The current financial year is coming to an end and most of us have must start getting worried about the tax liabilities.
Tax Planning is a key that helps you to take benefit of various tax deductions and exemptions to cut down the tax liability during a financial year. For a salaried person, tax planning forms an integral part of the financial planning.
It is important to understand your salary structure which constitutes various allowances, expenses, and perks related to your employment.
Tax planning tips for salaried workers should be a planned program that should be a mix of ideal investments and optimum tax benefits. You only need to plan ahead and avoid last-minute tricks for tax saving.
Let us focus on some key points or tax planning tips that will help you to reduce your tax incidence.
1. Claim Tax Deduction Under Section 80C
Section 80C of the Income Tax Act allows salaried employees to claim the tax deduction during a financial year. There are numerous investment options that will help you to claim tax deduction under section 80C, so you can reduce the tax liability.
- You may invest in life insurance policies such as term life insurance, child plan, pension plan, ULIP plans, etc.
- Section 80C also allows tax reductions for investments in the Employees’ Provident Fund, Public Provident Fund, National Pension Scheme, Sukanya Samriddhi Account, Post Office Senior Citizen Savings Scheme, and so on.
- Expenses such as tuition fees for children and home loan re-payment are also entitled to get the tax deduction under section 80C.
All these investments ensure potential returns along with tax benefits up to an aggregate limit of Rs 1.5 lakhs under section 80C.
2. Buy a Medical Cover to get Tax Deduction Under Section 80D
Buying medicinal insurance also gives you a tax deduction. The premiums paid against the health insurance for yourself, your spouse, dependent children, and your parents are eligible for tax deductions under section 80D of the Income Tax Act.
You can claim up to Rs 25,000 health insurance premium for the self and family (below 60 years). For parents (non-senior citizens), an additional deduction of Rs 25,000 can be availed. For senior citizens (family & parents), up to Rs 30,000 can be availed as a tax deduction. This limit will be magnified to Rs 50,000 from the financial year.
3. Check for the Allowances given by the Employer to seek Tax Exemption
There are some expenses that incur only because of your job, such as travel expenses for going to the office, expenses for entertaining would-be or existing clients, wear a uniform, etc. Such expenses go into the account of employer expense.
These expenses should not be part of your income and thus are considered non-taxable.
Allowances such as conveyance, uniform, telephone and mobile, newspaper & magazine, personality development, etc. if incurred actually will be non-taxable. You can also avail of tax deduction for the professional tax that you pay for the income earned by salary.
- Conveyance allowance: Employers also provide conveyance/ transport allowance to support the expenses incurred in commuting between office and residence.
You can avail of tax exemption for transport allowance of Rs 1,600 per month (Rs 19,200 annually). Blind and handicapped employees can avail of the tax exemption of up to Rs 3,200 per month.
- House rent allowance: You go to different cities, as the job location changes and reside over there to continue with the job. If you live in rented accommodation and receiving a house rent allowance (HRA) as part of your salary, you can claim a tax deduction against HRA as paid to you, subject to the limits specified.
The lowest of the below three is exempt from tax:
- Actual HRA received
- 50% of annual salary (living in metro cities)/ 40% (for non-metro cities)
- Excess of annual rent paid over 10% of annual salary
You should take rent receipts from your house owner, so you can submit them for claiming the tax deduction under section 10(13A) of the income tax act. If your annual house rent exceeds Rs 1 lakh, you need to provide copies of the rent agreement and homeowner’s PAN card.
- Telephone Reimbursement allowance: If your job requires you to call your clients, the employer will reimburse you against the billed amount. You also have the option to claim tax exemption for the same under the rules of 3(7)(ix) of the Income tax act.
Some personal expenses are also eligible for exemptions.
- Reimbursement of medical bills: Medical reimbursement against medical allowance is exempted up to Rs 15,000 during a financial year. You need to produce the actual bill of medical expenses. You can also reimburse medical expenses of your dependents, up to the maximum limit specified.
- Education allowance: You can get the tax deduction for the allowance received for education up to Rs 100 per month and hostel stay of employee’s children up to Rs 300 per month. The education allowance received is payable to a maximum of two children and tax deduction can be claimed u/s 10(14).
- Leave travel allowance: Your employer can also give you leave travel allowance (LTA), which is tax-exempted under certain conditions. Under this, two trips are allowed in a 4 year period.
The travel for which you get LTA should be within India and from the shortest route. You can claim for the maximum of AC first class rail fare or economy class of air travel, whichever is less. You can take advantage of LTA for the travel, when you are on the leave.
Note: you can get updated information for income tax slab rates for FY 2020-21
A proper tax planning tips helps you to reduce the tax burden. You need to choose investment options in a manner that your need for tax saving is fulfilled along with high returns from that investment.
When it comes to tax saving, it is recommended to give a tax declaration to your employer at the earliest during the year, so the employer would not deduct more TDS than required. It is important to begin your tax planning during the beginning of the financial year rather than at the end of the financial year.