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Tax Planning Tips for Salaried Persons

Chaitali Mehendale Chaitali Mehendale 14 August 2019

The key to smart tax planning is to keep it simple. You don’t need to seek advice from multiple sources and get confused in the process. Plan everything well ahead for the year with these smart tax planning tips.

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Often investment for many of us begins and ends with tax planning. Although it is important to avail tax benefits, this should not be your sole focus. Start jotting down your key financial objectives, the corpus needed, and the tentative time required to achieve your goals. Tax planning for salaried employees is easy and simple if you do it on time and take care of a few points. Tax planning should start in the month of April i.e., at the start of the financial year and not in February and March. Here are six critical points you should consider to save income tax on your salary.

1. Pay attention to your salary slip

Some components in your pay structure have provisions of deductions and exemptions under the Income Tax Act, 1961. The perks, perquisites, and tangible benefits that you are entitled to can be claimed up to a specific amount. A few of them are as discussed below:

  • House rent allowance: If you are staying in rented accommodation, then you can claim tax exemption with respect to the house rent allowance under Section 10(13A).
  • Education allowance: Allowances received for education up to Rs. 100 per month for a maximum of two children is tax-deductible. Hostel stays for employee's children up to Rs. 300 per month for a maximum of two children from the employer can be claimed under Section 10(14).
  • Leave travel allowance: As per this amendment, two trips in a period of four years can be claimed for tax exemption. The tax exemption is only for the shortest distance on a trip. This allowance can be claimed for a trip taken with your spouse, children, and parents. Travel allowances exemption is up to the actual expenses. Therefore, unless you actually take a trip and incur trip expenses, you cannot claim it.
  • Bonus: Bonus and incentives are usually paid once or twice in a year. Bonus, the performance incentive is fully taxable!

2. Take a good look at Section 80C and take advantage of it

Having in-depth knowledge at Section 80C can help you maximise your take-home salary. You are eligible to invest Rs. 1.5 lakh in various tax-saving instruments. Public provident fund (PPF), Equity Linked Saving Schemes (ELSS) Mutual Funds, National Saving Certificate (NSC), and five-year bank fixed deposit are some of the tax-saving investment options that you may consider. You can claim principal repayment towards the home loan, by presenting the proof of the same under Section 80C. You can also claim tax benefit under Section 24 towards the interest payment on your home loan up to Rs. 2 lakhs in a financial year. Moreover, these deductions under Section 80C can be directly claimed in the income tax return, and not necessarily through your employer. Most importantly, you need to make these investments before 31st March 2020 to claim tax benefits against them for the financial year 2019-2020.

3. Invest to meet your financial goals

Investment is not just to save tax, but also to meet your financial objectives. This approach can prove beneficial in tax planning. You can convert your tax saving investment instruments into high-returns ones. For example, let's say you intend to buy a new car in 6-7 years. You can invest a regular amount in ELSS. After 3 years, when the lock-in period of each ELSS investment ends, you can withdraw your funds and reinvest them to meet your goals. Thus, tax-saving investments can also help you to achieve your financial goals.

4. TDS on salary

TDS is tax deducted at source. Your employer deducts a part of your salary every month and pays it to the Income Tax Department. Based on your total salary for the financial year and your investments in tax-saving instruments, your employer determines how much TDS needs to be deducted from your salary each month.

For salaried employees, TDS is a significant portion of an employee's tax payment. Your employer will give you a TDS certificate called 'Form 16', mostly in June or July month, showing you how much TDS was deducted each month. Your bank also deducts TDS when you earn interest from fixed deposits. The bank deducts 10% TDS on FDs. The bank deducts TDS at the rate of 20% when it does not have your PAN card details. These TDS amounts can be claimed for a refund (if any applicable) by filing returns and submitting Form 16A to the Income Tax Department.

5. Have a look at other Sections as well

Apart from Section 80C of the Income Tax Act, several other sections can help you to save taxes. Here are some of the sections that you may consider to enjoy tax benefits. These details can also be found in the investment declaration document issued by your employer.

  • You can avail tax benefits on the premiums paid for health insurance policy under Section 80D.
  • Interest paid on education loan can also be claimed for tax exemption under Section 80E.

6. Avoid last-minute tax planning

Planning your investment for tax saving at the last minute leaves little time for you to study different investment options. It may also become troublesome to invest a lump sum amount just to save tax. You can invest a small amount regularly through mutual funds and SIPs throughout the year, thereby not eating a chunk of your savings at the last moment.

Points to remember in tax planning for salaried employees:

  • Make sure that your immediate and mid-year financial needs are covered as most of the tax-saving investments have a minimum lock-in period of five years.
  • It is vital to consider a number of investment options before making a final decision. Ensure that your need to save tax is not getting fulfilled at the cost of poor returns from the investment.
  • Be aware of the objective of your investments, its maturity period, and maturity terms and conditions.
  • Tax planning is not a year-end activity. Avoid hasty decisions of investing in tax savings schemes that won't give you benefits in the future. Strategic decisions made at the right time and simple management is all you need for smart tax planning!
Chaitali Mehendale
Written by Chaitali Mehendale
Chaitali Mehendale is an avid reader, blogger and traveller. When she is not busy writing stupendous content, she prefers to explore new places and meet new people!