Ultimate Income Tax Saving and Tax Planning
I’m sure all of us want to save taxes, legally. We also research the same. Everyone is aware of 80C, 80D, Standard Deduction, etc.If we don’t reduce our taxable income by utilizing all exemptions then no matter how many deductions we claim, we won’t be able to take full advantage of tax savings. Income Tax Act provides two types of relief for salaried employees to reduce their tax liability – first is Exemption and second is Deduction. Mostly, people use Exemption and Deduction interchangeably, which is incorrect.
Hence, EARNING – EXEMPTIONS = TAXABLE INCOME.
and, TAXABLE INCOME – DEDUCTIONS = NET TAXABLE INCOME.
So, if you remove all exemptions from your earning then you get taxable income. On this taxable income you can claim deductions like 80C, 80D, etc. And after deductions you get the final net taxable income, on which you have to pay tax. Hence, it is important to reduce your taxable income to gain further benefit of deductions.
how to save income tax on salary
An annual salary of Rs 10 lakhs and income tax zero It’s not possible So is it practically possible to pay zero tax with a salary of Rs 10 lakhs If I tell you in a summary, it is definitely possible What all things we should implement practically and how can we do tax savings We have to decide that But I’ll show you through calculations that zero tax is possible on Rs 16 lakhs salary And the purpose of this video is not to claim that every person with Rs 10 lakhs salary can pay zero tax.
The main purpose is to teach all the tax saving options That I will discuss line by line with you On the top, we’ll take annual CTC and then we’ll see line by line that where we get tax saving options What are the exemptions and deductions available With that, I’ll add some bonus tips through which tax savings can be maximized we’ll be discussing that how can we maximize tax savings with salary
tax planning is to choose between the new and the old tax slab
The first step for tax planning is to choose between the new and the old tax slab That with which one you want to go A very basic rule is hereThe people who are in the high income bracket should choose the old tax slab Because we have many investment and deduction options there Under the new tax slab, no such deductions are available That means tax will be applicable on the income But tax rate is less in the tax slabs That means there is already a rebate in the tax rates So the new tax slab should be chosen by the people who are in the low income bracket Or those who don’t want to do any investment planning and they don’t want to be in any hassle I did a detailed comparision of the old and new tax slabs so you can watch that as well Let’s directly go on excel and see line by line that what all exemptions do we get after the annual CTC what all deductions can we claim and how can we maximize the tax savings
Let’s say the annual CTC (Cost To Company) of a person is Rs 16 lakhs In 90% of the private companies, the salaries are given on the basis of CTC So if the CTC of a person is Rs 16 lakhs, according to the new wage code, companies have to keep a minimum salary as 50% of the annual CTC So we considered that here It will be imposed from FY 2022-23 If we take 50% of the annual CTC, the basic salary is Rs 8 lakhs
Firstly, there is an exemption. Many companies provide a facility of Provident Fund So the minimum requirement for EPF is Rs 15,000, i.e Rs 1800 is the minimum requirement But for maximum tax saving, most of the companies give an option to cut down the PF So you get tax exemption on employers contribution on up to 12% of basic So I considered that here This option is available in most of the companiesSo let’s take 12% of basic. Rs 96,000 are exempted After decreasing that, the gross salary remains Rs 15,04,000 After this, we have exemptions under section 10 on which no tax is imposed.
What are these exemptions?
HRA, which I assumed as 25% of CTC Let’s assume approximately When we live on rent, we can give 25-30% of the salary for rent as a thumb rule So I assumed 25% of the CTC in a way so that we can take the HRA component as tax exemption However, there is a detailed rule for it The actual HRA you take or Rent-10% of your basic salary Or 40% or 50% of your basic salary The minimum out of these 3 is considered So I assumed approximately 25% of CTC on which we want to take the tax exemption So that is around Rs 4 lakhs Many people have a confusion that can we claim HRA if we’re living in our own house If you own a house and you’re living in it, you cannot claim HRA In that case, you can claim a tax deduction on the interest or principal portion of your home loan But there are situations in which people are living in different cities.
