If you are a salaried person in India, you would want to master ways to save income tax when there is still time for it. There are several ways you can do tax savings legally. But, before we get to it, do note the current income tax slab applicable.
Individual Tax Payers and HUF (Both Men and Women, but Less than 60 Years Old)
| Income Slab | Tax Rate |
| Up till Rs 2,50,000 | No tax |
| Rs 2,50,000 – Rs 5,00,000 | 5% |
| Rs 5,00,000 – 10,00,000 | 20% |
| Above Rs 10,00,000 | 30% |
| Surcharge: 10% of income tax, when total income is above Rs.50 lakh and till Rs.1 crore Surcharge: 15% of income tax, when the total income is above Rs.1 crore |
| Cess: 3% on complete income tax + surcharge |
Senior Citizens (Both Men and Women of 60 Years of Age or Above, but Less than 80 Years)
| Income Slab | Tax Rate |
| Up till Rs 3,00,000 | Nill tax |
| Rs 3,00,000 – Rs 5,00,000 | 5% |
| Rs 5,00,000 – 10,00,000 | 20% |
| Above Rs 10,00,000 | 30% |
Senior Citizens (Both Men and Women of More than 80 Years of Age)
| Income Slab | Tax Rate |
| Up till Rs 2,50,000 | No tax |
| Rs 2,50,000- Rs 5,00,000 | 5% |
| Rs 5,00,000 – 10,00,000 | 20% |
| Above Rs 10,00,000 | 30% |
| Surcharge: 15% of income tax, when total income is above Rs.1 crore |
| Cess: 3% on total of income tax + surcharge. |
Here we list the top 10 methods to save tax in India, especially for those drawing a regular salary:
- Restructuring of Salary
You may meet many expenses related to your work out of your monthly salary. These expenses could be related to paying for uniforms at the job place, the phone bill, etc. Your employer must pay for the expenses that are linked to your job, thus, the government too considers such expenses as non-taxable.
Speak with your employer about restructuring your pay in which expenses as listed above and more can be included as allowances and not a part of your taxable salary.
Additional Reading: How to Calculate TDS on Salary?
Some of the allowances that save tax are those for:
- Medical treatment
- Travel
- Driver
- Uniform
- Newspapers/magazines/books
- Personality development
- Mobile/telephone,
- Office entertainment etc.
It is your employer who will decide your eligibility for these allowances. A professional tax that you may pay each month is also eligible for a tax deduction.
- Medical Expenditures
You may be eligible for tax exemptions on some of your personal expenses. If you can present actual medical bills, then these expenses can be counted as tax-free. These expenses are deducted from your gross salary and the employer can give a part of your salary as a medical allowance.
NOTE: The limit for exemption on medical bills is Rs. 15,000 for a financial year. Medical bills of dependents can also be accounted for exemption.
- Leave Travel Allowances
Leave allowances are tax-free up to a limit. You may be entitled to leave allowances in case the travel in question occurs when:
- You are on a leave and the limit for which is set to twice a period of 4 years.
- Travel happens in India and commences on the shortest route.
You can claim the maximum allowance as certified for economy class in air travel and AC-I of a train journey.
- Tax Saving on Rent Payments
House Rent Allowance (HRA) is remuneration provided by the employer if you have to live in rented accommodation due to working in a different city or place, then where you already have arrangements to stay in.
You can only deduct the lowest HRA from your gross income. It normally accounts for 50% of the basic salary in addition to Dearness Allowance (in case you are located in Kolkata, Mumbai, Chennai or Delhi), otherwise 40% of the basic salary with Dearness Allowance.
So the HRA calculation is- actual house rent paid minus 10% of Dearness Allowance plus the basic salary.
Points to Remember:
- Do collect the rent receipts. If the total rent payout for a financial year is more than Rs. 1 Lakh, you will require copies of the registered leave agreement with a copy of the homeowner’s PAN Card.
- There are ways to avail tax deductions on rent for parents’ accommodation as well, as long as you fulfil all the related formalities.
How to Invest Income and Reduce Taxable Income?
