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How to Save Income Tax on Income from Salary for Individuals

Paying the required tax on the income earned during the year is one of the primary responsibilities when it comes to Income Tax Act.

Tax payers often times think that they pay excess taxes. To deal with that, one should find a way that can help them to save their taxes and for this they require proper planning.

Also, in order to save taxes, one should be aware of the ways to save their taxes. In this article, we have discussed the ways to save extra taxes.

Section I – Your Monthly Payslip

If you want to save your taxes, it is important that you should go through your payslip first. Your monthly payslip will help you see what’s been paid to you and what deductions have been made.

  • Basic Salary

Basic salary is the amount paid to an employee before any extras are added or taken off, such as scaling down because of various salary sacrifices schemes or an increase due to overtime or a bonus.

It is generally a large portion of your total salary. HRA or House Rent Allowance is also defined as a percentage of this basic salary. Your PF (Provident Fund) is deducted at 12% of your basic salary.

  • House Rent Allowance

Salaried individuals often have to shift from their home towns for job purposes. And rent a home and go through house rent expenses. The good news is that may provide you with some relief are the fact that the same house rent expense can help you claim a tax exemption.

For a lower tax outgo, salaried individuals who live in a rented house / apartment can claim house rent allowance. And this can be partially or completely exempted from taxes. The allowance is for expenses related to rented accommodation.

Under the section 10 (13 A), a salary employee who receives a house rent allowance (HRA) and are staying in a rented house, can claim a tax exemption in lieu of the same under the Income Tax Act. If you are self – employed, you are also eligible for tax deductions under Section 80 GG of the Income Tax Act.

  • Medical Reimbursement

Tax deduction can be claimed against medical expenses.

Supposedly, if your company provides you with medical reimbursement of Rs. 15,000 towards medical expenses, you are required to submit bills to your employer in order to claim this. These expenses could be incurred towards consultation with a doctor, medicines, medical tests etc.

Also, ensure to keep all the bills safely and submit them to your employer for reimbursement on time.

The IT department also allows medical reimbursement of up to Rs 15,000. You are required to furnish the necessary bill to your employer in order to claim this. The remaining unclaimed amount of the Rs 15,000 is added to your taxable salary. Your taxable salary is taxed at the slab rate you belong to. The bills must be between Aprils last year to March this year.

  • Conveyance Allowance

Conveyance Allowance is a Transport Allowance which is offered to the employees of a company to pay back for their travel from residence to and from respective workplace location.

However, travel allowances are paid by an employer only if there is no transportation provided by the employer. In case, an employer offers office transport, conveyance allowance will not be provided to employees.

The conveyance allowance for up to Rs 9,600 per annum is exempt from tax.

  • Leave Travel Allowance (LTA)

Leave Travel Allowance or LTA is a type of tax exemption which is given to the employees by most employers. All the salaried employees can take advantage of this exemption for a trip within India under LTA. Also, this exemption is only for the shortest distance on a trip.

You can claim allowance for this trip taken with your spouse, children, and parents. However, this allowance would not be given with other relatives.

This exemption will be given up to the actual expenses. Hence, until you actually take the trip and incur these expenses, you cannot claim it. Submit the bills to your employer to claim this exemption.

  • Special Allowance

In some companies, Special allowance comprises any allowance or benefit grated to employees to meet specific expenses towards efficient performance of duties in an office or employment of profit. However, it differs from company to company.

Also, if anywhere on your salary, it is mentioned ‘special allowance’ which means it is fully taxable. This is also the remaining component of your salary, after allocating to basic, HRA (House Rent Allowance), LTA (Leave Travel Allowance), and Transport Allowance.

  • Bonus

Bonus or rewards, which are usually paid twice a year in many of the organizations, are subjected to 100% tax deduction. Performance bonus is usually linked to your appraisal ratings or your performance during a period and is based on the company policy.

  • Employee Contributions to PF (Provident Fund)

Towards employee’s pension and provident fund, both the employer and employee contribute 12% which is equal of the employee’s basic salary every month. An interest of about 8.5% gets accrued on it. This is a retirement benefit that companies with over 20 employees must provide.

  • Professional Tax

Professional tax is the type of tax which is levied by a state government on all individuals who earn a living through any medium. However, one should not confuse the term with professions such as doctors. Professional taxes are taxes which are levied by a state, just like income tax which is levied by the central government. The maximum amount of professional tax that can be levied by a state is Rs 2,500.

Section II – Difference Between take Home and CTC

The working group in India is rising rapidly, where a number of youngsters join the professional workforce every year, where everyone earns different salaries depends on their job profiles and skill levels. However, people are often confused about their pay checks.

We will start by explain CTC or Cost to Company. CTC is the cost a company incurs when hiring an employee. CTC consist of elements such as HRA (House Rent Allowance), PF (Provident Fund), and Medical Insurance among other allowances which are added to the basic salary.

These allowances consist of free meals or meal coupons, office space rent, cab service to – and – fro office, and subsidized loans etc. and form the entire Cost to Company.

