Taxes are important since they help the government provide products and services to the citizenry. However, you also want to have the most from your income, and this includes saving on your taxes. Sometimes you may be paying excess taxes, and you need to know how you can make savings which can be used in your home.
Top 10 Ways To Save Tax For Salaried Employees In India
Well, there are several ways of saving taxes and here you will get the top 10 ways to save tax for salaried employees in India.
Tax Savings Through Salary Restructuring
When you are in the corporate world, there are certain expenses that you should not have to bear; these expenses come by virtue of your employment at your current company. For examples, you may have to wear certain uniforms at your office, commute daily to your place of work, entertain corporate guests in an effort to foster a good relationship or win a new client, subscribe to certain publications which are targeted at your work, and so much more.
Should you leave your job, then these expenses would disappear; for this reason, these expenses should be paid for by the company. Your employer should give you an expense account so you can pay for these company-related expenses.
You should talk to your employer and ask for restructuring of your salary so you can have allowances and an expense account; these should not be part of your income. This means that you still get the same amount of money, but a portion of it will be allowances and you will not have to pay taxes on them. However, you will need to show that they are allowances when you file your taxes.
Here is a list of some of the allowances that you can ask for when seeking salary restructuring from your employer:
- Commuting and having a company driver
- Subscribing to job-related publications
- Medical allowance
- Uniform/dressing allowance
- Mobile telephony expenses
- Client entertainment
- Personal development such as going to school so you do your job better
Note that not all employees are able to access such restructuring, and eligibility is at the discretion of the employer.
Tax Savings on Rent
When you are transferred to another city by your company and have to rent a different house, apart from the one your family lives in, your employers should take up this expense. You are paying rent by virtue of your employment, and this rent should be deducted from your taxable income.
Part of your income will be given as House Rent allowance (HRA) and this should be deducted from your gross income before taxation. However, the full HRA will not be tax exempt, and there is a formula which you use to get your HRA for tax benefit.
The following are tax deductions on rent and only the lowest will be eligible
- The actual HRA you receive from the company
- The actual rent that you pay, less 10% of your salary plus DA
- If you are living in Mumbai, Delhi, Chennai and Kolkata, you can deduct 50% of your basic salary plus DA; anywhere else is 40% of your basic salary plus DA
As you can see, you can save a lot when you use HRA, so you should ask your employer to include HRA in your salary structure. Remember that you have to keep the rent receipts from the landlord. Should your rent exceed 1 Lakh, you should have a registered lease agreement and a copy of the landlord’s PAN card.
There are many HRA calculators that you can use to get the tax benefit in this case.
Tax Savings from Leave Travel Allowances and Medical Expenses
There are certain personal expenses that can be tax-exempt. The expenses will be deducted from your gross salary since they will be seen as allowance. You need to confirm with your HR department. Medical allowances that are tax-deductable are capped at Rs. 15,000 a year; anything above that will be taxed. You need to produce medical bills for the exemption to apply; bills for your dependents are also included in this bracket.
The travel and leave allowance is also tax-exempt, but there are certain restrictions that apply:
- The travel expenses should have been incurred while you were on leave and not working
- The travel should be through the shortest route
- You can only claim such exemption twice within a period of 4 years
- The travel should be within India
- Only economy class for air travel and AC-1 for rail travel apply
Tax Savings Through Investment
When you invest your money, you reduce your taxable income and get a rebate; such investments are listed under section 80C of Tax deductions. The investments that you can make mostly come from the EEE category. You do not pay any tax during investment, earning and redemption. The deductions you get under section 80C are limited to 1.5 Lakh since the year 2014.
Here is a list of investments that will save you tax
Employment Provident Fund (EPF)
The EPF is a retirement benefits savings scheme, and it is mandatory for all salaried employees who have a BIC salary of less that Rs. 15,000 per month. Both the employee and employer contribute an equal amount into the employees account. The employee’s contribution is tax-exempt while that of the employer is tax-deductible.
Public Provident Fund (PPF)
The PPF is a long-term savings scheme by the government and can be opened by anyone through most banks, SBI and the Post Office.
Equity Linked Savings Scheme (ELSS)
This applies to investments in mutual funds which are diversified and have to be locked-in for a period of 3 years. The investment applies to the share market and gives the highest tax returns.
