How do salaried employee save income tax in India?

Discover effective tax-saving strategies for salaried employees in India. Learn how to leverage allowances, deductions under Chapter VI(A), and exemptions to optimize your tax planning. Maximize take-home income through smart investments and compliance with recent tax reforms.

Tax planning plays a crucial role in the financial lives of salaried employees in India. With the country’s tax laws offering various provisions and deductions, individuals can significantly reduce their tax burden and increase their take-home income. By understanding and utilizing the available tax-saving options, employees can optimize their finances and achieve their financial goals more effectively.

In this article, we will explore the key strategies and avenues through which salaried employees can save income tax in India. From making smart investments and taking advantage of deductions, we will delve into the actionable steps that can help individuals optimize their tax planning.

Whether it’s investing in tax-saving instruments, utilizing exemptions for house rent and medical expenses, or making the most of allowances and reimbursements, there are numerous avenues for employees to explore. Moreover, being aware of recent tax reforms and amendments is crucial to stay updated and adapt tax planning strategies accordingly.

Save tax without investment by taking maximum deduction of allowances provided by company

Salaried employees in India can save income tax by taking advantage of deductions related to allowances provided by their companies. These allowances are given to employees to cover specific expenses and can be partially or fully exempt from taxation, subject to certain conditions. By understanding and utilizing these allowances effectively, employees can significantly reduce their taxable income. Let’s explore some common allowances and the tax benefits associated with them:

1. House Rent Allowance (HRA): HRA is provided to employees to cover their rental expenses. The amount of HRA exempt from tax is the least of the following: a) Actual HRA received from the employer b) Rent paid minus 10% of salary c) 50% of the employee’s salary (for employees in metro cities) or 40% of the salary (for employees in non-metro cities)

By providing appropriate rent receipts and a rent agreement, employees can claim the exempt portion of HRA while filing their tax returns.

2. Leave Travel Allowance (LTA): LTA allows employees to claim tax exemption on expenses incurred for domestic travel. The exemption is limited to the actual travel cost for the employee and their family, subject to certain conditions. Employees must ensure they retain travel bills, tickets, and other relevant documents to avail of this benefit.

3. Medical Allowance and Reimbursements: Employers may provide employees with a fixed medical allowance or reimbursements for medical expenses incurred. These allowances can be tax-exempt up to a certain limit, provided the employee submits appropriate medical bills and receipts.

4. Transport Allowance: Transport allowance is given to employees to cover their commuting expenses. It is tax-exempt up to Rs. 1,600 per month.

5. Children Education Allowance (CEA): CEA is given to employees to support their children’s education expenses. It is tax-exempt up to Rs. 100 per month per child for a maximum of two children.

6. Hostel Allowance: If an employee’s child resides in a hostel, the hostel allowance provided by the employer is tax-exempt up to Rs. 300 per month per child for a maximum of two children.

7. Meal Coupon Allowance: Many companies offer meal coupons as a tax-saving benefit to their employees. These coupons can be used to purchase meals and non-alcoholic beverages from designated outlets. The maximum tax exemption allowed on meal coupons is Rs. 50 per meal. Therefore, if an employee receives meal coupons for two meals per day, they can avail themselves of a tax exemption of up to Rs. 100 per working day. By utilizing meal coupons effectively and keeping track of their usage, employees can reduce their taxable income significantly.

8. Uniform Allowance: Certain professions require employees to wear specific uniforms or prescribed clothing. Companies often provide a uniform allowance to cover the cost of purchasing, maintaining, and cleaning these uniforms. Under the Income Tax Act, the allowance provided for the purchase or maintenance of uniforms is tax-exempt up to the actual amount spent or the limit set by the employer. Employees should ensure they maintain the necessary bills and receipts to claim this exemption effectively.

9. Phone and Internet Bill Allowance: With remote work becoming more prevalent, companies may provide allowances to cover employees’ phone and internet bills. This allowance helps employees offset their communication expenses incurred for work purposes. As per tax regulations, if the phone or internet connection is in the employee’s name, they can claim a proportionate exemption for the expenses related to work usage. It is essential to maintain proper records and bills to demonstrate the work-related usage of these services to the tax authorities.

10. Car Maintenance Allowance: In some cases, companies provide employees with a car maintenance allowance to cover expenses related to vehicle upkeep, such as fuel, repairs, and servicing. This allowance can be tax-exempt up to the amount specified by the employer, provided the employee submits the necessary bills and receipts for verification. It is crucial to maintain a record of all car-related expenses to ensure accurate tax planning and claim the allowable exemption effectively.

Save tax by taking deductions available under Chapter VI(A) of Income Tax Act, 1961

Chapter VI(A) of the Income Tax Act in India encompasses various deductions that individuals can claim to reduce their taxable income. These deductions are designed to incentivize specific expenses, investments, and contributions, promoting savings and financial stability. Let’s explore some key deductions available under Chapter VI:

1. Section 80C: This is one of the most widely utilized sections for tax deductions. Under Section 80C, individuals can claim deductions up to Rs. 1.5 lakh for specified investments and expenses. Some popular avenues for deductions under this section include:

• Contributions to Employee Provident Fund (EPF) and Public Provident Fund (PPF).
• Payment of life insurance premiums.
• Investment in National Savings Certificates (NSC).
• Repayment of principal on a home loan.
• Subscription to specified equity-oriented mutual funds (ELSS).
• Tuition fees paid for children’s education.

2. Section 24B: Section 24(b) of the Income Tax Act in India allows individuals to claim deductions on the interest paid on a home loan. Under this section, homeowners can claim deductions up to Rs. 2 lakh per year on the interest component of their home loan EMI. This deduction is applicable for both self-occupied and rented properties. To avail of this deduction, individuals must ensure that the loan is taken for the purpose of purchase, construction, repair, or renovation of a residential property. Section 24(b) provides significant tax benefits to homeowners, reducing their taxable income and easing the financial burden of home loan repayments.

3. Section 80D: This section allows deductions on payments made towards medical insurance premiums. Individuals can claim deductions up to Rs. 25,000 for health insurance premiums paid for themselves, their spouse, children, and parents (up to Rs. 50,000 for senior citizens).

4. Section 80E: Deductions under this section are applicable to interest paid on education loans taken for higher education. There is no upper limit for deductions, and the deduction can be claimed for a maximum of eight years from the start of loan repayment.

5. Section 80G: Donations made to specified charitable institutions and funds are eligible for deductions under this section. The deduction amount can vary based on the nature of the organization and the prescribed limits set by the government.

6. Section 80TTA/80TTB: These sections pertain to deductions on interest earned from savings accounts and fixed deposits. Under Section 80TTA, individuals can claim deductions up to Rs. 10,000 on interest earned from savings accounts. Senior citizens can claim deductions up to Rs. 50,000 on interest income under Section 80TTB.

7. Section 80CCD(1): Contributions made to pension funds, such as the National Pension Scheme (NPS), qualify for deductions under this section. The total deduction limit under Sections and 80CCD(1) is Rs. 50,000.

8. Section 80DDB: Individuals can claim deductions on medical expenses incurred for the treatment of specified diseases for themselves or their dependents. The deduction amount varies based on the age of the individual or dependent.

*****

The author is an Income Tax and GST Practitioner and can be contacted at 9024915488.