Income Tax Planning Guide For Salaried People

In order to manage finances by saving money on taxes, Tax planning is vital. It is important to develop certain strategies to shrink off the taxes. Tax saving can be easy if done in a correct manner. There are various sharp-witted strategies to stay away from paying excess of taxes and save as much as possible. A salaried person needs to look for tax saving options which not only can help them in saving taxes but also help in achieving financial goals.

This article shall provide insight into certain allowances, exemptions and deductions that can be opted for by salaried persons to reduce their tax burden.

1) House rental allowance: HRA is exempted u/s 10(13A) of the income tax act, 1961.What needs to be kept in consideration is that HRA received from an employer is fully taxable if the employee lives in his own house or is not paying any rent. HRA is available to those employees who have HRA component in their salary and have rented an accommodation. The tax benefit in the form of HRA is allowable only for the period for which house is rented.

How much is HRA exempted?

Minimum of –

1. Actual HRA

2. Rent Paid – 10% of salary

3. 40% of Basic salary* (Non-Metro cities) or 50% of Basic salary (Metro cities)

*In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received on the basis of sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available.

How HRA can be claimed?

HRA can be claimed if an employee has rent receipts and rent agreement. Salaried employees drawing HRA up to Rs. 3,000/- per month are exempted from submission of rent receipt to the employer. However, it is imperative to note that this exemption from producing the rent deed and receipts is only for the purpose of TDS. In case of regular assessment of the employee, the Assessing Officer may enquire the authenticity of the payment of such rent and may ask to produce the necessary documents as it may deem fit. Also as per CBDT Circular if annual rent paid by an employee exceeds 1Lakhs, he is required to quote the PAN of landlord to the employer.

What if an employee does not get HRA but still has rental outflow?

There may be section of salaried people who do not have HRA component in their salary structure or might be self-employed but have an outflow in the form of rent. For such section of people Section 80GG of Income tax Act 1961, comes to rescue.

Amount eligible for exemption is:

Least of:

1. Rent paid in excess of 10% of total income

2. 25% of the total of the total income where total income= Gross total income- Long term capital gains-Short term capital gains where STT has been paid and deduction under Section-80C to 80U except deduction under this section i.e. Section-80GG)

3. Rs 5,000 per month

However, it must be kept in mind that this deduction is available only when the individual or his/her spouse or minor child does not own any accommodation where the employee is employed. Also, if the individual owns any residential property at any place other than the place of employment and is availing the benefits of self occupied property for that property from it , then no deduction U/s 80GG is allowed.

NOTE: HRA and home loan benefit can be claimed simultaneously. If an employee has rented a house, he can claim HRA even if he owns another house in the same city where he is employed or elsewhere and can claim benefit of deduction for home loan against principal and interest paid. However, this benefit of home loan is not available in case a taxperson is getting benefit of section-80GG.

2) Leave travel allowance: LTA U/S 10(5) provides for an exemption only in respect of two journeys performed in a block of four calendar years. The current block of calendar year is 2018-2021.The LTA amount eligible is the lower of the air-conditioned first class fare by the shortest route or the actual amount spent. The same rule applies to the journey undertaken by any other mode, such as a private taxi, and the place of origin and destination are connected by rail. The exemption is available to family which includes the spouse and children of the employee, parents, brothers and sisters of the employee, who are mainly dependent on the employee.  It is allowed on actual fare amount.

DEDUCTIONS under Income Tax Act, 1961

a) Standard Deduction: Employees are allowed are a standard deduction of 50000 from FY 2019-20.

b) Deductions u/s 80C- The Maximum limit of deduction combing all investments and expenditures under section 80C is Rs 1.50 lakhs. Following are the options available:

