Everything You Need To Know About Tax Saving!

Tax saving

With The Filing Season Coming In, Everyone Is In Search Of Ways To Save Tax.

In order to figure out the tax-saving process, you need to first identify the tax slab you fall under and also, understand the significance of each of your salary components.

Salary Structure

Salary consists of various components that can widely help in reducing your total taxable amount for the set financial year. On a broader perspective, salary components are divided into 3 major benefits: 

1.Direct Benefits 

Direct benefits are basically referred to as the direct remuneration paid to the employees in the form of monthly salary, bonuses, incentives, etc.  

a. Basic Salary 

The basic salary is the most core and primary component of the salary structure. It usually comprises of 40-45% of the total salary amount and hence, is the largest constituent as compared to any other component in the salary. Also, it is fully taxable. 

b. House Rent Allowance (HRA)  

Under section 10-13A of Income Tax Act, an employee can avail of the benefits of HRA as it is not fully taxableThe House Rent Allowance ensures that the employees who are staying in a rented house or apartment can claim that amount which will in turn help in reducing the total taxable amount for them. However, the least value from the below three entities will be considered for exemption: 

  • Actual HRA received from the company 
  • 50% (in case of metro cities) or 40% (in the case of non-metro cities) of annual basic salary 
  • Rent paid less 10% of the annual basic salary 

Also, the receipts and bills(with the Pan card of the owner of the rent is more than 1Lakh) need to be produced as proof of the payment.  

c. Leave Travel Allowance (LTA) 

The Leave Travel Allowance helps the employees to claim expense incurred in travel within India. However, there are some limitations like the employees can avail to exempt this amount only when they are traveling with their spouse, parents, and children. 

Also, LTA can be claimed only twice in a period of four years. The ongoing block is the calendar year 2018-2021. 

d. Statutory Bonus 

Statutory Bonus is the amount to the employees with the intention of motivating them. As per the Payment of Bonus Act,1965, a statutory bonus is the right of an employee, which is imposed by law. The bonus amount is fully taxable. 

e. Conveyance Allowance 

From April-2018, the exemption on conveyance has been removed with the introduction of the standard deduction. Therefore, the employees now do not need to collect or submit the conveyance proofs. 

f. Special Allowance 

The special allowance is usually the balancing component of the salary structure and is fully taxable. 

2. Indirect Benefits 

Indirect benefits are the indirect cash compensation provided to the employees in the form of various allowances and plans. 

a. Food Coupons 

The organizations can provide food allowance to their employees in the form of pre-paid food coupons or vouchers. The maximum of Rs.50 per meal can be exempted from the total taxable amount from the employees.  A total of 2 coupons per day can be tax exempted. Hence, a total sum of Rs 2,400 can be exempted per month.  

b. Medical Reimbursement 

Medical Reimbursement is a kind of benefit provided to the employees which allow them to claim an amount up to Rs. 15,000 per annum, towards expenses incurred for health or medical reasons. 

However, as per the amendment specified in Budget-2018, medical reimbursement and conveyance allowance have been replaced with a Standard Deduction of Rs. 40,000, which was later increased to a limit of Rs. 50,000 in Budget-2019. 

3. Contributions 

a. Employee Contribution To Provident Fund (PF) 

Provident Fund is a government-managed pension scheme that allows the employees to contribute towards social security. 12% of the basic salary is deducted every month towards the employee provident fund. Employees’ contribution towards PF is tax exempted under section 80C. 

b. Gratuity 

According to Sec.10(10) of the Income Tax Act, gratuity is paid to the employee after he/she completes 5 or more years of employment in the company. The exemption limit, which was previously Rs. 10 Lakhs is now increased to Rs. 20 Lakhs.  

Here some more components of the salary u/s 16: 

a. Standard Deduction u/s16 deduction  

The Standard Deduction u/s 16, was reinstituted into the salary structure in the 2018 budget with the exemption limit of Rs. 40,000. However, the exemption limit has now been increased to Rs. 50,000 in lieu of conveyance allowance and medical allowance. 

b. Professional Tax u/s16 deduction 

Professional Tax is referred to as the tax imposed by the state government. In other words, it is just like income tax levied by the central government. Every earning individual with an income is liable to pay a professional tax which varies based on the states and the income levels.  

Now as we are well aware of the components of the salary structure, let’s now look into the deductions through which you can save tax:  

  • Deductions Under Section 80C 

The deductions under section 80C include Provident Fund, ULIP (Unit Linked Insurance Plan), LIC, Children’s Tuition Fee, Repayment of Home Loanetc, with the total exemption limit of Rs. 1,50,000.  

Here’s a brief view under each sub-section under Section 80C:  

TABLE-1C

 

  • Deductions Under Section 80D: 

Medical Insurance Premium paid for self, children or spouse can be claimed under this section and the exemption limit is Rs.25,000The individual can also claim a deduction of Rs.25,000 for the parents if they are below 60 years of age. And in the case of parents aged more than 60 years, an amount of Rs.50,000 can be claimed.  

