An employee’s guide to tax-planning

Taxes grow without rain. It’s one of the great certainties of life. At some point, you’ll start to pay attention (if you haven’t yet) to how much tax outflow is being inflicted on your income. When you do, you’ll probably come to the realisation you’re paying more than you should. Don’t worry, we’ve all been there. It’s only a matter of educating yourself.

It’s the start of the new financial year. Start it by taking a closer look at your tax-saving options. Tax laws can be complex and hard to understand, so we’ve made an easy-to-understand guide for you to refer to.

Tax-free claims

These are tax benefits all salaried people should have access to. All you need to do is have a chat with your HR about the tax-free components or benefits they offer within their salary structure.

1. House Rent Allowance: If you live in a rented house, you can claim HRA to lower your taxes. HRA is usually a component in your salary. Subject to certain rules, it could either be partially or wholly tax-exempt. But if you don’t live in a rented accommodation, this allowance is fully taxable.
2. Leave Travel Allowance : You can claim this reimbursement on expenses you incur on traveling within the country. It includes air, rail and road travel. LTA can cover travel expenses you make towards your immediate family as well.
3. Telephone/Internet reimbursement: You can get 100% exemption against your actual bill amount. This is applicable only for postpaid connections. Traditionally, this benefit was available for employees who used their phone and internet for official purposes. Nowadays that’s almost everyone.
4. Fuel and Driver’s Salary Reimbursement: A reimbursement for employees who own and operate their own vehicles. The cost of petrol or diesel can be claimed as tax deductible for up to Rs 1,800 per month if you drive a car with an engine capacity below 1.6 litres. Rs 2,400 is allowed if your car’s engine capacity is above 1.6 litres. Driver’s salary is exempt up to Rs 900 per month.
5. Meal Benefit: Meal vouchers can reduce your taxable income by up to Rs 36,000 every year. These vouchers may be used to buy food and non-alcoholic drinks, usually during work hours.
6. Books & Periodicals: It’s quite common for some professionals to have to keep themselves updated with industry trends and practices. These employees can purchase books, newspapers, periodicals and other relevant literature and get reimbursed on the bills. The actual amount is fully tax exempt.

Tax exemptions under Section 80C

You can reduce up to Rs 1,50,000 from your total taxable income by using a combination of these tax saving provisions included in the Income-tax Act. These can be investments or expenditures incurred towards specific items. For example, suppose your taxable income is Rs 6 lakhs, through investments listed under 80C, you can bring that down to 4.5 lakhs.

1. Employee Provident Fund (EPF): This is a fund meant to secure a person’s retirement. It’s built through monthly contributions from the employee and their employer. There’s a fixed rate of interest (8.65%) that accrues on your EPF balance. When the fund matures, both the interest and the principal are tax-free. The fund will be available to you even when you resign, should you choose to withdraw it then.
2. Public Provident Fund (PPF): This was introduced by the Ministry of Finance a few decades ago. Similar to the EPF, the deposits you make into this fund and the interest accrued (8.1%) on them are tax-free.
3. Voluntary Provident Fund (VPF): This is a corpus fund that you have more control over, than the traditional EPF. You can periodically move funds into this account, which accrues an interest rate of 8.75%. This is something you can invest in in addition the EPF or PPF.
4. Equity Linked Savings Scheme (ELSS): This is a type of diversified equity mutual fund that gives you tax benefit, and could also get you handsome returns when the capital appreciates. It has a lock-in period of 3 years. However, you should be aware that it comes with a risk, as does any investment in the equity market. If risk is not for you, then you should look at safer options like the EPF, PPF and NPS.
5. Unit Linked Insurance Plan (ULIP): The ULIP is a life insurance plan, which also gives you the option to invest in a number of qualified stocks, bonds and mutual funds within in. You can set off up to Rs 1,50,000 under 80C and 80CCC.
6. Tuition fees: If you’re a parent, chances are you’re going to be spending money every year on tuition and education. This can be turned in to a tax benefit too. Up to Rs 1,50,000 a year is fully tax-deductible for up to 2 children per income tax assessee.
7. Sukanya Samriddhi Account: If you’re the parent of a girl child, under this scheme, you can deposit up to Rs 1,50,000 every year and get interest at the rate of 9.2% per annum. The account will mature when the girl turns 21. 1.5 lakhs a year is fully tax deductible.

Beyond Section 80C

If you want to reduce your taxable income by more than what 80C provides (Rs 1.5 lakhs), you can look into these financial investment options. The kind of investments you choose should depend on your ability to save and your appetite for risk.

1. National Pension Scheme (NPS): The NPS is an umbrella of investment options, which is aimed at helping you invest your pension wealth. Any citizen between the ages of 18 and 65 can invest in those options. Any contribution you make up to Rs 50,000 can be offset against your taxable income.
2. Capital gains set-off: If you’ve made a loss on a capital asset sale, ( if your cost of acquisition is more than your selling price, you can offset your losses against any future capital gains you make. This means, you can carry forward your losses to your IT returns. But the important thing to remember is capital gains losses can be set off against other capital gains only. You can’t deduct from your taxable salary income, for instance.
3. Rent paid without HRA (House Rent Allowance): If your salary doesn’t include HRA, but you stay in a rented house, you can still get a tax benefit on the rent you pay. Ask your HR for form 10B.
4. Education loan repayment: You can claim a deduction on the interest you pay on your education loan.
5. Medical insurance and health check up: You can get a deduction for up to Rs. 25,000 on medical insurance premiums that belong to you, your spouse, dependent children and parents. If your parents are senior citizens, then the limit increases to Rs 30,000. Additionally, any preventive health check-ups you do is also deductible from your taxable income by up to Rs 5,000 a year.

Thanks for reading our tax-savings guide. We hope it helps you do more with your income and savings. This is the first of many tax-related resources we’ll bring you. There’s a lot of information out there, and we’d like to decode as much of it as possible for you. If you like this guide, pass it along to your friends.