5 smart ways of Tax planning in ITR
Tax planning in nut shell: Everyone wants to save Taxes as much as possible and why not! It is your hard earned Income and you must save taxes as much as you can through smart tax planning. For Tax saving most of the people only focus on exemptions and deductions but one point they miss out is the salary optimisation by doing changes and adjustments in salary components. The salary you get have different components like Basic salary, DA, HRA, LTA, Conveyance, Performance pay, Food coupons, Miscellaneous etc. Basic and DA are complete taxable, rest of the components are partially or fully non taxable. So first thing for salary optimisation is to keep Basic salary and DA minimum i.e. 50% (not more than that). Currently as per IT rules, you need to keep Basic salary/DA at least 50% of your CTC. Rest of the components you need to maximise so that you get maximum tax exemption.
Once you have done salary structure optimisation now you can apply for exemptions and deductions. Exemptions and Deductions are 2 different terminologies. Exemption is a component that is not considered for Taxation to give taxable income and Deduction is a component where an amount is deducted from Taxable income (for some reason) to benefit Tax payers.
Total Income – Exemptions = Taxable income
Taxable income – Deductions = Net taxable income
Choosing a right Tax slab: There are 2 tax regimes: old tax regime and new tax regime, you need to choose one. The new tax regime has lower tax rates than old tax regime.
You can claim Exemptions and Deductions only in old tax regime while in new tax regime you cannot any of the claims. So if you fall under higher income bracket and you have exemptions and deductions to claim then you should go for Old tax regime and if don’t have much exemptions and deductions to claim you should go for new tax regime. So rest of this article by default become for those who are still in Old tax regime.
There are the 5 smart ways thourgh which you can maximise your Tax saving along with Salary optimisation and in last there is an example to practically implement these ways in a salary structure. So here these 5 ways:
First Way: EXEMPTION 1
EPF Employer’s provident fund: You can get exemption for PF investment of minimum Rs. 15000 ( Rs. 1800/month) but you can maximise it as it has maximum limit of 12% of basic salary. If your salary CTC is Rs. 15 lakh, your basic salary will be Rs. 7.5 lakh and exemption of EPF will be 12% of 7.5 lakh will be Rs. 90000. PF attracts good interest rate of 8.1% you should maximise your investment here as per your need.
Second way: EXEMPTION 2
Exemptions under section 10:
House Rent allowance HRA: The most important component of Exemption. If you are living in rented house, you must claim this exemption. As per rule you have to calculate 3 figures and whichever is minimum you can claim that as HRA. First– Actual HRA received; Second– 50% of basic (for metros)/ 40% of basic (for non-metros); Third– Rent minus 10% of Basic. When you calculate these 3 figures and whichever is least, you can claim that as HRA. You can notice that second and third points are in inverse correlation so if you increase second, third will reduce and vice versa. Just remember if you increase your Basic salary more than 50% of CTC to claim more HRA, it will have impact in other components. You should optimise HRA as per your rent and must claim.
Children Education Allowance CEA (2 kids): It is 100/month for 2 kids. If you have 2 school-going kids you can claim here Rs. 2400.
Children Hostel Allowance CHA (2 kids): It is 300/month for 2 kids. If you have 2 kids who are living in day boarding or Hostel you can claim here Rs. 7200.
Leave Travel Allowance LTA: You can claim LTA when you and your family have travelled for some holiday. You can claim LTA in any 2 financial years in span of 4 years. Whenever you have travelled you should claim LTA and it should be of the longest and most expensive of all for both sides to and fro. For example: your family of 4 have travelled by air of fare Rs. 10000/person to and fro then you can claim LTA of 10000X4X2= Rs. 80000 in that financial year.
Reimbursements: There are many reimbursements like Internet, food coupons, travel, fuel etc. If you are getting these reimbursements from your employer you can claim these reimbursements. For example you can claim Food coupons taken in food card as a reimbursement upto Rs. 3000/month. So 3000X12= Rs. 36000 for that year. But your employer must provide you this amount as food coupon in your food card then you can claim this amount.
Third way: DEDUCTION 1
Standard deduction: Here you don’t have to do anything; Government is giving this deduction of Rs. 50000 to all.
Deductions under 80C: The most popular deduction of all. If you have invested in any these – PPF , EPF (apart from employers contribution), LIC premium , ELSS, principal amount payment towards home loan, Tuition fee, NPS section- 80CCD(1A), Sukanya smriddhi yojana (SSY) ,NSC , Senior citizen savings scheme (SCSS), ULIP, tax saving FD for 5 years etc. You can claim upto Rs. 1.5 lakh in total. The good components here are PPF, ELSS and SSY and rest can be considered from person to person need.
Fourth way: DEDUCTION 2
Deductions under 80CCD: Here you claim can claim additional Rs. 50000 for NPS plus upto 10% of your net salary as NPS contributed by your employer. It is not so popular option as there are certain drawbacks of NPS which makes it less attractive so you can keep this option when you have no option left and you have want certain deduction.
Deduction under 80D: The Health insurance premium comes in this section. You can claim upto Rs. 25000 for personal and upto Rs.50000 for parents. Generally this much premium is not paid by public. Usually a nominal Health Insurance of around Rs. 25000 for family is purchased by most of the people. Health insurance is very essential today you must buy and claim it.
Fifth way: DEDUCTION 3
Deduction under 80E, 80EEA and 80EEB: Section 80E is deduction for interest on education loan, and 80EEA is deduction for interest on Home loan up to Rs. 3.5 Lakh. 80 EEB is the deduction for interest on loan for purchasing Electric Vehicles. One should remember that this deduction is only on interest part so you should not take any loan till it is your actual requirement just for the sack of saving tax.
Other small Deductions: First- Deduction on Precautionary Health checkup upto Rs. 5000. One should do regular Health checkup atleast once a year as precautionary measure, it is really important because of rising health issues. If you do that, don’t forget to claim this deduction. Second- Deduction on saving account interest upto Rs. 10000 (Rs. 50000 for senior citizens).
Apart from these, there are lot of deductions in Chapter 6* of Income Tax Act but they are not so useful for individuals. If you follow these 5 smart ways of Tax saving you will save a good amount and it is said “a penny saved is penny earned.” You must try to save as much as you can.
Example- Let’s suppose your annual CTC is 13 lakh and you have opted for old tax regime. This is how you can plan so that you don’t have to pay any Tax.
| GROSS SALARY | 13,00,000 | |
| EXEMPTIONS | EPF | 50,000 |
| HRA | 3,00,000 | |
| CEA and CHA | 9,600 | |
| LTA | 50,000 | |
| Reimbursements | 20,000 | |
| Taxable Income | 8,70,400 | |
| DEDUCTIONS | Standard deduction | 50,000 |
| 80C investments | 1,50,000 | |
| 80D Medi claim | 25,000 | |
| 80E/80EEA Interest on Education loan/ Home loan | 1,50,000 | |
| Other Small deductions | 10,000 | |
| Net Taxable Income | 4,95,400 | |
Since your taxable income is under 5 lakh hence you will get full rebate and net Tax will be ZERO. This how you can smartly plan and save the Tax.
Finance Tapasvi