• Provident fund–Employee’s contribution is eligible for deduction U/s 80C.
• Sukanya Samridhi account-It can be opened for girl child below 10 years of age and maximum for 2 girl child. The deposit is to be made for 15 years with minimum initial deposit of Rs. 250 and maximum investment being Rs1.5 lakhs in a financial year. Interest is calculated on yearly compounding basis.
• National saving certificate– NSC is tax saving fixed deposit scheme from India post. It is available for 5 years now since 10 years NSC has been discontinued. The minimum investment amount is Rs 1000, there is no maximum limit for investment. Investments in NSC are eligible for a deduction of up to Rs 1.5 lakhs p.a. under Section 80C. Furthermore, the accrued interest which is deemed to be reinvested qualifies for deduction under Section 80C.
• Senior citizen saving scheme: It is for senior citizens above the age of 60 years. Minimum deposit is Rs 1000 and maximum investment is Rs 15 lakhs. The maturity period for the SCSS scheme is 5 years. It can be extended for another 3 years, effectively bringing up the period to 8 years.
• Tax saving fixed deposit/ Post office time deposit (for 5 years)–Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section-80C
• Life insurance: Premium paid towards yourself, spouse or children is eligible for deduction u/s 80C.The maturity proceeds of life insurance is tax free u/s 10(10D) subject to certain conditions.
• Tax saving mutual funds (ELSS): Minimum investment is Rs 500. There is no limit for maximum investment however for deduction purposes it is Rs1.5 lakhs
• Home loan principal payment: The Deduction up to Rs 1.5 Lakhs is allowed on the principal repayment of the housing loan if the house is self-occupied or vacant.
• Stamp duty and Registration charges: Deduction for stamp duty and registration charges can also be claimed u/s 80C but within the overall limit of Rs 1.5 lakhs. However, it can be claimed only in the year in which these expenses are incurred.
• Tuition fees: Deduction from taxable income under Section 80C is available to individual taxpayers up to a maximum amount of Rs. 1.5lakhs for education expenses incurred for one’s children. The deduction is available only on actual payment basis.

3)  Home loan interest: The interest paid for the year can be claimed as a deduction from your total income up to a maximum of Rs 2 lakhs under Section 24. From Assessment Year 2018-19 onwards, the maximum deduction for interest paid on Self Occupied house property is Rs 2 Lakhs. For let out property, there is no upper limit for claiming interest. This Deduction can be claimed from the year in which construction of the house is completed.

It is to be noted that though there is no bar on the amount of home loan interest that can be claimed as a deduction under Section 24 for a rented house property, the losses which could arise on account of such interest payment can be set off only to the extent of Rs 2 lakhs.

4) Deductions u/s 80D: Premium paid for Mediclaim /Health Insurance for Self, Spouse, Children and Parents qualify for deduction u/s 80D.Maximum deduction allowable is Rs 25,000 in case you are below 60 years of age and Rs 50,000 above 60years of age. An additional deduction of Rs 25,000 can be claimed for buying health insurance for your parents (Rs 50,000 in case of either parents being senior citizens)

5) Deductions u/s 80DD: In case an employee has dependent that is differently abled, he can claim deduction for expenses on his maintenance and medical treatment. Dependant shall mean spouse, children, parents, brothers & sisters of the taxpayer. Also the dependent should have not claimed deduction u/s 80U for self. Deduction up to Rs. 75,000 if the disability is not less than 40 per cent and Rs 125,000 in case of severe disability can be claimed u/s 80DD of the Act.

6) Deductions u/s 80E: The interest paid on education loan in a financial year is eligible for deduction u/s 80E.The loan should be for individual, spouse or children. Unlike 80C there is no condition that the course should be in India. The tax benefits on education loan are only valid once you start the repayment and moreover they are only available up to eight years.

7) Deductions u/s 80TTA: If a taxpayer is keeping some money in saving account, this is the easiest deduction under the Income Tax Act that individuals can claim. Interest on savings accounts is tax free up to Rs 10,000 per year under Section 80TTA. This limit is Rs 50,000 for senior citizens for both FD and savings account interest under Section 80TTB.

8) Deductions u/s 80U: Tax Payer can claim deduction u/s 80U in case he suffers from certain disabilities or diseases. The deduction is Rs 75,000 in case of normal disability (40% or more disability) and Rs 1.25 Lakhs for severe disability (80% or more disability).

Conclusion: Taxpayers who do not spend time in planning their taxes, the filing season becomes a nightmare. However most of the investments listed under section 80C have a lock-in period set at 5 years, so it is essential to ensure that one’s financial needs are well-covered before one invests. Investments should not be used as tax saving instruments but should consider the various investment options available before choosing the ones that are most beneficial to you. The need to save tax should never lead you to select investment options that yield poor returns.