For example, some people own a house in Delhi but they live in Gurgaon If they bought this house on loan then they can claim the principal interest With that, if they are living in Gurgaon on rent, then they can claim it’s HRA also Similarly, people can live in distant cities If a person has a house in Delhi but he’s doing a job in Mumbai Then he can pay HRA there and here he can claim home loan principal and interest deduction And I would like to give one more bonus tip. There are many people who live with their parents And their house is in another city. In this case, they can pay the rent to their parents What is its benefit? Firstly, you’ll get an HRA deduction claim Secondly, if your parents don’t have any income So no income tax will be applicable up to Rs 5 lakhs and it will be 0. Or if you are in the 30% income tax bracket But your parents are in the 10% income tax bracket Then 20% tax can still be saved Then comes children’s education allowance It is Rs 100 per month and if you have 2 children then you can claim Rs 2400 There is a children’s hostel allowance which is around Rs 7200 for 2 children, i.e Rs 300 per month per kid However, it is not a very big amount so I can remove it but first, let’s see the final calculations Then comes LTA which is Leave Travel Assistance/Concession In some companies, it is called LTC So you can claim it for 2 years in any 4 years
Let’s say you are on a holiday So the bonus tip is that you can claim the LTA of such a holiday trip in which you travelled maximum Let’s say you have 4 members in your family and you all travelled by air and its expense was Rs 50,000 So you should claim the transportation fair in this case So I assumed Rs 50,000 fare for air travel for a family of 4 and we deducted it Many companies try to save people’s taxes in the form of reimbursement But reimbursement is not a part of your salary So I considered it 0 because I don’t want to take any unrealistic figures So now the remaining salary is Rs 10,44,400 Now let’s talk about the other available deductions Till now we discussed about the exemptions
Firstly, we get a standard deduction. You don’t have to do anything because government is providing this and Rs 50,000 will be deducted from your net salary So we considered it Then comes section 24 which is called loss from house property Many people have confusion here Many people think that the interest of their home loan is Rs 2 lakhs then they will get a tax rebate on it It is not true Let’s say you live somewhere else, you are claiming HRA and you have a house Then you have to consider the rent of that house Whether it is on rent or not Notional rent concept is applied here How much is the average rent in that locality Let’s say if the rent is Rs 10,000 Then you have to add Rs 10,000 in your income So how do we get a rebate here? Whatever your rent is, notional or actual We’ll take it and subtract the property tax from it Then 30% of the rent is considered as the annual maintenance So that is also deducted by the government Then the interest portion of the home loan is subtracted So if this is positive and you’re making a profit then you’re not getting any tax rebate In fact, this amount is being added in your income Rather you would have to pay the taxes So when you will be able to claim the rebate? When the interest will be more than the rent portion So how much can we claim for a loss from house property? The maximum limit is Rs 2 lakhs That means we get up to Rs 2 lakhs tax deduction for loss from house property So I considered it as the maximum If we take rent of a house Rs 10,000 approximately And if a person took Rs 30 lakhs loan then 25-30 thousand would be going as interest So loss from house property is approximately Rs 2 lakhs So I took this as an assumption We are talking about maximum tax savings. Maybe your home loan interest rate is more or less than this It depends. But we’re talking about the maximum tax saving. The next deduction is under section 80C which is the most popular deduction All your investments with mutual funds or insurance, everyone tells about section 80C But understand carefully that the total limit of all the options is Rs 1.5 lakh What are these options? In EPF, one is the employer’s contribution which we already took above This employer’s contribution is not included But the money which is deducted from your side in PF comes under this So maybe your contribution is 10-12% So you may get a tax rebate of 12% of basic But the overall limit under section 80 C is Rs 1.5 lakhs. If the total amount is less in EPF, you can invest in PPF (Public Provident Fund) We can include the principal of the home loan Then we can invest in ELSS (Equity Linked Saving Scheme) which are a type of tax saving mutual funds This is a very good option. However, there is a lock-in of 3 years Then we have an option of ULIP (Unit Linked Insurance Plan) Not a very good product according to me but if you’ve invested then you should claim your tax savings.
