How can you save income tax on your salary? Read ahead and know more.
Tax - this word puts fear in the hearts of brave men and women. Nobody likes to pay taxes. There are many ways to save tax on income earned. If you are a salaried individual looking to save taxes, we have created this article just for you.
10 Tax Saving Tips and Tricks for Salaried Individuals
When you check your salary slip, you get a clear idea of how your monthly income is distributed (the break-up of your salary). The same information is available on your offer letter. With this information, you can calculate the right amount of income tax and submit the proper investment declaration for the same. The first component you will see is the ‘Basic’. As the name suggests, this is the money given for maintaining yourself. The ‘Basic’ component is not applicable for any tax deduction.
Let us look at the break-up (components) of your monthly salary which can be utilised for tax saving.
House Rental Allowance (HRA)
If you stay in a rental apartment/house which is not close to your office, you can claim HRA to save tax on your house rent. For this deduction, you must be living on a rental basis and should receive rent receipts from the landlord along with a valid copy of the rental agreement (notary or registered). For HRA, the following exemption is applicable:
The HRA received from your employer
The rent paid by you for the house, minus 10 percent of your salary (including your allowances) or 50 percent of your basic salary (for a metro) or 40 percent of your basic salary (for non-metro).
Note: If the rent exceeds more than Rs. 1 lakh, you will be required to furnish the PAN details of your landlord.
Leave Travel Allowance (LTA)
Under this component, you can raise a claim for the expenses on domestic vacations. This includes the expense of travel tickets for yourself and your family. You are not taxed on the travel expenses of your spouse and two children, if they are part of your travel. You can cover your parents, brother and sister, if they are solely dependent on you.
Note: You can avail this benefit twice in the block of four years. If you have not made any claim in the past four years, you can easily carry over one vacation in the next block, provided you avail it in the first year of the block itself.
Income from Gratuity
Gratuity is the amount received at the time of retirement. It is also given in case of an emergency or on becoming incapacitated or on termination. The gratuity is received by dependents (spouse, children and parents) in case of death. The Ministry of Finance has enhanced the income tax exemption for gratuity under Section 10 (10) (iii) of the Income Tax Act, 1961 to Rs. 20 lakhs.
You can ask your company to issue you food coupons as a part of your monthly salary. These are not taxable up to Rs. 2600 per month.
There is a standard deduction of Rs. 50,000 in lieu of medical reimbursement and transport allowances for the taxpayers. Salaried individuals/pensioners need not have to furnish any bills or documents to claim the standard deduction of Rs. 50,000. You can straight away claim it.
These basic expenses are part of the reimbursement component of your salary. Your company can make these expenses tax free (the company does not recharge or pay your bills). You can either get telephone expenses reimbursed or claim tax benefits.
Voluntary Retirement Scheme
If you decide to undergo voluntary retirement, the amount received is non-taxable (upper limit of Rs. 5 lakhs).
Note: This is applicable only for employees of the public sector or authority established under central or state government.
A medical insurance policy allows you to avail tax deduction under Section 80D (of the Income Tax Act, 1961.
Note: The allowance is Rs. 25,000 for medical insurance of self, spouse and dependent children and Rs. 30,000 (w.e.f. A.Y 2019-20, this amount has been increased to Rs 50,000) for parents above 60 years. You can also avail Rs. 5,000 for the cost incurred for preventive health check-ups for self, spouse, children or parents.
Best Tax Saving options under Section 80C
Equity Linked Savings Scheme
ELSS plans come with dual benefits. You save tax and gain wealth over the investment tenure. The funds of an ELSS plan are primarily invested in equities which can earn close to 20% or higher returns which is higher in comparison to 8% returns from PPF, FD, NSC, etc. You can save tax up to an investment of Rs. 1.5 Lakh per year in ELSS. Another added benefit of an ELSS scheme is the feature to invest via systematic investment plan (SIP).
Tax Saving Fixed Deposit
This is similar to a normal fixed deposit. The only difference is that the amount is deposited for a lock-in period of 5 years. A tax saving fixed deposit can be opened with a minimum amount of Rs. 8000 to Rs. 10,000. The rate of return varies from 5.5% to 8%. You can save tax up to an investment of Rs. 1.5 Lakh per year with a tax saving fixed deposit.
The list mentioned above is not exhaustive. You can invest in a variety of tax saving instruments. These various types of instruments are mentioned under the different Sections of the Income Tax Act, 1961. Each section has its own limits and conditions. Make sure you read all details carefully before investing.