We’re finally amidst tax planning season. As a salaried employee, it’s vital to understand your tax slab and the meaning of your salary breakup components before anything else. Now you may ask why? Doing so will help you determine how to save tax on salary by understanding the deductions at your disposal.
In this blog, we’ll cover the various sections under which you can save tax under the Income Tax Act.
11 Ways on How To Save Tax on Salary
For your convenience, we’ve divided the content into subsections of the income tax. Let’s get into it.
1. Leave Travel Allowance
If an employee travels within India, they can claim an exemption for that trip under LTA. This exemption only applies to the shortest distance travelled during the trip.
Moreover, a person can only claim it if they are being accompanied by their spouse, parents, or children. In order to claim this exemption, the employee must incur the expenses and submit the bills to their employer.
2. Standard Deduction
The Standard Deduction is a replacement for conveyance allowance and medical allowance. After the 2023 budget, employees can claim a flat deduction of Rs. 50,000 from their total income. This helps reduce their tax liability. Taxpayers can claim this deduction under both the old and new tax regimes.
3. Gratuity
A gratuity is a form of retirement benefit that an employer offers to an employee who has served in the organization for at least five years. The amount is paid out when the employee retires or resigns from their position.
4. Provident Fund
Provident Fund is a social security initiative where both the employer and employee contribute an equal amount every month toward the employee’s pension and provident fund. This contribution is typically 12% of the employee’s basic salary.
The government sets the interest rate, which is currently around 8.65%. When the fund matures, the returns are exempt from tax. Additionally, EPF contributions can be claimed for tax exemption under Section 80C of the Income Tax Act.
5. Health Insurance
A salaried employee can claim a deduction for medical insurance under section 80D of the Income Tax Act. This medical or health insurance must cover their spouse, dependent children, or parents. An employee can claim up to Rs. 25,000 against an insurance premium paid to cover their spouse and dependent children.
Besides that, they can claim another Rs. 25,000 against the insurance premium paid to cover the life of their parents. If the parent is a senior citizen, the employee can claim up to Rs. 50,000 instead of Rs. 25,000.
6. Receipts Upon Opting for Voluntary Retirement
Did you know that as per Section 10(10C) of the Income Tax Act, any compensation received upon voluntary retirement or separation is exempt from tax? However, this exemption is subject to the prerequisite that the receipts comply with rule 2BA, and the maximum compensation received should not exceed Rs. 5,00,000.
7. Home Loan
Besides the ones mentioned above, a salaried employee can also claim a deduction for interest on a home loan of up to Rs. 2,00,000 in a financial year under section 24 of the Income Tax Act. That said, the loan must be taken to acquire, construct, repair, renew, or reconstruct a property.
Besides, you can claim a tax deduction for the principal amount repayment under section 80C of up to Rs. 1.5 lakhs.
8. House Rent Allowance
Employees who live in rented accommodation can claim House Rent Allowance (HRA) to lower their tax outgo. HRA is partially or completely exempt from taxes, depending on the amount received, rent paid, and the city of residence.
9. Mutual Funds
Investing in Equity Linked Saving Scheme (ELSS) mutual funds qualifies for a tax deduction under section 80C of up to Rs. 1.5 lakhs. ELSS is a tax-saving mutual fund that invests more than 65% of its corpus in equities and the remaining 35% in debt instruments.
10. Section 89 (1) Exemptions
Under Section 89(1) of the Income Tax Act, any salary received in arrears or in advance is allowed for tax relief. It is done to ensure that employees are not unfairly taxed for receiving their earnings in a lump sum or in advance.
11. Deductions
There are several provisions available by which you can lower your taxable income. For instance, under Section 80C, you can save up to Rs 1.5 lakhs annually through investments in FD, Equity Linked Savings Scheme, Insurance policies, and other eligible instruments.
Besides, there are many other deductions available under Section 80. Some of these include 80D, 80E, 80GG, 80U, etc. which can further reduce your tax liability.
Some Additional Alternatives That Can Help Reduce Your Tax Burden
In addition to the pointers mentioned above, here are some other alternatives to help you save money on tax.
- Internet or Phone Related Expenses: Some employers may cover the expenses associated with using these devices in advance, or employees may be able to seek reimbursement for them. Additionally, you can obtain tax advantages for these expenditures.
- Car Leased By Employer: If an individual uses a car leasing policy provided by their employer, they can operate a car that is leased by their employer. It enables them to potentially save on tax for car instalment payments as they may not need to purchase a car themselves.
- Meal Coupons: Certain employers offer their employees meal vouchers, such as Sodexo or Zeta. These vouchers are not subject to taxation as long as they do not exceed Rs 2,600 per month.
FAQs on How To Save Tax on Salary
Here are some frequently asked questions on How To Save Tax on Salary:
Can you kindly share some ways to reduce the amount of tax I have to pay on my salary?
If you’re feeling like you’re paying too much in taxes on your salary, there are a few ways you can explore to reduce your tax liability. One strategy is to look into the deductions and exemptions offered under the Income Tax Act, which could help to lower the amount you owe.
It can include things like claiming allowances such as HRA and LTA, as well as using the Standard Deduction. Besides, Section 80C provides opportunities to deduct up to Rs 1.5 lakh for certain types of expenses and investments.
How to save income tax on salary of 15 lakhs?Â
If your annual income is 15 lakh, there are several ways to reduce your tax liability. One option is to take advantage of exemptions such as HRA, LTA, and reimbursements to decrease your net salary income. Another strategy is to use deductions under Sections 80C, 80D, and 80E to lower your taxable income further.
For example, investing in eligible avenues, like PPF, NPS, or tax-saving mutual funds, can allow you to claim deductions under Section 80C. Similarly, paying health insurance premiums can enable you to claim deductions under Section 80D, while the interest paid on education loans can be claimed under Section 80E.
Is it possible to claim a tax deduction if my income falls below Rs.5 lakh?
Even if your income is below Rs.5 lakh or falls between the income bracket of Rs 2.5 lakh to Rs.5 lakh, you can claim tax deductions. Section 87A of the Income Tax Act allows individuals with a total income of up to Rs 5 lakh to avail of a tax deduction of up to Rs 12,500. In other words, if your total income falls within this range, you can claim a deduction of Rs 12,500 from your total tax liability. Please note that this deduction is applicable only to individual taxpayers and not to HUFs or other taxpayers.
Are allowances provided by an employer subject to taxation?
Generally, the allowances given by employers are considered part of an employee’s salary and are, therefore, taxable. However, some allowances may offer tax exemptions or benefits under specific sections of the Income Tax Act. For instance, House Rent Allowance (HRA) and Leave Travel Allowance (LTA) may be exempt from tax up to a certain limit, depending on certain conditions. Similarly, medical allowances, conveyance allowances, and telephone allowances may also be tax-exempt up to a specific limit if certain conditions are met.
Saving tax on salary is an essential aspect of personal finance management, and there are various legal ways to do so. By investing in tax-saving instruments, claiming deductions, and planning your income and expenses, you can reduce your tax liability and increase your take-home pay.
It is crucial to understand the applicable tax laws and consult a financial advisor or tax expert to ensure compliance and optimize tax savings. So, follow these strategies as they’d allow you to efficiently manage your finances and achieve your financial goals.
If you want to save tax on your salary, start planning and investing in tax-saving instruments today.
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