  • Deductions Under Section 80DD: 

The expenses incurred on a disabled or handicapped dependent relative can be claimed under this section. However, the exemption amount may differ as shown below: 

    • If the disability is more than 40% but less than 80%, then a total of Rs. 75,000 can be claimed as a deduction.  
    • If the disability is more than 80%, then Rs. 1,25,000 can be claimed.  

Note: A medical certificate from the prescribed medical authority must be produced in order to claim this deduction.  

  • Deductions Under Section 80DDB: 

You can claim the expenses on medical needs for self or dependents as specified below: 

    • For an individual or HUF, the exemption limit is Rs.40,000. 
    • For senior or super senior citizens, the exemption limit is Rs. 1 Lakh.  

Note: A medical certificate from the prescribed medical authority must be produced in order to claim this deduction. 

  • Deductions Under Section 80E: 

The interest on loans taken for pursuing higher education can be claimed under this section 

  • Deductions Under Section 80G: 

Donations made towards the social cause can be claimed under this section. Any donations made in cash more than Rs. 2,000 cannot be claimed as deductions. The donations made above Rs.2,000 through any other mode like a credit card, debit card, online payments, etc, except cash, can be claimed as deduction under this section. 

Now, let’s look into the maximum limit for deductions. Donations made to some institutions can be claimed fully while some have a limitation of 10% of Adjusted Gross Total Income.  

Adjusted Gross Total Income= All exempted income – Long term capital gains – All deductions (except 80G) 

Hence, the institutions here are divided into four categories as shown below: 

  • Donations with 100% deductions without restriction 
    • National Defence Fund set up by the Central Government 
    • Prime Minister’s National Relief Fund 
    • National Foundation for Communal Harmony 
    • An approved university/educational institution of National eminence 
    • Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector of that district 
    • Fund set up by a State Government for the medical relief to the poor 
    • National Illness Assistance Fund 
    • National Blood Transfusion Council or to any State Blood Transfusion Council 
    • National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities 
    • National Sports Fund 
    • National Cultural Fund 
    • Fund for Technology Development and Application 
    • National Children’s Fund 
    • Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund with respect to any State or Union Territory 
    • The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force Central Welfare Fund, Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996 
    • The Maharashtra Chief Minister’s Relief Fund during October 1, 1993, and October 6, 1993 
    • Chief Minister’s Earthquake Relief Fund, Maharashtra 
    • Any fund set up by the State Government of Gujarat exclusively for providing relief to the victims of the earthquake in Gujarat 
    • Any trust, institution or fund to which Section 80G(5C) applies for providing relief to the victims of the earthquake in Gujarat (contribution made during January 26, 2001, and September 30, 2001) or 
    • Prime Minister’s Armenia Earthquake Relief Fund 
    • Africa (Public Contributions — India) Fund 
    • Swachh Bharat Kosh (applicable from the financial year 2014-15) 
    • Clean Ganga Fund (applicable from the financial year 2014-15) 
    • National Fund for Control of Drug Abuse (applicable from the financial year 2015-16) 
  • Donations with 50% deductions without restriction 
    • Jawaharlal Nehru Memorial Fund 
    • Prime Minister’s Drought Relief Fund 
    • Indira Gandhi Memorial Trust 
    • The Rajiv Gandhi Foundation 
  • Donations with 100% deductions subject to 10% of Adjusted Gross Total Income 
    • Government or any approved local authority, institution or association to be utilized for the purpose of promoting family planning 
    • Donation by a Company to the Indian Olympic Association or to any other notified association or institution established in India for the development of infrastructure for sports and games in India or the sponsorship of sports and games in India 
  • Donations with 50% deductions subject to 10% of Adjusted Gross Total Income 
    • Any other fund or any institution which satisfies conditions mentioned in Section 80G(5) 
    • Government or any local authority to be utilized for any charitable purpose other than the purpose of promoting family planning 
    • Any authority constituted in India for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns, villages or both 
    • Any corporation referred in Section 10(26BB) for promoting the interest of minority community 
    • For repairs or renovation of any notified temple, mosque, gurudwara, church or other places. 
  • Deductions Section 80U: 

The individual who is suffering from physical disability can claim a deduction under this section up to Rs. 75,000. In the case of severe disability, the limit is increased to Rs. 1,25,000.  

These deductions and exemption limit greatly help in planning your investments. Hence, it is best suggested to plan at the beginning of the year, so that it does not hinder you at the end of the year. This will ensure that you make sound investment decisions and file for returns.

Contributing Author
Keka Editorial Team

A bunch of inspired, creative and ambitious youngsters- that’s Keka’s editorial team for you. We have a thirst to learn new subjects and curate diverse pieces for our readers. Our deep understanding and knowledge of Human Resources has enabled us to answer almost every question pertaining to this department. If not seen finding ways to simplify the HR world, they can be found striking conversations with anyone and everyone , petting dogs, obsessing over gadgets, or baking cakes.