under 80C save tax up to 150000
The life insurance premium is also considered under 80C Sukanya Samriddhi Yojana is also a very good product If you have a daughter then you can plan this for her You get tax savings in National Saving Certificate. However, the interest rate is not good enough Post office FD and 5 year FD The interest rate is not high enough but you get tax savings in it If you are paying the tuition fee for your children, then you can claim it under section 80C NPS Sec 80CCD (1A) NPS means National Pension Scheme If you’ve invested in it then it is also considered under Sec 80C I’ll discuss 2 more clauses about NPS in which your savings can be maximized There’s no such benefit of NPS under the 1.5 lakh limit of Sec 80C But we can claim an additional tax rebate of Rs 50,000 under Sec 80CCD (1A) And if you invest Rs 50,000 in NPS other than 80C, then you get a tax rebate on that also We can definitely take that option as well Then comes one more option is NPS. Here, we were investing our own money But here, the employer can also contribute to it In many companies, they make a flexible structure In which you can opt if you want to invest more in NPS and employer will also contribute to it So the employer can add up to 10% of basic in NPS Sorry, it’s not basic. It is 10% of your net salary So 10% of net salary is Rs 1,04,000 This is also a very good option and you’re getting a higher limitApart from this, there are more options Under Sec 80D, you can claim up to Rs 25,000 rebate on medical insurance premium or health insurance And if there’s any senior citizen in your house, this limit becomes Rs 50,000 But I considered Rs 25,000 limit here Then comes Sec 80E, interest on education loan If you took an education loan for higher education, then you get tax rebate on its interest portion I considered Rs 50,000 approximately Let’s say a person took a loan of Rs 5-6 lakhs So if a 10% annual interest rate is charged, then Rs 50,000 is almost there So you can easily consider Rs 50,000 here There was one more clause Sec 80EE for the people who took home loans in 2016-17 At that time, an additional rebate of Rs 50,000 was given on the interest That was for a lifetime so if by chance you took a home loan in 2016-17, you can claim that rebate even today Then comes Sec 80TTA, in which you can claim a tax rebate on interest on a savings account of up to Rs 10,000 So if I do all these calculations according to the Rs 16 lakhs CTC Then now our taxable income is Rs 3,54,960
How much will be the tax applicable?
In the old tax slab, no tax is applicable up to Rs 2.5 lakhs From Rs 2.5 – Rs 5 lakhs, there’s a slab of 5% but if your overall income is less than Rs 5 lakhs Then your income tax becomes 0 because you get a tax rebate of Rs 12,500 So under this planning, we’re aiming to bring our income less than Rs 5 lakhs so that the tax applicable become 0 And it is not practica lSo now, let’s try to make it a practical scenario because I agree with you The interest on the savings account, Let’s go reverse. The interest in your savings account will be added to your income We haven’t considered it yet so let’s take it 0.
tax saving options other than 80c
90% of people might haven’t taken a loan in 2016-17 So let’s consider it as 0. Till now, our tax is 0 If we talk about the interest on education loan, maybe many people would not take any education loan But many people take it. So the people who took education loan should definitely claim it but Let’s consider it 0 for the practical scenario. Till now, the income is less than 5 lakhs Let’s see some more scenarios Many people might not have children so let’s make it 0 Anyways, it was not much amount So let’s consider it 0 Income is still less than Rs 5 lakhs.
What are the main components?
