Tax planning ensures that you make the most of your hard-earned income. For salaried employees, understanding the nuances of tax planning can lead to significant savings and increased financial stability. Indian taxpayers pay around 20–25% of their income in taxes. However, there are some expenses allowed for exemptions and deductions, which can reduce your total tax burden significantly or make your income tax-free. This article lists the simple things you can do for personal tax planning.
Take Advantages From The Components of Your Salary
These are the components of your salary that are exempt from taxable income. Using them wisely can help you increase your savings from taxes.
Leave Travel Allowance (LTA): Employees are eligible to claim an exemption for expenses incurred for travelling for vacation, up to the exemption limit under the Income Tax Act, 1961. One can claim an exemption for travelling by train, air, or bus, subject to the exemption limit allowed.
LTA exemption applies only to domestic travel. To claim the benefits, the employee must furnish proof of taking the actual journey.
House Rent Allowance (HRA): You can claim an HRA deduction if you are living in a rented property. Whichever is the lowest of the following is applicable for the tax exemption:
- The actual HRA amount mentioned in your salary slip
- For rented accommodations in non-metro cities, the deduction is 40% of your salary, including Basic+DA
- For employees living in metro cities such as Mumbai, Chennai, Kolkata, or Delhi, the HRA deduction is 50% of their salary
- HRA deduction equals the total rent paid minus 10% of the basic salary
Health insurance premium: The premium you pay towards your medical insurance for yourself or your loved ones is subject to exemption as per the income tax laws. A maximum deduction of ₹1,00,000 is allowed under Section 80D.
Allowances Exempt under Section 10(14)(I): The following allowances are exempt from employee income tax.
- Daily allowance for performing office duties in a place other than the office.
- Helper or driver allowance for a driver to drive you to and from work and a helper to assist in administrative activities.
- Academic allowance for academic pursuit to upskill.
- Uniform allowance for maintaining a dress code in the office is also exempt from income tax.
Employee Provident Fund (EPF): The employer’s contribution to a recognised employee provident fund is exempt from income tax. The employer’s contribution of up to 12% of salary (basic+DA) is tax-free.
National Pension Scheme (NPS): Under Sections 80CCD(1), 80CCD(1B), and 80CCD(2), contributions to the National Pension Scheme are exempt from income tax. Employees can check their eligibility in the following table.
| 80CCD(1) | 80CCD(1B) | 80CCD(2) | |
| Eligible Assessee | Individuals (salaried or self-employed) depositing into his/her pension accounts under the NPS or Atal Pension Yojana. | Individuals depositing in the National Pension Scheme. | Deposits made by employers into the pension fund of an employee. |
| Deduction | 10% of salary (basic+DA) | ₹50,000 irrespective of deduction allowed under 80CCD(1) | 14% for Central Government
10% for other employers |
Deduction under 80C: Deductions available under 80C can assist in tax planning for salaried employees by lowering the tax burden. We have discussed the details in the following section on investment in deductible options.
Standard Deduction: The standard deduction was introduced in 2019. Salaried employees can claim a deduction of ₹50,000 or the amount of their salary, whichever is lower. It covers both conveyance and medical allowances, which are calculated separately.
Investment in Deductible Options Under 80C
Salaried employees can take advantage of deductions allowed under investments in deductible options. Here is a list of eligible investments for income tax exemption.
Fixed deposit: You can save by investing in tax-saving fixed deposits. You can claim a deduction of up to ₹1.5 lakh annually under Section 80C of the Income Tax Act, 1961. These fixed deposits have a 5-year lock-in, and the interest earned is taxable.
Public Provident Fund (PPF): By investing in a PPF, you can save up to ₹1.5 lakh a year under Section 80C of the Income Tax Act, 1961, while earning a guaranteed return on your investment.
Unit Linked Insurance Plan (ULIP): Investing in ULIP plans allows you to get a tax deduction under Sections 80C and 10(10D) of the Income Tax Act of 1961.
Equity Linked Savings Scheme (ELSS): ELSS are mutual funds with tax saving benefits. You can get a tax rebate of ₹1,50,000 a year by investing in equity linked savings schemes. Among all the tax saving investment instruments, ELSS has the potential to generate the highest returns.
National Savings Certificates: You can save tax under Section 80C by purchasing National Savings Certificates. You can buy them from banks or post offices.
Senior Citizens Savings Scheme (SCSS): The principal deposited in SCSS is tax deductible. However, the upper limit for receiving tax rebates is ₹1.5 lakh.
Life insurance: Premiums paid towards life insurance plans also qualify for a tax rebate under Section 80C.
Tax Filing
Tax filing is mandatory for all income earning individuals in India. After subtracting all deductions and exemptions, one can estimate the net taxable income. The tax is calculated only on the taxable portion.
The following is the formula to calculate taxable income.
Net income = Gross Income – (Deductions + Exemptions)
Tips To Save More
- Take a Good Look At Section 80C: Section 80C is perhaps the most important ally for income tax planning for salaried employees. It comes with a wide range of investment options that allow you to reduce your tax burden. It offers as much as ₹1,50,000 tax benefits to lower your tax payout.
- Target with ₹1.5 lakh limit: Once the limit is set, you can then work backward to consider the most suitable option. You can choose from options such as life insurance, PPF, tax-saving mutual funds, NSC, and so on.
- Explore the most important option: Choose the most relevant option that aligns with your overall financial plan.
- Choose a secondary option: After selecting the first option, you can choose the second alternative, like investing in a pension plan. Contributing to the National Pension Scheme qualifies for a tax deduction under Section 80CCD – a 80C subsection .
- Deduct home loan: You can claim a tax benefit on a home loan under Section 80C. You can also claim a deduction under Section 24 for the interest paid on the home loan.
- Don’t ignore other sections: Besides 80C, you can also explore other Sections like 80D, 80E,or 80G.
Final Words
By proactively engaging in personal tax planning, salaried employees can optimise their finances, reduce their tax burden, and achieve greater financial security and stability for the future. Remember these income tax planning tips mentioned above when you plan your taxes in the future.
FAQs
What is tax planning for salaried employees?
Tax planning refers to strategically managing finances and utilising available deductions, exemptions, and allowances to minimise tax liabilities and maximising savings.
What are some common tax-saving options for salaried employees?
The common tax savings options for salaried employees include:
- Life insurance
- Public Provident Fund
- Employee Provident Fund
- National Pension Scheme
- Tax-saving Fixed Deposits
- National Savings Certificates (NSC)
When is the best time to start tax planning for the financial year?
It is advisable to start planning at the beginning of the financial year, as it gives you more time to plan and allocate your finances more effectively.
How can income tax planning help salaried employees beyond reducing tax liabilities?
Tax planning not only reduces tax burdens but also provides financial discipline and helps in achieving long-term financial goals.
