INCOME TAX PLANNING GUIDE FOR SALARIED PERSONS
It is important for salaried people to manage finance by saving money on tax. It is necessary to develop a strategy to reduce tax. Tax saving can be easily done in a correct manner. A salaried person needs to look for tax saving options which not only can help them in saving taxes but also helps in achieving goals.
In this article, it is briefly described about the deductions, exemptions, and certain allowances that can be opted by the salaried persons to reduce their tax burden.
1. Leave Travel allowances:
Under section 15, Leave Travel allowance provides an exemption only in respect of two journey's performed in a block of our calendar year. The current block of a calendar year is 2018-2021.
The LTA amount eligible is the lower of the air-conditioned first-class fare by the shortest route or the actual amount spent. This rule applies to the journey undertaken by other modes, like as private taxi, and the place of origin and destination are connected by rail.
This exemption is available to a family including spouse, children of the employees, parents, brothers, and sisters of the employee, who are mainly dependent on the employee.
DEDUCTIONS under Income Tax Act, 1961
a) Standard Deduction: Employees are allowed a standard deduction of Rs. 50,000 from F.Y 2019-20.
b) Deductions u/s 80C- The Maximum limit of deduction including all the investments and expenditures under section 80C is Rs 1.50 lakhs. Following are the options available:
Provident fund– Employee’s contribution is eligible for deduction U/s 80C.
Sukanya Samridhi account- It can be opened for girl children below 10 years of age and maximum for 2 girl children. The deposit is to be made for 15 years with a minimum initial deposit of Rs. 250 and maximum investment being Rs1.5 lakhs in a financial year. Interest is calculated on a yearly basis
National saving certificate– NSC is a tax-saving fixed deposit scheme from India post. It is available for 5 years now for 10 years NSC has been discontinued. The minimum investment amount is Rs 1000, there is no maximum limit for investment. Investments in NSC are eligible for a deduction of up to Rs 1.5 lakhs p.a. under Section 80C.
Senior citizen saving scheme: This is for senior citizens above the age of 60 years. The minimum deposit is Rs 1000 and the maximum investment is Rs 15 lakhs. The maturity period for the SCSS scheme is 5 years. It can be extended for another 3 years, effectively bringing up the period to 8 years.
Tax saving fixed deposit/ Post office time deposit (for 5 years)–Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled to section-80C
Life insurance: Premium paid towards yourself, spouse or children are eligible for deduction u/s 80C. The maturity proceeds of life insurance are tax-free u/s 10(10D) subject to certain conditions.
Tax saving mutual funds (ELSS): Minimum investment is Rs 500. There is no limit for maximum investment however for deduction purposes it is Rs1.5 lakhs
Home loan principal payment: The Deduction up to Rs 1.5 Lakhs is allowed on the principal repayment of the housing loan if the house is self-occupied or vacant.
Stamp duty and Registration charges: Deduction for stamp duty and registration charges can also be claimed u/s 80C but within the overall limit of Rs 1.5 lakhs. However, it can be claimed only in the year in which these expenses are incurred.
Tuition fees: Deduction from taxable income under Section 80C is available to individual taxpayers up to a maximum amount of Rs. 1.5lakhs for education expenses incurred for one’s children. The deduction is available only on actual payment basis.
2. House Rent Allowance:
HRA is exempted under section 10(13A) of the IT Act, 1961. HRA received from an employer is fully taxable if the employee is staying in his own house or is not paying rent. HRA is available to those employees who have an HRA component in their salary and have rented accommodation.
The tax benefit in the form of HRA is allowable only for the period for which the house is rented.
How much is HRA exempted?
Minimum of –
1. Actual HRA
2. Rent Paid – 10% of salary
3. 40% of Basic salary* (Non-Metro cities) or 50% of Basic salary (Metro cities)
How HRA can be claimed?
HRA can be claimed if an employee has rent receipts and rent agreement. Salaried employees drawing HRA up to Rs. 3,000/- per month are exempted from submission of rent receipts to the employer. However, it is instructed to note that this exemption from submitting the rent deed and receipts is only for the purpose of filing TDS. In case of regular assessment of the employee, the Assessing Officer may enquire about the authenticity of the payment of such rent and may ask to submit the necessary documents. Also as per CBDT Circular, if annual rent paid by an employee exceeds 1Lakhs, he is required to quote the PAN of a landlord to the employer.
3. Home loan interest:
The interest paid for the year can be claimed as a deduction from your total income up to a maximum of Rs 2 lakhs under Section 24. From Assessment Year 2018-19 onwards, the maximum deduction for interest paid on Self Occupied house property is Rs 2 Lakhs. For let out property, there is no upper limit for claiming interest. These Deductions can be claimed from the year in which construction of the house is completed.
4. Deductions u/s 80D: Premium paid for Mediclaim /Health Insurance for Self, Spouse, Children, and Parents qualify for deduction u/s 80D.Maximum deduction allowable is Rs 25,000 in case you are below 60 years of age and Rs 50,000 above 60years of age. An additional deduction of Rs 25,000 can be claimed for buying health insurance for your parents (Rs 50,000 in case of either parent being senior citizens)
5. Deductions u/s 80DD: In case, if an employee is physically disabled, he can claim a deduction for expenses on his maintenance and medical treatment. The person on whom he is Dependant shall mean spouse, children, parents, brothers & sisters of the taxpayer. Also, the dependent should have not claimed deduction u/s 80U for self. Deduction up to Rs. 75,000 if the disability is not less than 40 percent and Rs 125,000 in case of severe disability can be claimed u/s 80DD of the Act.
6. Deductions u/s 80E: The interest paid on education loan in a financial year is eligible for deduction u/s 80E.The loan should be for individuals, spouse, or children. Unlike 80C there is no condition that the course should be in India. The tax benefits on education loans are only valid once you start the repayment and they are only available up to eight years.
7. Deductions u/s 80TTA: If a taxpayer is keeping some money in saving account, this is the easiest deduction under the Income Tax Act that individuals can claim. Interest on savings accounts is tax-free up to Rs 10,000 per year under Section 80TTA. This limit is Rs 50,000 for senior citizens for both FD and savings account interest under Section 80TTB.
8. Deductions u/s 80U: Tax Payer can claim deduction u/s 80U in case if he suffers from certain disabilities or diseases. The deduction is Rs 75,000 in case of normal disability (40% or more disability) and Rs 1.25 Lakhs for severe disability (80% or more disability).
By considering all the above sections the taxpayers can reduce the tax burden. Most importantly Investments should not be used as tax saving instruments.The need to save tax should never lead you to select investment options that yield poor returns.
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