Tips to save Income Tax on Salary
Planning the taxes in advance can help with saving taxes on salary. Tax planning involves making strategic decisions and taking advantage of available tax deductions, credits, exemptions, and incentives to optimize your tax situation. Effective tax planning can help individuals and businesses reduce their tax burden, increase their after-tax income, and achieve their financial goals. Let us know how to alleviate the tax burden and save taxes.
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Components of Salary
Understanding the components of salary is crucial for planning and saving on income tax. Here are the main components of an individual’s salary:
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Basic Pay
This forms the foundation of your salary, including basic pay and dearness allowance (DA) to offset inflation. It also determines your employer’s contribution to retirement funds like the Employees’ Provident Fund (EPF).
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Allowances
House Rent Allowance (HRA) helps reduce tax burden for those living in rented accommodation. Leave Travel Allowance (LTA) provides tax exemption for travel expenses within India during specific periods for you and your family.
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Bonus
A company-specific perk, usually annual or semi-annual, which is taxed as part of your income.
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Retirement Savings
The Employees’ Provident Fund (EPF) is a social security scheme where both the employee and employer contribute 12% of basic salary plus DA to build a retirement corpus.
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Tax Efficiency
Standard deduction replaces medical and conveyance allowances to reduce taxable income. Professional tax is paid to the state government, with a maximum limit of ₹2,500 for tax deductions.
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Retirement Benefits for Salaried Individuals
Leave encashment is taxable except in certain exemptions. Central and state government employees are fully exempt, while non-government employees have exemptions based on the average salary of the last 10 months, ₹25 lakh as per Budget 2023, or salary for earned leaves.
Advance salary under Section 89(1) can be partially exempt if a portion of total salary or family pension is received in advance. Voluntary Retirement Scheme (VRS) under Section 10(10C) provides exemption up to ₹5 lakh if conditions are met. Pension is taxable according to your slab, but 1/3rd of the accumulated pension received as a lump sum is tax-free under Section 10(10A). Gratuity is payable upon retirement or resignation after five years of service, with exemptions depending on coverage under the Gratuity Act. Family members receiving gratuity on employee death are exempted from tax.
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Income Tax Calculation
Salary income is added to income from other sources such as property, stocks, and interest. Deductions and exemptions are subtracted from the gross income to determine net taxable income, which is then taxed according to applicable slabs.
For individuals below 60 years, tax slabs under old and new regimes vary, with Budget 2023 updates making income up to ₹7 lakh tax-free under the new regime. Individuals aged 60-80 have a basic exemption of ₹3 lakh, and those above 80 years have ₹5 lakh.
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How to Save Income Tax on Salary
Optimize your salary structure by allocating components to tax-free allowances like HRA and LTA and claim tax-free reimbursements for expenses such as medical, fuel, and phone bills.
Invest in tax-saving instruments under Section 80C, such as PPF, NSC, EPF, and tax-saving FDs, to claim deductions while building wealth.
Utilize Section 80D to claim deductions on health insurance premiums for yourself, spouse, children, and parents, including preventive health check-up expenses.
Invest in Equity Linked Saving Schemes (ELSS), which offer potential capital appreciation along with tax savings under Section 80C, with a three-year lock-in period.
Seek guidance from tax professionals to optimize salary structure, maximize deductions, and ensure compliance with tax laws. Tax Pal Solutions provides online tools and expert assistance to help you estimate your tax liability and save efficiently.
