How to check if your salary structure is tax efficient?

The word salary brings a lot of happiness on our faces, but have we ever wondered how to make it tax efficient? Well, whether you are a newbie just trying to gain a foothold on financial straws or an experienced individual, it is important to understand what tax-saving exercise is and how to do it in a well-planned manner otherwise you will end up losing your fat pay-cheque.

Calculate your tax liability
Before diving into the different kind of deductions that are available, we should calculate the tax that we are liable to pay to the government. The gross total income is divided under five sub-heads

  • Salary Income
  • Income From House Property
  • Profits and Gains from Business or Profession
  • Capital Gains
  • Income from other sources
In a lieu to save taxes, the people end up making useless investments that could prove to be financially damaging. The exhaustive list of deductions like house rent allowance, medical insurance, NPS should be on priority. Remember that the basic tenets of tax-planning remain the same for the whole year. So, before rushing into the deductions, it is important to calculate the tax liability.

Deductions that an individual can claim for
The investments up-to Rs 1.5 lakh is exempted from tax under the section 80 C.

What kind of deductions can an individual claim for?
The individuals can claim for a whole gamut of deductions like the provident fund, equity-linked saving scheme, Sukanya Samridhi Yojana, tax-saving FD, fall under the bucket of 80C. Every instrument has different features and may vary from individual to individual depending upon their risk appetite. There are certain expenditures that an individual can claim for like home loan, tuition fees, principal repayment of a loan, etc.

What kind of deductions is available under the section 80D?
Section 80D allows the deduction of the amount expended by the individuals on the premium of health insurance policy. Under this section, one can cover spouse, children and other dependents. An amount of Rs 15,000 can be claimed as a deduction and the amount is increased to Rs 30,000 for the senior citizens.

What kind of deductions is available under the section 80E?
Under the section 80E of the income tax, the taxpayer can claim for the loan taken to pursue higher education. This loan can be taken by the individual himself, for a spouse or for children.

What kind of deductions is available under the section 80G?
Under section 80G, the taxpayers are liable to make a deduction for the donations offered to the charitable institution.

What kind of deductions are available under 80 IA and 80 P?
80 IA- This kind of tax deductions is available to the industrial undertakings like telecommunication, industrial parks, etc.
80P- This kind of deduction is available to the cooperative society and other cottage industries.
A separate list of deductions is available to the Hindu Undivided Families and individuals with disabilities.

the instruments that are worth investing in- Well, the earlier table summarizes the traditional form of investments, but for the new investors there are several other avenues that help them to save the taxes like NPS or national pension system. You need to invest a minimum amount in order to keep the account running. For the individuals, who are not covered under the provident fund, should, therefore, ask their employer about NPS retirement scheme. The employee will get the benefit of 10% of the basic pay and it will reduce his tax burden too. Depending upon the age, the employee can select the instrument or fund. If he is young enough equity instruments can help and if he is aged fixed income schemes may work the best.

Leave travel allowance- many of us don't know how to fully make use of the leave travel allowance to claim a deduction under the Income Tax Act. There are certain rules that an individual need to follow to get this benefit. Here are the rules
  • LTA can be claimed for the family members only for the journeys taken within India.

  • The LTA is not allowed for more than 2 children.
  • The allowance is limited to the reimbursement of airfare, train fare and doesn't extend to local sightseeing tours.
  • This allowance is applicable for 2 journeys in a block of 4 years.
  • To enjoy this deduction, the employee needs to submit the valid documents along with the travel bill to the employer. Though the rules related to LTA is clearly mentioned by the Income Tax Department but some organization follow different rules, hence before availing such exemption it is important to make clarity, well in advance.
There are other organizations that offer the individuals with other perks and benefits like fuel, gadget.

HRA- The government has made a special provision for HRA, under which the employee is liable to receive the income tax benefits. The employee can claim a maximum of actual HRA, excessive rent paid over 10% of the salary, 50% of DA if accommodation is provided in the rented house in a city and 40% for non-metro cities.

Penalties imposed
Through all these ways the tax-payer can make the salary structure cost efficient but that doesn't mean that the tax-payers should inflate or under-report their income when filing the income tax returns. In such cases, the salaried individuals will be punishable under the penal code and will be reported as the tax evasion.
In the end, we would like to conclude that every financial year not only brings with new resolution and lifestyle changes but also impact your financial health. So, it is important to keep a look at the changing tax rules, it will definitely help you to structure your income in an efficient way.


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