This article provides a complete focus on tax planning for salaried individuals in India.
What are Tax Planning for Salaried Employees?
The first step towards tax planning is knowing the slabs applicable and income tax planning for salaried employees. This includes:
1. Income tax slabs and rates
2. Deductions and exemptions allowed under different sections of the Income Tax Act
3. Calculation of taxable income after claiming deductions
4. Computation of income tax liability
Salaried employees need to assess their income, planned investments and expenses to estimate their tax liability for the year. This helps them plan their taxes better.
Key Areas of Tax Planning for Salaried Individuals
Certain key areas should be focused on for tax-saving options for salaried employees:
1. Section 80C Deductions
Section 80C provides deductions up to Rs. 1.5 lakhs per year on specified investments and expenses such as life insurance premiums, EPF contributions, PPF investments, ELSS mutual funds, NSCs, etc. Salaried persons should maximise 80C deductions to reduce taxable income.
2. Claiming HRA Exemption
Salaried persons living in rented houses can claim HRA exemption, subject to certain conditions. This helps save tax on rent paid. Computing HRA exemption leads to tax savings.
3. Section 80D Health Insurance
Under Section 80D, health insurance premiums are tax deductible up to a certain limit. Adequate health coverage protects against potential risks.
4. Home Loan Interest Deduction
Individuals who have availed of a housing loan for the purpose of purchasing or constructing a property can claim a deduction on the interest payment under Section 24 of the Income Tax Act. The maximum limit for deduction is Rs. 2 lakhs per financial year, which is a significant tax benefit.
5. Education Loan Interest
Section 80E allows the deduction of interest paid on higher education loans without any upper limit until the loan is fully repaid.
6. Section 80C and 80CCC
Section 80CCC provides additional tax deductions for NPS contributions above Rs. 1.5 lakh annual limit of Section 80C. It acts as an added incentive for long-term retirement savings.
7. Standard Deduction
Every salaried taxpayer is eligible to claim a standard deduction of Rs 50,000 per year. No documentary evidence is needed to claim this deduction.
8. Allowances & Perquisites
Certain allowances like HRA, conveyance and many perquisites received as part of salary package are partially or fully tax exempt. Understanding these benefits helps save taxes.
Also Read about Long-term Capital Gains Tax on Shares
Ideal Tax Planning Tips for Salaried Employees
Now that we understand the basic rules and major deductions available for salaried class let us look at some practical year-end tax planning tips for last-minute savings:
1. Analyse Your 80C Investments: See the scope for additional investments in tax-saving instruments. Options like PPF, ELSS, and NSCs are ideal combinations of tax savings with growth potential.
2. Top Up Your Health Insurance: Check if your health insurance coverage for yourself and your family can be enhanced to claim higher Section 80D benefits. Also, buy necessary health policies for elderly dependent parents.
3. Prepay Future Expenses: Advance payment of education fees planned for next year and prepaying part of your probable home loan EMIs for next year can help maximise deductions under respective sections.
4. NPS Last Minute Top Up: If you have already exhausted Rs. 1.5 lakh limit of Section 80C, contribute additionally to NPS before March 31st for extra tax benefit under Section 80CCD (1B).
5. Claim Medical Bills: Apart from health insurance, you can also claim deductions for preventive medical check expenses up to Rs 5000 per year and medical expenditures for elderly dependent parents.
6. Update Rental Agreements, Form 12BB, 16: Ensure necessary documentary proof for claiming HRA and LTA benefits. Also, obtain and file form 16, form 12BB.
7. Avoid Year-End Bonus TDS: Request your employer to structure bonus payouts such that the total tax liability does not attract excessive TDS and potential refund problems.
Common Tax Planning Mistakes to Avoid
While planning taxes, salaried persons often make common mistakes. Awareness of these errors can help avoid them:
1. Not filing tax returns believing income is below exemption limits - without realising that many deductions become inadmissible.
2. Failing to collect proper investment proofs and missing out on legitimate deductions.
3. Not reporting income from other sources like part time freelancing, interest income etc.
4. Not showing correct details of all salary income - allowances, perquisites etc. leading to tax notice.
5. Not reviewing previous years' Form 26AS, leading to lower claims than actual contributions.
6. Not submitting proof of rent payment and HRA exemption on time
7. Delaying NPS account opening formality, thus missing a last-minute tax-saving opportunity
8. Not choosing tax-friendly withdrawal options from employee benefits like EPF/NPS (annuity income instead of lumpsum).
9. Not revisiting home loan selection between jointly and individually - resulting in lower combined interest deduction.
10.Not reviewing spouse's investment declarations from a tax perspective.
With adequate planning, review and course correction, salaried employees can adopt the most tax-efficient options and reduce tax errors.
Conclusion
An informed and organised approach to tax planning can help salaried individuals make optimal use of available tax deductions, maximise savings and achieve their financial goals. Year-round discipline coupled with year-end actions provides the winning tax planning strategy for salaried taxpayers.