We should definitely invest in EPF We should definitely claim HRA If you can claim LTA, you should definitely do it because it’s a big amount Everybody gets the standard deduction If you took a home loan, you should definitely claim it If you’re planning for any property, you can take a home loan for it and reduce the tax You should definitely claim 80C Now it comes to NPS. It is such a segment in which some people want to invest and some don’t It is a retirement product so you need to understand that it is for the long term So you can decide how much you want to invest The medical insurance premium is also a product that everyone should take So I will not reduce this So even if I reduce Rs 25,000 more, the income tax applicable would still be 0 So practically, income tax can be easily 0 for a salary of Rs 16 lakhs But there is a practical problem that the in-hand salary is now below Rs 5 lakhs So is the money left is sufficient for all the expenses? According to me, now he only has to spend on the normal expenses Like grocery bills, utility bills Because many expenses are already covered Since HRA is claimed, so rent is already paid Medical insurance and other insurance amount is already paid EMI of home loan is already paid And rest of the investments are also done So the remaining money is just for the normal expenses
Let’s make it more practical
You might say that the situation is tight in Rs 16 lakhs. So let’s change it to Rs 15 lakhs In this situation, the taxable income is Rs 4,11,500 Let’s consider that this person doesn’t want to invest much in NPS In this, let’s say that he only want to invest Rs 20,000 so let me write it here The taxable income is still below Rs 5 lakhs So I think anyone with an annual income of Rs 14-15 lakhs can bring down the taxable income below Rs 5 lakhs, i.e Income tax can be 0. So we discussed line by line that how can we maximize our individual tax saving Now I want to give one more bonus tip to you Especially related to home loan When we borrow a home loan, in many cases husband/wife is also working You may want to buy a big house If we’re planning for a big house, we might take a big home loan So in this case, we can take a joint home loanBecause of this, both can individually claim the interest and principal of the home loan That means both will individually get a tax deduction we discussed mainly for the salaried class people.
tax saving options for salaried
So what all can you see on your salary slip? Basic and DA which occurs in all salaries. Then there might be some allowances such as HRA, Leave Travel Allowance (LTA), Conveyance, Washing, etc. Lastly, in some companies you might probably also see reimbursements such as Mobile, Food Coupon, Internet, etc. On the Basic and DA part, you will have to pay full tax. But on allowances and reimbursements you can get many exemptions. Then you might think of taking your full salary under HRA or other allowances instead of Basic and DA. So you can take exemption on full salary. then obviously the Government and Income Tax Department have thought of this long back. To prevent you from saving alot of money through exemptions, the government has two things in order.
Tax saving is HRA.
First key to tax saving is HRA. HRA majorly helps in saving tax. The government assumes that an employee will need to relocate for job purposes and will need to rent a new place there. Paying pre-tax on the new house’ rent will unburden employee’s pockets a little hence government gives exemption on HRA For finding HRA, you need to calculate 3 numbers the lowest among these 3 will be your actual HRA exemption value.
1. Actual HRA received – if no HRA component is given in
your salary slip then you will not get HRA exemption.
2. 50% of basic for metros and 40% of basic for non-metros –
suppose your basic is Rs 5 lakh then you can
get maximum Rs 2.5 lakh as HRA exemption annually.
3. Rent – 10% of basic – suppose your basic is Rs 5 lakh
and your annual rent is Rs 3 lakh
then benefit = 3 lakh – (10% of 5 lakh=) 50,000
= Rs 2.5 lakh is your maximum HRA exemption.
Calculate all these 3 values and the least value among them will be your HRA exemption amount. Also note that the second and third components work in reverse order. If you reduce Basic value, then third component will reduce. Then, overall third component will be bigger value and your exemption will be larger. But in the same case, second component of 50% basic will also reduce So for every rent there is an optimized number you can keep for HRA to save maximum tax. So now I will show you an excel calculation. Suppose an employee has total salary Rs 10 lakh He only received HRA and basic salary His total annual rent is Rs 4 lakh In this case if we put 4 lakh as HRA & 6 lakh as Basic without any thinking then the employee’s net tax saving will be Rs 3 lakh. But, if basic is increased to Rs 6.6 lakh & HRA is decreased to Rs 3.3 lakh then the employee’s tax saving will be Rs 3.3 lakh that is, 30,000 more extra savings! for metros and non-metros. If you use these
numbers, you can easily get to your optimized value.
