• Jun
  • 03
  • 2015

Tax Planning for Salaried and Individual People

Article ID 54903 | Posted In Income Tax | , | 16 Comments » Print Friendly and PDF

CA Aashish Ramchand

The general perception when it comes to salaried employees is that there isn’t much scope for saving tax. But that isn’t true. In fact there are many avenues under the head “Income from Salary” in which tax savings are possible.

Your total salary is basically an amalgamation of various incomes called by different names. It’s a total of your basic salary + various allowances + various perquisites and certain other incomes like commission etc. What most people are unaware of is that apart from basic salary, other incomes like allowances and perquisites are exempt but only up to a certain permissible limit. Every employee can (with an approval from his employer) alter his salary package in a way which suits his or her needs to avail maximum tax benefits.

All employees must empower themselves with the knowledge of the various exemptions that are available in case of some very common day to day allowances and perquisites.

House Rent Allowance – HRA granted to an employee is exempt to the extent of the least of the following

1. 50% of your salary (in case you reside in either of the 4 metro. In all other cases its 40%)

2. Rent paid in excess of over 10% of your salary

3. HRA actually received.

Transport allowance – Any transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty, shall be exempt to an extent of Rs. 1600 per month wef FY 2015-16. Earlier up to Financial Year 2014-15 the limit was Rs. 800 per month.

Also Read- CBDT Notifies Revised Transport allowance exemption limit

Rent free un/furnished accommodation provided by an employer to his employee. – The valuation of such a perquisites in respect of the accommodation provided is as shown :-

a) 15% of the salary if the accommodation is provided in a city having a population exceeding 25 lakh

b) 10 % of the salary if the accommodation is provided in a city having a population above 10 lakh up to 25 lakh

c) 7.5% of the salary if the accommodation is provided in a city having a population up to 10 lakh

In case where furniture is also provided by the employer, 10% of the your salary is taken as the value of such furniture where the same is owned by the employer. If the same is not owned, the actual hire charges paid b the employer are taken.

Also Read- Valuation of Rent Free unfurnished accomodation

Other perquisites such as employer’s contribution to staff group insurance scheme or recreational facilities, including club facilities extended to all employees are exempt from tax in all cases.

I have discussed the above exemptions with you so that you, the employee knows the available exemptions. With this you can now design your salary package in such a way that it brings you maximum tax benefit. You can try and restrict your allowances within the exemption limit and also plan your taxes accordingly as you know what the value of your perquisites.

But the main tax saving tip is the one I am about to discuss with you. According to section 80CCD(2), the employer’s contribution made to a pension scheme, which is allowed as a deduction to the employee would be available to him over and above the Rs. 1,50,000/- of section 80C, 80CCC and 80CCD(1). Therefore you can now make this a definite part of your salary package where you tell your employer to contribute 10% of your salary to a recognised pension scheme and avail a 100% tax benefit on the same.

Also always remember to give your home loan details to your employer and always make sure you have exhausted your 80C and 80D deduction limit.

(Author is CA by profession & Co-Founder of  Make My Returns (www.makemyreturns.com) & can be reached at  aashish@makemyreturns.com)

(Article was first published on 07.02.2013 and republished with amendments)