How to Save Income Tax on Salary Income
As soon as the Assessment year comes, the salaried class gets agitated about their tax returns. For you it is foremost to understand the tax slab and what is the meaning of each of your salary breakup component. By acknowledging this, you can figure out how to save tax. Let us understand about your salary components and how you can save tax on your salary income point by point.
(A) Pay Slip Components
1. Basic Salary:This is a fixed component in your payslip which you receive from your employer apart from other salary benefits.
2. Dearness allowance: It is an allowance which is allowed to you for factoring in inflation which increases the cost of living.
3. Housing Rent allowance (HRA):Salaried individuals who live in rented property can claim HRA to lower the tax amount. There is an option to partially or completely exempt the amount of rent paid from the taxable income for which you need to follow the guidelines set by the income tax department in this regard.
4. Leave Travel allowance (LTA): You can avail exemption for a trip within India under LTA. The exemption is available for the shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, parents & children but not with other relatives. This particular exemption is up to the actual expenses, therefore to claim it you actually need to take the trip and incur these expenses. So, submit the bills to your employer to claim this exemption.
5. Bonus: Bonus is usually paid yearly or half-yearly. Full amount of bonus is taxable. Performance bonus is usually associated to your appraisal ratings or your performance during a period and is based on the company policy.
6. Employee Contribution to PF: The Indian Government has initiated a scheme of social security where both employer & employee contribute a 12% equivalent of the employee’s basic salary plus dearness allowance every month toward Employee’s Provident Fund (EPF). An interest of 8.50% gets attracted on the accumulated amount. Companies above 20 employees need to contribute towards the PF amount under the EPF Act, 1952. The EPF contributions lead to creation of a retirement corpus for you when you retire.
7. Standard deduction: This deduction was reintroduced in 2018 replacing medical allowance & conveyance allowance. Now you can claim INR 50,000 from your total salaried income as standard deduction thereby reducing the tax liability.
8. Professional Tax: It is a tax levied by state government just like income tax being levied by central government. The maximum tax amount that can be levied is INR 2500 & this is usually deducted by the employer only and deposited to the State Government. Professional tax is allowed as a deduction from your salary income while filing ITR.
(B) Difference between CTC & Take-Home salary
Your job may entitle you to some benefits in the form of rent free accommodation, food coupons or a cab service apart from your salary. The total cost to the company (CTC) is the sum of all the benefits offered plus your salary. Your CTC will include:
(i) Salary received every month
(ii) Retirement benefits such as PF and gratuity
(iii) Non-monetary benefits such as an office cab service, free meals at the office, etc.
In comparison to the CTC, your take-home salary will include:
(i) Gross salary received every month.
(ii) Minus tax free allowances such as HRA, LTA, etc.
(iii) Minus income tax payable (calculated after considering Section 80 deductions).
1. Leave Encashment exemption:
You should always check with your employer about leave encashment policy. Some employers allow you to carry forward the leave days and some give you the option of encashment of leave days. The amount you receive is taxable as salary part. But in some cases, no tax is charged on the amount you receive through encashment. These instances include the following:
(i) Central and State Government employees are not charged tax on the leave encashment amount.
(ii) For non-government employees, the least of the following 3 is exempt:
1. Average salary of the last 10 months before retirement
2. Leave encashment received provided it is limited to INR 3 lakhs
3. Amount equal to the salary for the earned leaves
The amount liable to tax shall be the total leave encashment received minus exemption calculated as above. This is added to your income from salary.
2. Advance Salary:
If you have received a certain portion of your total salary in advance, or got a family pension in advance, tax relief is given under section 89 (1).
3. Voluntary Retirement Scheme (VRS):
Any compensation received on voluntary retirement is exempt from tax as per the Section 10(10C) subject to certain conditions. These conditions state that the compensation should be received on voluntary retirement, it should not exceed INR 500000, the receipts are in compliance with rule 2BA, and you should be an employee of an authority which is formed in compliance with certain rules. No exemption can be claimed under this section if you have already taken benefit under section 89.
Any amount received as pension is taxable in the year in which it is received. Pension is generally paid in the form of annuities. You can also commute 1/3rd of the accumulated pension and receive the amount in lump sum. This lump sum amount would be tax-free under Section 10(10A) but the annuity payments would be taxed in your hands.
It is a benefit given by the employer to its employee at the time of retirement. On completion of 5 years in the company, you would be entitled to receive gratuity from the employer. But the gratuity amount is received only at the time of resignation or retirement. The tax calculation is different and it depends on whether your employer is covered under the Gratuity Act.
(D) Calculation of Income Tax
After calculating the taxable income from salary, you can calculate your tax liability. While doing this, the following points should be kept in mind:
1. Income can also be from various other sources apart from salary. It can be from house property, stocks, interest, etc. which all adds up to form total income on which tax is calculated depending on the slab rate.
2. The net taxable income would be taxed as per the given slab rates:
The above table is applicable for taxpayers who are up to 60 years of age. 4% of the total amount of tax calculated is charged as the health and education cess.
Up to INR 2,50,000
|INR 2,50,000 to INR 5,00,000||5%|
|INR 5,00,000 to INR 10,00,000||20%|
|INR 10,00,000 & above||30%|
3. TDS on Salary: Every employer deducts a certain amount from your basic salary and pays it to the tax department on your behalf. The employer calculates the tax liability on your basic salary and investments made, deducts TDS from your salary. The employer will give you with the TDS certificate also known as Form 16 containing all the details about the TDS deductions. These deductions should be taken into account in to know the tax liability.
4. Form 16: Also known as TDS certificate, it contains all the information regarding the tax deductions made by the employer from your salary on a monthly basis during the given financial year. The form is typically divided in two parts i.e. part 1 containing details about the employer like the name, address, Pan Details etc. whereas part 2 containing details about the salary paid, deduction, other income etc.
5. Form 26AS: This form contains details about the tax deducted on your behalf and also the amount of tax paid. Form 26AS is available on the website of the IT department.
6. Deductions: Section 80C of the Income Tax Act can reduce your gross income by INR 1.5 lakhs. There are a lot of other deductions under Section 80 such as 80D, 80E, 80GG, 80U etc. that can reduce your tax amount. The lower your taxable income, the lesser tax you will be required to pay. So don’t forget to claim all deductions.
CA Palak S Jain
CMO, Financial Analyst, Expertbells consulting pvt ltd