Depending on the tax bracket, taxpayers pay taxes and file Income Tax Returns at the end of each financial year. Unfortunately, with an increase in income every year, the tax payable also increases. But, if you want to know how to save tax on salary, here are 15 best ways you can do so. Keep reading to get all the details.
Learning how to reduce tax on salary is a vital aspect of financial planning. Especially for those starting their career, it is essential to utilise the several tools available to save taxes, as they have just begun earning.
Income till Rs. 2.5 lakh is exempted from taxes. But even if your salary falls in a higher tax slab, you can take home a huge chunk of your hard-earned money by making some vital investments. Tax-saving is the obvious goal, but the added benefit of getting high returns through the same process makes saving income tax even more crucial.
There are numerous benefits of indulging in tax-saving investments. Let’s explore them in detail.
In India, taxpayers can make use of various legal ways to save money on taxes. These are a few of the easiest ways in which you can reduce your income tax liability:
1. Medical Expenses
Income Tax Act, 1961 enables taxpayers to seek exemptions for medical expenses. People can seek tax exemptions for their medical expenses including health checkup bills, medical consultations and chemist bills. Moreover, they can also seek exemptions for medical expenses levied on their family members.
2. Education Loan
Section 80E of the Income Tax Act enables individuals to seek tax exemptions for the interest payable on the education loan. However, only individuals can avail of deductions for an education loan. This provision is not available for Hindu Undivided Families (HUFs) or any other category of taxpayers.
3. Tax Saving Mutual Funds
Section 80C of the Income Tax Act allows taxpayers to seek deductions for investing in mutual funds. One can choose Equity Linked Savings Scheme which is a good option for income growth as well as availing tax benefits. ELSS funds come with a mandatory 3-year lock-in period. The income tax department allows a deduction up to Rs. 1.5 lakh.
4. Long-Term Capital Gains
Long term capital assets are good options for saving on taxes. If someone sells their house which is a long term capital asset and uses the amount to invest in another house, then they can seek exemptions u/s 54 of ITA. If a person sells their house, a long term capital asset and invests the amount in bonds, then Section 54EC of ITA allows tax exemptions. Suppose an individual sells their long term capital asset, which is not a house and invests the amount in buying a house, then he/she can seek tax exemptions u/s 54F.
Moreover, the ITA has laid down legal guidelines for someone who is unable to invest their long term capital gains within the stipulated time. He/she can simply deposit the amount in a Capital Gains Account Scheme (CGAS) at a specified bank.
5. Standard Deduction
Salaried people can avail of tax benefits under the category of standard deductions. The standard deduction is an amount that is deducted from the gross salary of an individual. This tax benefit is available to all people who receive a salary. Additionally, pensioners can avail of this benefit as well. The Government of India raised the standard deduction amount to Rs. 50,000 in 2019.
6. Professional Tax
The income tax department has levied a professional tax on every profession and employment. Employees, professionals and freelancers need to pay professional tax if their income exceeds the specified threshold. Professional taxes are collected by state governments. Every state government has its own professional tax slab rate. However, one can claim tax deductions for professional tax from the entire taxable salary income while filing Income Tax Return.
7. Leave Encashment
Employers stipulate a certain number of leaves for their employees. However, if the employee does not need to take leaves, the employer compensates the unutilized leaves in the form of leave encashment. Leaves encashed during the period of service will fall under income. However, one can seek tax deductions for it, under Section 89. If a central/state government employee receives leave encashment, it is fully exempt as per the guidelines of ITA. Section 10 of ITA provides the formula for computing the exempt amount when a non-government employee receives leave encashment.
8. Insurance Plans
Section 80D of the Income Tax Act enables taxpayers to seek tax benefits for premiums paid while maintaining a health insurance policy. Additional benefits will be applicable if the insurance policy covers senior citizens. Taxpayers can seek deductions for premiums paid for maintaining a life insurance policy under Section 80C. If one has purchased a life insurance policy for a disabled family member, one can seek tax deductions if the premium does not exceed 15% of the sum assured. However, the disability has to be listed under Sections 80U. If the premium paid for a life insurance policy is less than 10% of the sum assured, the maturity amount will not be taxed as per the mandate of Section 10D of ITA.
9. Charity and Donations
Section 80G of the Income Tax Act enables taxpayers to seek deductions for donating to specific charities and relief funds. The list of charities is provided by the Government of India. One should note that the donations have to be made via cash, cheque or draft. If the cash amount exceeds Rs. 2000, the IT department will not allow deductions. Any donation exceeding Rs. 2000 has to be made via any specified mode other than cash.