Investments eligible for tax rebates fall under Section 80C Deductions. The amount invested is deducted from taxable income and mostly such investments fall under the EEE category. It indicates that you are not liable to pay tax on such investments, redemptions and earnings. The upper limit to such deductions is set at Rs. 1.5 lakhs.
Additional Reading: Best Tax Savings Plans and Other Savings Schemes in India
Here are some of the income investments for tax exemptions:
- PPF Deposit Account
As a long-term investment and tax-saving scheme by the government, anyone drawing regular income and salary can open a PPF account with certain banks and post offices.
- EPF Account Contributions
Employee Provident Fund is a popular retirement saving instrument. It is mandatory for employees from the organized sectors to contribute to EPF if their basic salary is less than Rs. 15,000 per month. The benefit of this account is that the employer has to contribute an equal amount as put ahead by the employee. The EPF contribution by the employer is tax exempted, and that by an employee is tax-deductible.
- Sukanya Samriddhi Account
As a government scheme for the girl child, SSA offers the highest returns on small savings. The investment is locked until the girl child becomes 18 years of age. The maturity and investment amount are tax-free.
- Equity Linked Saving Scheme (ELSS)
These are diversified mutual fund schemes coming with a lock-in tenure of 3 years. ELSS invests in the share market with a great potential of high returns.
- Tax Saving Fixed Deposit
These FDs have a lock-in period of 5 years. The interest earned on tax-saving FD is taxable.
- National Saving Certificate (NSC)
NSC is issued for 5 years and it is a post office small saving scheme. The interest earned however is subject to tax, but not the investment amount.
- Senior Citizen Saving Scheme
Designed for senior citizens in India, this scheme offers regular income for elders and the interest rate earned is better than PPF and NSC. Retired defence personnel can take up this scheme at any age.
- Expenses Counted in Tax Saving
Here is a list of expenses eligible for deduction (not more than Rs. 1.5 Lakhs) in tax saving, which also comes under the Section 80C limit:
- Home loan principal payment- The EMI paid for a home loan is divided into two parts, interest and principal. The latter gives tax-saving benefits.
- Insurance scheme premium
- Tuition fees for children and self
- Medical Insurance Deduction
You can sax tax through medical insurance premiums for dependent parents and your family. Health insurance expenses are liable for the deduction, over and above the limit of Rs. 1.5 lakhs. Similarly, health check-up expenses can be counted in tax savings as well. You can minus these expenses from your total taxable income.
- The limit for the deducible amount for the health insurance of parents is up to Rs. 25,000. Health check-up expenses limit for deduction is up to Rs. 5,000.
- The limit for the deducible amount for health insurance of parents, if they are more than 60 years of age is up to Rs. 30,000.
- Tax Benefit on Home Loan Interest Payment
The limit for a tax deduction on home loan interest payments is set at Rs. 2 lakhs. You can double tax savings with the joint home loan as well. However, to avail of this benefit, the loan amount must be considerably big.
- Save Tax by Setting off Capital Gain
If you are salaried, you have to provide capital gains tax on investments. Gold and property attract long-term and short-term capital gains taxes, while shares attract only short-term capital gains taxes. You can set off capital gains from investments with a capital loss from other investments. It is possible to carry forward capital loss for up to 8 years.
For example, if you face a trading loss in shares, then this loss can be carried for seven years and in subsequent years, the trading profit can be set off with a big loss.
Additional Reading: How to Calculate Capital Gains and Losses?
- Tax Saving on Charity and Donations
Tax saving applies for donations and charity amounts as well. Donations to religious bodies and scientific institutions enable you to claim a tax rebate. Not every charity will be eligible for 100% tax savings, but donations for a few notified NGOs, PM relief funds and political parties can allow for 100% tax benefit.
- Timely Declarations of Investments and Taxes
Employers deduct TDS every month from an employee’s salary, as they have to pay advance tax every quarter. TDS deducted is based on projected tax liability for a financial year. In case you do not declare your investment, expenses and tax savings plan for the year, the projected tax will be higher. Thus, timely declarations of investments and taxes are important for lower TDS.
It is advisable to start saving tax and plan for tax savings as early as possible at the very beginning of the financial year to save maximum tax. The above-mentioned tax saving methods will surely help you plan your taxes healthily.
