80CCD)
80CCDPension fund initiated by central government80CCD1: Employee Contribution: Maximum Rs. 1.5 lac or deduction up to 10% of salary (for employees) or 20% of gross total income (if you are self-employed) 80CCD(1B): Self Contribution- Maximum Rs.50,000 for a deposit made to the NPS (National Pension Scheme) or your Atal Pension Yojana account 80CCD(2): Employer’s Contribution-Additional deduction up to 10% of your salary
80EInterest on Education Loan for higher educationNo upper limit on the amount but available only for 8 years starting from the year in which you start repaying the loan.  
  1. Expenditure
SectionDeductionUpper Limit
Section 80DPremium paid for Medical Insurance for self/ family/ parentsRs 25,000 for premiums paid for self/familyRs. 50,000 for premiums paid for senior citizen parentsAdditionally, health checkups to the extent of Rs 5,000 are also allowed and covered within the overall limit
80EEBInterest paid on loan taken for the purchase of electric vehicles (EV)Rs 1,50,000
80EEInterest paid on Home LoanRs 2 lakh
80TTASavings Account InterestRs 10,000

Want to know more about the exemptions and deductions  with a practical calculation? Click here to watch our video on 12 Lakh Salary, Zero Tax with examples.

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