On top of this, a complete tax deduction applies to any amount donated to support a political party. Section 80GGC of the Income Tax Act allows for this tax exemption, but only when this donation takes place via wired transfer.
10. House Rent Allowance (HRA)
One of the components of an employee’s salary is House Rent Allowance, which is an expense incurred by the employers for their employee’s rented accommodation. HRA is deducted from the employee’s monthly salary and can be exempted from tax, fully or partially.
If you are claiming HRA to lower your income tax, then you are bound by some clauses. If you do not live in rented accommodation and still claim HRA, then it is fully taxed. But if you do, then the taxable income is calculated after deducting HRA from the salary.
11. Leave Travel Allowance (LTA)
Twice in four years, under Section 10(5) of the Income Tax Act, a salaried employee can claim tax exemption for travelling within India. This form of tax exemption sounds uncomplicated, but it comes with various clauses.
To claim LTA, one has to go on the trip, and it is only applicable to the trip’s shortest distance. Furthermore, the said trip can only include the taxpayer’s children, spouses and parents. Also, LTA does not cover any cost apart from the travel fare.
12. Home Loan
Taking a loan is the most recommended method of saving income tax on salary. Upon taking a home loan, one doesn’t just get financial assistance for purchasing a house but also saves a huge chunk of salary. Under Section 80C of the Income Tax Act, you can claim a deduction of up to Rs. 1.5 lakh on the principal amount borrowed.
Furthermore, Section 24(b) of the Income Tax Act permits a maximum deduction of Rs. 2 lakh on the interest component of a home loan.
13. Retirement Benefits or Gratuity
If a salaried employee devotes five years of service to an organisation, he/she receives a gratuity that is partially or completely exempted from income tax. One condition is that the Payment of Gratuity Act should cover the employer of the said employee.
Furthermore, this retirement benefit is only available upon retirement, resignation, death or disability of an employee. A full exemption applies to gratuity received by a government employee, whereas for others, the maximum limit is Rs. 20 lakh.
14. Employees’ Provident Fund
It is the most popular tax-saving tool. The Government of India initiated this security benefit for all salaried employees in 1952. Employees and their employers contribute 12% of the employee’s basic monthly salary to the Employees’ Provident Fund.
Employees can access their lumpsum fund after retirement or if they remain unemployed for more than two months.
15. Government Schemes
Under Section 80C of the Income Tax Act, salaried employees can claim tax relief up to Rs. 1.5 lakh by investing in government schemes. The added benefit of these investments is that they offer guaranteed returns. Depending on which scheme you invest in, the tax benefit can apply to the amount invested and the returns generated. Examples of such government schemes are Public Provident Fund (PPF) and National Pension Scheme (NPS).
The lower your salary, the lower tax you pay; this is common knowledge. However, not everyone is familiar with the legal provisions regarding how to save income tax on salary. Inculcating a few of the above-mentioned tax saving options into your financial planning can give your career a head start. They will also keep you financially secure upon retirement.
Ans: No, there is no limit on the number or the type of tax-saving options you choose. However, there is a limit regarding the amount of tax relief you can claim from each option or in total. Section 80C of the Income Tax Act allows a maximum deduction of Rs. 1.5 lakh.
Ans: If you are claiming tax relief on your salary only, you will also have to submit Form 16 and Form 26AS, along with your ITR. Through Form 16, your employer certifies the amount of TDS (Tax Deducted at Source) deducted from your salary. Form 26 AS gives information regarding the total tax deducted in the form of an annual tax statement.
Ans: According to the current tax slab, individuals earning an annual salary of Rs. 2.5 lakh to Rs. 5 lakh, have to pay income tax. However, under Section 87(A) of the Income Tax Act, those earning lesser than Rs. 5 lakh can get a tax rebate of up to Rs. 12,500. Thus, one will incur no tax liability.
Ans: As Form 16 and Form 26AS are filed along with ITR, the submission is done through the e-portal of the Income Tax Department. Note that if an employer does not deduct any TDS, it is not compulsory to issue Form 16.
Ans: Yes, the Income Tax Act allows citizens in the age group of 60-80 to enjoy additional tax benefits. They get a higher deduction on health insurance premiums. They also do not have to pay taxes on any interest they earn up to Rs. 50,000.
Ans: There are many ways you can save tax on salary. The list of tax-saving instruments is as follows:
Life Insurance Policies
Medical Insurance Policies
Long term capital gains
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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