Efficient tax planning is the key to reducing your taxable income. However, multiple options and contradictory advice often leave one confused. Many salaried professionals find themselves in this situation at the beginning of the year when they have to make tax-saving investments. Most end up procrastinating the decision endlessly, or at least till the HR manager reminds you to submit the investment details or face cumulative tax deductions.
Let us start with the basics:
Why is your taxable income not the same as your total income?
The tax laws detail how to determine the taxable amount under each head of income depending on the exemptions and deductions allowed.
For salaried individuals, there are various investment and retirement benefits that can help save tax. We will enumerate some popular allowances and reimbursements to make the most of these provisions.
(A) House Rent Allowance
Rentals paid to your landlord help you get tax benefits. This is the House Rent Allowance (HRA) component of your CTC. As per the current provisions, HRA is the minimum of:
1. Actual HRA
2. Rent Paid - 10% of Basic Salary
3. 40% of Basic (for non-metros) or 50% of Basic (for metros)
Illustration: Mrs. Prerna is an employee of a private company in Baroda. She receives Rs. 30,000 per month as the basic salary and Rs. 7,500 per month as the HRA. She pays Rs. 8,000 per month as house rent. As the house is situated in Baroda (a non-metro), the least of the following is exempt from tax;
Actual HRA received
Excess of rent paid over 10% of salary = Rs. 8,000 - Rs. 3,000 (Rs. 30,000 x 10%)
40% of the salary = (Rs. 30,000 x 40%)
Rs.5, 000 per month being the least of the above is exempt (and the balance HRA is taxable).
(B) Special Allowances [sec. 10(14)]
1. Children Education Allowance of maximum Rs. 100 per month per child (maximum 2 children). Hostel Expenditure Allowance of maximum Rs. 300 per month per child (maximum 2 children).
2. Transport Allowance up to Rs. 1,600 per month for travelling to and fro from office to home.
(C) Leave Travel Concession in India
Actual expenditure in respect of fare for shortest route (Two trips in a block of 4 years where the amount does not exceed the Air Economy or Rail AC I Fare) is exempt if:
1. Incurred by an employee for himself and his family
2. On leave to any place in India
(D) Retirement Benefits
1. Employee Provident Fund (EPF)
Employee's contribution to EPF is allowed as deduction from total income under section 80C (with an overall cap or Rs. 150,000).
After a continuous service of 5 years an employee is entitled to gratuity payment. For Government Employee any death cum retirement gratuity is fully exempt from tax. For non-government employees while there are detailed calculations the maximum amount of gratuity that is tax exempt is Rs. 1,000,000.
3. Pension Funds (Section 80CCC)
An investment in pension funds, up to Rs. 150,000, is eligible for deduction from your income.
Total deduction available for 80CCC and 80C is Rs. 150,000.
(E) Health Insurance Premium
Section 80D provides a deduction for contribution towards the health insurance premium to the extent of Rs. 25,000 paid for self and family. If the policyholder is a senior citizen, the benefit can increase to Rs. 30,000. (As revised for FY 2016-17).
(F) Life Insurance Premium
Under Section 80C of the IT Act, all amounts paid towards Life Insurance Premiums (with the same overall cap or Rs. 150,000) are exempt from tax. This is an ideal and long-term avenue for tax savings.
The above are the few popular provisions that employees can use to avail tax benefits. The Income Tax Act states more such allowances exemptions and deductions that one can leverage to reduce the tax outflow. Some organizations also offer their employees the flexibility to customize their salary structure as per their individual needs.
You may be entitled to certain applicable tax benefits on your premiums and policy benefits. Please note that all the tax benefits are subject to tax laws prevailing at the time of payment of premium or receipt of benefits by you. Tax benefits are subject to changes in tax laws.