Sukanya Samriddhi Account
This is a savings scheme started by the government and targeting the girl child. This brings the best returns amongst small saving schemes. The investment is held until the girl turns 18. The full investment and money paid on maturity is tax-exempt.
Tax Saving Fixed Deposit
This is like any other fixed deposit from any bank, but the maturity period is 5 years. You will have to pay tax on the interest earned.
National Saving Certificate (NSC)
This is a small saving scheme offered by the post office, and each certificate is issued for a period of 5 years. The NSC has an interest rate of 8.5%, and such interest will be subject to tax.
Senior Citizen Saving Scheme
This is another savings scheme offered by the government and is targeted at senior citizens. The investment will have regular payouts, and it has a higher interest rate than the PPF or NSC. People who retire from the Defence Forces can apply for this scheme at any time.
Tax Savings Through Certain Expenses
There are certain expenses that are tax-exempt, as long as they are under 1.5 Lakh. Such expenses include:
- Tuition fees for yourself and your children
- Premiums paid on insurance schemes
- Home loan principal payment – when you take a home loan, the EMI has two parts – the principal and the interest; the principal is tax-exempt under section 80C
When you aim to benefit from all three at a go then the sum total should not exceed the 1.5 Lakh limit
Tax Savings from Medical Insurance
Whenever you have medical insurance expenses going over 1.5 Lakh, you are eligible for tax deductions. The premium that you pay on yourself, your dependents and parents qualifies for this deduction. When you go for checkups and use your insurance you also get tax deductions. Here are some of the deductions that you can make from your medical insurance.
- A maximum of Rs. 25,000 for self and dependents, including health checkups to a maximum of Rs. 5,000
- A maximum of Rs. 25,000 for your parents, and if they are over 60years old, the limit increases to Rs. 30,000
Tax Savings from Home Loan Interest Payments
There is a separate tax saving that you make on the payments of your home loan interest. According to the budget of 2016, the home loan interest that enjoys tax savings has a limit of 2.5 Lakh. This is a considerable savings, and the bigger the loan, the larger the saving will be. You can also have a joint home loan to double the savings you enjoy.
Tax Savings from Giving Capital Gains
If you are salaried, you need to give capital gains so you can enjoy tax savings. Investing in shares attracts short-term capital gains taxes, while investing in property and gold attracts both short and long term capital gains taxes. However, you can enjoy tax savings by setting off capital gains from an investment the capital loss of another. A point to note – you can only offset short term capital gains with short-term capital losses, and this is true for long-term capital gains and losses.
You are allowed to carry forward your capital loss for a period of 8 years. This allows you to make a considerable savings when you offset the capital loss. An example would be capital losses that you make in shares – the loss can be carried forward for 7 years, and your subsequent trading profits can be offset by paying the losses.
Tax Savings Through Philanthropy
Whenever you make a donation, you enjoy tax savings, depending on the charity that you give to. When you make donations to the PM Relief Fund, or certain notable NGOs and political parties, you can get 100% tax exemption. When you donate to scientific institutions and religious bodies, you can claim a tax rebate.
Tax Savings Through Timely Investments and Tax Declarations
This is the most practical and important tip benefitting from tax savings. Every quarter, employers pay advance tax, and then they deduct it from your salary every month as TDS. The TDS is based on the projected annual tax liability for that particular year.
Now, the projected tax will be higher if you fail to declare your planned expenses, investments and tax savings for the year. The employer normally starts deducting monthly TDS from the first quarter of the year, and you may declare your tax saving instruments when it is very late. The result is that you will pay extra taxes and you will only reclaim them in your income tax return. You should always declare your planned tax at the beginning of the financial year.
There is another worrisome scenario in this case. Consider a case where you declare all available tax savings options to maximize your tax savings, but forget to declare your expenses, tax savings and investments till the final quarter of the financial year. You will have a huge burden of investing or large tax deductions during the first two months of the next financial year. Start your tax savings and investments from the very start of the financial year.
There are many more ways in which you can make savings on your taxes. The above top 10 ways to save tax for salaried employees in India illustrates some of the common ways in which you can make savings on your tax. See which ones apply to you and then implement them in the next financial year and see how much you will be able to sae. Some of them can be implemented right away, so go right ahead and do so.