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.
It is important to understand the salary components and the exemptons and deductions provided to you. It can help you save on taxes.
- Basic Salary: This is the fixed amount of your pay slip which is the basic pay that your employer promises you apart from the other salary benefits. The basic salary is also used to calculate the employer’s contribution to the provident fund (EPF), as the contribution is expressed as a part of the basic salary.
- Dearness Allowance: Dearness allowance (DA) is an allowance allowed to you for factoring in inflation, increasing the cost of living.
- House rent Allowance: If you are employed and live in a rented apartment or house, you can claim HRA to lower your tax amount. There is an option to partially or completely exempt the amount of rent paid from the taxable income. You need to follow the guidelines set by the income tax department in the computation of the HRA amount.
- Leave Travel Allowance: Under LTA, you can apply for tax exemption for the costs incurred while traveling within India. This exemption can be availed on the shortest distance during the trip. The allowance claim also includes costs for spouses, children, and parents if traveling together. To avail of the exemption, you need to provide all the related documents associated with travel, so you must take a trip before making the claim. LTA is allowed twice in a block of four years.
- Bonus: The bonus declared by the company differs from one company to another. Generally, a performance bonus is given once or twice a year. The bonus comes under the tax slab as it is an income. 100% of the bonus amount is taxed.
- Employees’ Provident Fund contributions: The Government of India has initiated the social security scheme for salaried individuals, where the employee and the employer contribute 12% of the basic salary and dearness allowance every month towards the Employees’ Provident Fund (EPF). The amount attracts 8.55% of the interest on the accumulated amount. All the companies employing above 20 employees must contribute towards the PF amount under the EPF ACT 1952. The EPF contributions create a retirement corpus for you when you retire.
- Standard deduction: Medical allowances and the conveyance allowance have been replaced by standard deductions in the 2018 budget. Now you can claim ₹50000 from your total salary income as a standard deduction, thereby reducing the amount of taxable income.As per budget 2023 this deduction is now available under the new tax regime also.
- Professional Tax: This tax is levied by the State Government and is similar to the income tax which is levied by the Central Government. The maximum amount that can be claimed as deduction under income tax act is ₹2500. This is usually deducted by the employer only and deposited to the State Government.
What is the difference between the CTC (Cost to Company) and take-home salary? The company may entitle you to several benefits like food coupons, pick and drop facility, rent-free accommodation, gratuity, etc. These benefits add up and form part of the total amount of hiring you for the company, which is known as the cost to the company. So, the CTC would include the salary paid every month, the retirement benefits payable when you retire or leave the organization, and non-monetary benefits like free meals, free transport, etc.
Compared to CTC, the basic take-home pay would include the gross salary paid to you after deducting the tax-free allowances like HRA, LTA, etc., and the income tax payable by you.
The salary also includes the retirement benefits which are payable to you. Let’s understand these benefits –
Retirement Benefits
In the calculation of taxation on your salary income, a lot of tax benefit is given on the amount of money spent on planning for retirement. These benefits are known as retirement benefits. Let’s discuss all retirement benefits in detail:
Leave Encashment Exemption:
As an employee, you should always check with the employer regarding their leave encashment policy. The policy varies from company to company, some allow you to carry forward the leave days, and some give you the option of encashment of leave days. The amount that you receive comes under the taxable slab. There are certain exemptions where no tax is charged on the amount you receive by encashing the leaves that are not taken. These instances include the following:
- Central and State Government employees are not charged tax on the leave encashment amount.
- In the case of non-Government employees exemption is allowed for the lowest of the following amounts:
- Average salary of the last 10 months before retirement
- Leave encashment amount received provided it is limited to ₹25 lakhs as per budget 2023 update
- Amount equalling the salary for the earned leaves
Income Tax Calculation
Once you are aware of the tax deductions available for you in the salary component, you can calculate your tax liability. However, the following should be kept in mind while calculating the tax –
- Salary income is not the only taxable income that you have. There are various sources that also contribute towards income besides salary for example it can include income from property, stocks, interest, etc. All these incomes are added together and then on the accumulated amount tax is charged depending on the slab that the income falls in.
- You also get deductions and exemptions from the gross taxable income calculated from all the heads of income. You have to deduct such tax-free deductions and exemptions to arrive at the net taxable income.
