The biggest benefit of earning a monthly salary is that you can avoid the volatility associated with an unsteady income. Another advantage of a monthly salary is that the tax liability to the government gets deducted at source. All the income earned by a salaried employee is subject to taxation. However, this can often lull the salaried employee into complacence. Just because the tax is deducted at source, it does not mean that the salaried employee need not do any tax-planning. As a salaried individual, you can easily minimise your overall tax liability. There are various income tax saving options that are available to salaried employees and deeper knowledge about them will help individuals save tax.
Some of these options are discussed below:
Section 80C allows individuals to claim a total deduction of up to Rs. 1,50,000 by investing in a broad selection of approved investments. The lock-in period, rate of return and tax treatment of returns will differ from one option to the other. Some investment options under Section 80C include:
Public Provident Fund
Equity Linked Savings Scheme
Five year fixed deposits with banks and the post office
National Savings Certificate
Section 80D – this allows a deduction of Rs. 25,000 for medical insurance of self, spouse and dependent children and an additional deduction of Rs. 25,000 for medical insurance of parents below 60 years and of Rs. 30,000 if parents are above 60 years of age. Incase both the taxpayer and the parent are older than 60 years of age then a total deduction of Rs. 1,00,000 is allowed.
Section 80G - Donations to specified funds or charitable institutions.
Individual taxpayer is paying rent but is not receiving any HRA from the company.
The least of the following could be claimed under Section 80GG:
25 per cent of the total income;
Rs. 5,000 per month or
Excess of rent paid over 10 per cent of total income
This deduction will, however not be allowed, if you, your spouse or minor child own a residential accommodation in the location where you reside or perform office duties.
If HRA forms part of your salary, then the minimum of the following three is available as exemption:
Actual HRA received;
50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
Actual rent paid less 10% of basic salary + DA
You can use your home loan to save more tax. While the principal component of your home loan is available for deduction under Section 80C of the Income Tax Act 1961, the interest component of the home loan taken for a self-occupied property is available for deduction under Section 24. However, this is subject to a limit of Rs. 2 lakhs.
Contribution to pension account, leave travel allowance, transportation allowance, medical bills reimbursements can also be used to reduce the tax liability of an individual.
The key to tax saving is to plan in advance and make judicious tax saving investment.