Tax Saving Tips for Salaried Employees

11 Tax Saving Tips for Salaried Individual

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14 Nov 2019

Half the financial year is over and if you still have not done your tax planning, it is the time now. Paying the taxes as per the regulations is mandatory; however, there are some ways in which you may reduce the liability.

Here are 11 tips that will help minimize tax liability.

Section 80C

Under section 80C of the Income Tax Act, 1961, deductions of up to INR 1.5 lakh per year are available. If you invest in tax-saving instruments, such as the public provident fund (PPF), life insurance, equity-linked savings scheme (ELSS), National Savings Certificate (NSC), and others, a deduction is available under section 80C.

Rental payments

If you are salaried individual and live in a rented house, you are eligible for tax benefits on the house rent allowance (HRA). The exemption on the HRA may be received fully or partially. However, if you receive HRA but do not live in a rented home, the deduction is not available.

Vacation bills

Some exemptions may be available on the leave travel allowance (LTA) if you submit the vacation bills. However, the exemptions are available only for domestic travel. Moreover, if LTA is not included in your salary structure, such exemption is not available.

Medical insurance for your family

Health insurance for self, spouse, and dependent children not only provide financial protection but also have tax benefits. The section 80D of the Income Tax Act, 1961 exempts health insurance premium of up to INR 25,000 for self, spouse, and children. The tax exemptions are higher if you avail of health insurance for parents under the senior citizen category.

Education loan

As per the section 80E of the Income Tax Act, 1961, loan availed for higher education is eligible for tax benefits. This benefit is available for eight years, which is the maximum tenure for an education loan.

Interest income on savings account

One of the lesser-known tax-savings tips for salaried individuals is the tax benefits on interest earned on the bank savings account. Under sections 80TTA and 80TTB of the Income Tax Act, 1961, interest earned on bank savings account of up to INR 10,000 is eligible for tax exemption.

Leave encashment

If your employer offers the option of encashing your leaves, it is recommended you do so. An exemption of up to INR 3 lakh is available for leave encashment. However, the exemption is available only at the time of resigning or retiring and leave encashment during your employment is taxable as per the income tax laws. For private sector employees, the exemption is applicable for the lowest of the following three calculations:

  • 10-month average salary (includes basic salary plus dearness allowance) before resignation or retirement

  • Actual encashment restricted to INR 3 lakh

  • The equivalent amount of salary for earned leave (must not exceed 30 days for every employment year) 

Salary restrictions

Certain expenses you incur are related to your career. Some of these include frequent travels, making calls, reading magazines and newspapers, or dressing particularly for the job. As these expenses are directly related to your work, several employers may pay for these. One of the tax-saving tricks for salaried individuals is to not pay tax on these expenses. These expenditures are not taxable if you pay for these from your allowance. Some of the allowances include conveyance, mobile and conveyance, uniform, newspaper, books, and magazines, and driver. However, the income tax laws limit the maximum allowance eligible for exemption and it is recommended you check these before calculating your total liability.

Standard deductions

The standard deductions were reintroduced in the 2018 Union Budget and have replaced medical and conveyance allowance. You may claim a standard deduction of flat INR 50,000 (before the 2018 Union Budget, it was INR 40,000), which reduces your total tax liability.

Employee contribution to provident fund (PF) 

Provident fund is an initiative by the Indian Government towards social security. The employees and the employers both contribute 12% of the monthly basic salary towards employees’ provident and pension fund. It is a retirement benefit that every company with more than 20 employees must offer as per the Employee Provident Fund Act, 1952.

National Pension System (NPS) 

An amount of up to INR 50,000 invested in the National Pension System (NPS) is eligible for deduction under section 80CCD (1B) of the Income Tax Act, 1961. Additionally, the employer's contribution of up to 10% of your basic salary toward NPS is exempt under section 80CCD (2).

In addition to 2020’s tax-saving tips for salaried employees mentioned above, exemption on receipts when you voluntarily retire is available under section 10(10C) of the Income Tax Act, 1961 as below:

The actual compensation received on voluntary retirement or separation.

The maximum amount should not be more than INR 5 lakh.

You must be an employee of a Central or State government, a local university, public sector undertaking, or a cooperative society

The compensation must adhere to the norms as per Rule 2BA

The aforementioned exemption is not available if you have claimed relief under section 89 for voluntary retirement, separation, or termination.

Your cost-to-company (CTC) comprises monthly salary, retirement benefits like gratuity or PF, and other non-monetary benefits. The take-home salary is calculated as the gross salary minus the exemptions like HRA and LTA minus the tax payable after taking benefit of all the aforementioned tax-saving tips.

Employers deduct TDS (tax deducted at source) from your monthly salary. This amount is paid to the Income Tax Department on your behalf. Based on your salary and tax-saving investments, the TDS is calculated by your employer.

Your tax liability is lower when your taxable income is less. Therefore, it is important you take advantage of all the available benefits and deductions discussed above. Investing under eligible instruments as per section 80C of the Income reduces your taxable income by up to INR 1.5 lakh. Additional deductions under sections 80D, 80E, 80GG, and 80U of the Income Tax Act, 1961 further help reduce your tax liability.

Apart from following the tax-saving tips for salaried employees mentioned above, it is recommended you seek professional guidance from an experienced tax advisor to maximize your benefits. You can also avail tax benefits on your personal loan under certain conditions.

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