Based on the information provided, here is a comprehensive guide for salaried professionals on how to save tax and increase their take-home pay.
1. Optimize Your Salary Structure
A smart salary structure is the foundation of effective tax saving. By working with your HR department, you can incorporate various tax-saving allowances and benefits into your compensation package.
- Tax-Exempt Allowances: Opt for allowances that are partially or fully exempt from tax. These can include:
- House Rent Allowance (HRA): If you live in rented accommodation, a portion of your HRA can be exempt from tax. The exemption is calculated based on a specific formula involving your salary, rent paid, and location (metro vs. non-metro city).
- Leave Travel Allowance (LTA): This allowance covers travel expenses incurred during leave, allowing you to claim an exemption for two trips in a four-year block.
- Food and Fuel Cards: Many companies offer prepaid cards for meals or fuel, which are tax-free up to certain limits.
- Internet, Telephone, and Books Reimbursements: You can claim reimbursements for these expenses by submitting bills, which are then deducted from your taxable income.
- Digital Benefits and Leasing: Modern solutions can help you save tax on expensive items.
- Gadget Leasing: Instead of purchasing a new laptop or phone, you can lease it through your employer. The lease rental is deducted from your income before tax, lowering your taxable income. You may even have the option to buy the device at a nominal price at the end of the lease term.
- Work-from-Home Allowances: Post-pandemic, many companies offer allowances for home office furniture, UPS, or WiFi. With proper bills, these can be claimed as tax-free reimbursements.
2. Maximize Deductions and Investments
Beyond your salary structure, strategically using deductions under various sections of the Income Tax Act can significantly reduce your tax liability.
- Section 80C: This is a crucial section with a deduction limit of up to ₹ 1.5 lakh. You can claim this by investing in a range of specified instruments, including:
- Public Provident Fund (PPF)
- Equity-Linked Savings Scheme (ELSS) mutual funds
- Life insurance premiums
- Employee Provident Fund (EPF) contributions
- National Savings Certificates (NSC)
- Children’s tuition fees (for up to two children)
- Principal repayment of a home loan
- Section 80D: This section allows you to claim deductions on health insurance premiums.
- You can claim up to ₹ 25,000 for premiums paid for yourself, your spouse, and dependent children.
- For senior citizens (aged 60 and above), the limit is increased to ₹ 50,000.
- An additional deduction can be claimed for premiums paid for your parents, with a limit of ₹ 25,000 (or ₹ 50,000 if they are senior citizens).
- A deduction of up to ₹ 5,000 for preventive health check-ups is also available within the overall limits.
- National Pension System (NPS): NPS offers additional tax benefits beyond the ₹ 1.5 lakh limit of Section 80C.
- An additional deduction of up to ₹ 50,000 can be claimed under Section 80CCD(1B) for your own contribution to the NPS.
- An employer’s contribution to your NPS account (up to 10% of your basic salary) is also deductible under Section 80CCD(2).
- Section 80E: This is a lesser-known but powerful deduction for young professionals. You can claim a deduction on the entire interest paid on an education loan for yourself, your spouse, or your children. There is no upper limit on the amount of interest that can be claimed, but the deduction is available for a maximum of eight years.
3. Avoid Common Tax Mistakes
Many salaried individuals lose out on savings due to simple oversights.
- Poor Planning: Don’t wait until the end of the financial year. Plan your investments and deductions at the beginning of the year to ensure you use the full limits available.
- Choosing the Wrong Tax Regime: Compare the old tax regime (with deductions and exemptions) with the new tax regime (with lower tax rates but fewer deductions). While the new regime may seem simpler, the old regime might offer greater savings if you can take advantage of a wide range of deductions and flexible salary components.
- Ignoring Taxable Perquisites: Be aware that some perks, like club memberships, are considered taxable perquisites.
- Not Using Digital Tools: Utilize the digital platforms provided by your employer to submit claims, track limits, and store bills. This ensures timely and accurate submissions.
- Mismatch in Documents: Always cross-check the details in your Form 16 (issued by your employer), Form 26AS (an annual tax statement from the Income Tax Department showing all TDS), and Annual Information Statement (AIS). Mismatches can lead to penalties for a shortfall in advance tax.
4. Other Important Tips
- File Your ITR on Time: Filing your Income Tax Return (ITR) on time is crucial, even if your income is below the mandatory threshold. It helps in expediting any refund claims and establishes a healthy financial record.
- Consult with Experts: If you find tax planning confusing, seek advice from a financial advisor or tax professional. They can help you create a personalized plan to maximize your savings.