Refer to the example below to understand CTC better:

Cost to Company
Components Amount
Basic Salary Rs 3,00,000
Special Allowance Rs 1,00,000
HRA Rs 80,000
Medical Reimbursement Rs 15,000
Medical insurance for you and your family Rs 5,000
PF (12% of basic) Rs 36,000
Performance bonus (range between 50,000 to 75,000 based on performance ratings) Rs 75,000
Total CTC Rs 6,11,000

 

For the CTC mentioned in the above example, the payslip will look like:

Taxable Salary
Components Amount
Basic Salary Rs 3,00,000
Special Allowance Rs 1,00,000
HRA (less exemption on producing of rent receipts) Rs 50,000
Bonus received Rs 70,000
Total Salary Rs 5,20,000
Less: 12% PF Rs 36,000
Less: Tax Payable* Rs 12,875
Take Home Salary Rs 4,71,125

Broadly your CTC will comprise of the following:

  • Salary received each month
  • Retirement benefits such as PF and gratuity
  • Non – monetary benefits such as an office cab service, medical insurance paid for by the company, or free meals at the office, a phone provided to you and bills reimbursed by your company

Your take home salary will comprise of the following:

  • Gross salary received each month
  • Minus allowable exemptions such as HRA, LTA, conveyance allowance etc
  • Minus income taxes payable (calculated after considering Section 80 deductions)
*Tax Payable
Total Salary Rs 5,20,000
Less: Deduction under Section 80C Rs 1,25,000
Taxable Salary Rs 3,95,000
Tax Payable (includes cess; excludes interest payable) Rs 12, 875

Section III – Retirement Benefits

  • Exemption on Leave Salary

Leaves are there in both government and private employees such as casual leave, sick leave, privileged leave and earned leave during their course of employment. However, these leaves differ from company to company. Some of the employers allow you to carry forward some amount of leave days and allow the employee to encash them while others prefer that you finish using them.

  • Leave encashment during employment

In case an employee decides on encashment of leaves during his timeframe of employment, the entire amount would be taxable under the head Income from Salary”. Nevertheless, at the time of filing for returns, tax exemption is permitted on a certain amount.

  • Leave encashment at the time of retirement

An employee is entitled to exemptions under section 10 (10AA), at the time of their retirement. Nevertheless, the amount exempted is different for government and non – government employees.

While in one hand, leave encashment is completely tax free for government employees’ retirement, to a certain extent it is partially exempted from tax in case of non – government employees.

The least of the following exempted:

  • Actual leave encashment received
  • Average monthly salary of the last 10 months
  • The maximum amount specified by the government i.e. Rs 3,00,000
  • Cash equivalent of earned leaves (to a maximum of 30 days) for every year of service completed

The remaining amount received would be taxable as per the Income tax slab rate.

Section IV – Income Tax Basics   

  • What income is I taxed for?

Your earning is not equivalent to your salary, as one could earn their income from various other sources as well.

As per the Income Tax Department, total income of an individual, could be from house property, profit or loss from selling stocks or from interest on a savings account or on fixed  deposits.

When all these numbers gets piled up, that becomes your gross income

Income from Salary All the money you receive while rendering your job as a result of an employee contract
Income from house property Income from house property you own; property can be self – occupied or rented out
Income from other sources Income resulted from fixed deposits and savings account come under this head
Income from capital gains Income earned from the sale of a capital asset (mutual funds or house property)
Income from business and profession Income / loss arising as a result of carrying on a business or profession. Freelancers’ income comes under this head.

 

How much tax do I have to pay?

From the above mentioned list, add all the income which will be your gross total income. From your gross total income, deductions under Section 80 are allowed to be claimed. The outcome is the income on which you have to pay tax.

  • What is Form 16?

Form 16 is an income tax form which can be used by companies in order to provide their salaried individuals in India. This form consists of all the required details that can help in filling income tax returns with the Income Tax department in India.

This form is divided into two parts such as Part A and Part B.

Part A consist of details such as employer and employee name, address, PAN (Permanent Account Number) and TAN details and TDS deductions.

Part B consists of details such as salary paid, other incomes, deductions allowed, tax payable etc.

  • What is Form 26 AS?

Form 26 AS is an official form that consists of details of deducted tax by tax deductors. And also details of tax deducted at source, tax collected at source, details of advance tax, along with Refunds and high value transactions deducted on behalf of the tax payer.

  • Bring your taxable Income down by with deductions

Note that Section 80 C of the Income Tax Act can bring down your gross income by Rs 1, 50,000. Also, there are a bunch of other deductions under Section 80 C that reduces your tax liability.

  • Show the Income Tax Department you have paid all your taxes

Any individual whose income exceeds Rs 2,50,000 (for Financial Year ending March 31st, 2015), is required to file their income tax return in India.

The last date to file last year tax returns is 31st March, 2018

Financial Year Last Date for filing
2015 – 16 31st March 2018
2016 – 17 31st March 2018

 

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