Leave Travel Allowance (LTA)
Next component is Leave Travel Allowance (LTA) and very few companies and employees take its advantage. If you and your family takes 2 trips within 4 years which is very common for taking vacations then your travel expenses for train, flight, etc., can be exempted under Leave Travel Allowance (LTA) subject to the fact that you get LTA from your company. Suppose your family of 4 travels from Delhi to Andamans. Take one way ticket flight as Rs 10,000 then total travel expense for flights would be Rs 80,000 for 4 people, which can be completely exempted under LTA. Think of it as not paying 30% tax, hence your ticket is 30% cheaper. So do travel all over India and ask your employer to pay you LTA. Although third and fourth allowances may not give big exemptions but leaving them out is stupid. They are Children Education Allowance & Hostel Allowance. They are only applicable for employees with kids. Maximum Rs 9,600 exemption for up to 2 kids is possible annually. But if you have kids who study in school then definitely take Education Allowance, and if they stay in boarding, day-boarding, college hostel, then also claim Hostel Allowance. In future, these limits may increase so your benefits may increase as well.
Next up is Reimbursements. If you make any expenses on behalf of the business and the business pays you back for it as reimbursement then generally you don’t have to pay any tax on it. Say, your cellphone is predominantly for office use and you take reimbursement for the cellphone bill then that is tax exempted. Say, you are working from home and have taken high speed internet connection to work efficiently.Then that internet bill can also be reimbursed by the company and be tax exempted. Hence, try to claim such small expenses made on behalf of the company as reimbursements rather than as allowances. Submit the billing as proof to the company and get them all tax exempted.
Salaried employees can firstly opt for Rs 50,000 standard deduction, which is a no-brainer. Suppose, your taxable income comes to Rs 10 lakh then it automatically becomes Rs 9.5 lakh. The next deduction which everyone is aware of is 80C. Under 80C, you can get deductions for investments in PPF, Sukanya Samriddhi Yojana (SSY), kid’s tuition fees. If you want to take more risk then you can also invest in Equity Linked Saving Scheme (ELSS). However, 8% investment in PPF is probably better than 13% investment in mutual funds. And, PPF interest rate also fluctuates a little like right now it is supposed to go below 7% which I cannot give a surity about but in the past few years it has consistently been giving around 8% returns. Second deduction which people often talk about that can give you Rs 50,000 deduction is 80CCD (NPS) deduction. But I don’t suggest it a lot since the lock-in period is high. Upon retirement, you have to buy minimum 40% annuity which also does not give high returns and at that time due to inflation the amount may be equal to peanuts for you. So if I’m doing tax planning for myself I’ll only opt for NPS if absolutely necessary.
For example, my income is at Rs 5.5 lakh and tax payment is Rs 12,750 then I’ll invest 5000-6000 in NPS and reduce my tax liability to under Rs 5 lakh so my full 12,750 tax gets saved. Otherwise, I’d rather opt for another investment
which provides better liquidity rather than NPS. Now, after deductions we discuss some expenses on which you can claim tax deduction too. This expense is Health Insurance (80D). Under health insurance, you can claim maximum upto Rs 25,000 personally and Rs 50,000 for parents. But do note that common salaried employees never claim such high health insurance, it usually ranges between 7000-10,0000. And while taking it understand that you are essentially saving 30% tax on this if you fall under the 30% tax slab rate. Next, if you’ve taken a home loan or electric vehicle loan, for 8.5%-9% then as per some Conditions you can claim deduction on the interest. Now, do not forcefully take such loans to save tax. See it as getting 30% discount on interest rate if you fall in 30% slab and fulfil all the T&C. Effectively, your 10% interest rate will become
7%-7.5% interest rate with this deduction. So only take loans if necessary. And when you go to banks to take loans, the associates there will inform you of all the deductions you will get. Lastly, some small deductions like Rs 5000 for preventive health check-up, which we suggest anyone above 25-30 years to go for once a year atleast and take the 5000 deduction for it. For interest on savings account and FD accountyou can get Rs 10,000 deduction and Rs 50,000 deduction for senior citizens.
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