How to plan tax deductions for salaried income?
This post targets explicitly new investors who are getting started with investing. We cover the most common, i.e. 80C, 80D, HRA, home loan and educational loan interest deductions.
How to plan tax deductions for salaried income?
Posted on 18 Jan 2022 • Updated on: 01 Feb 2024
Author: Sayan Sircar
Tags: 
Tax
13 mins read
Tax
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This post targets explicitly new investors who are getting started with investing. We cover the most common, i.e. 80C, 80D, HRA, home loan and educational loan interest deductions.
Originally published: 18-Jan-2022
Updated: 02-Feb-2022 - post Union budget 2022
Updated: 02-Feb-2023 - post Union budget 2023
Updated: 01-Feb-2024 - no changes in direct/indirect taxes in interim budget 2024
Updated: 23-Jul-2024 - tweaks in new tax regime slabs and NPS deductions in Union Budget 2024
📚 Topics covered:
- Introduction to Personal Income Tax
- Tax Planning vs Tax Avoidance vs Tax Evasion
- Choosing Old vs New Tax Regime
- Standard Deduction and Reimbursement
- Leave Travel Allowance (LTA)
- 80C Deductions
- 80D Deduction for Medical Insurance Premiums
- 80E Deduction on Educational Loan Interest
- Deduction for Interest on Home Loan
- House Rent Allowance - HRA
- NPS Contribution
- 80G Donations
- 80TTA Savings Bank Interest
- Proof Submission
Introduction to Personal Income Tax
Disclaimer: Taxation is a dynamic concept, and the content of this article is valid on the date of publication and any subsequent updates. Always consult a professional tax advisor before doing anything that leads to taxes being due.
In this world nothing can be said to be certain, except death and taxes. — Benjamin Franklin
Paying income tax is one of the inevitabilities that everyone with income has to deal with sooner or later. However, new investors are typically shocked to see how much taxes they are paying on their salary slips for the first time.
The most basic tax calculation is:
Tax is due on net income, i.e. gross income minus deductions. Deductions allow you to save tax. Tax in India is based on slabs. As the income increases, taxes are levied at higher rates on the additional income above thresholds. This means that the highest tax slab is applied only to the income above the value over which 30% is applicable, not to the entire income. There is a surcharge on the total tax only if the taxable income exceeds ₹50 lakhs.
This article only covers the most common tax deductions available to salaried employees. There are more available on the Income Tax website, but the applicability is less due to conditions that are not for every taxpayer.
Tax Planning vs Tax Avoidance vs Tax Evasion
Many investors approach tax planning from the “how to save most tax” angle, resulting in inappropriate investing or spending money to save tax. While the first problem is easy to rectify, the second is spending more to save tax, which is an unfortunate and permanent loss of capital. For example, do not spend 100 to get 30 back. A deduction that is not suitable for your future financial goals is an effective wastage of 70 of capital since you get 30 back as reduced taxes only after spending that 100.
Before we start, we should keep in mind the key difference in attempts to pay less tax, i.e. planning vs avoidance.
Tax planning uses legal tax-saving provisions to pay a lesser amount of tax. A typical example is section 80C which allows the reduction of taxable salary up to ₹1.5 lakhs/year under allowable deductions. This article will focus on some usual tax planning provisions.
Tax avoidance uses loopholes in tax laws to reduce tax payable. Therefore, it operates in a legal and moral grey area. Tax evasion is illegally not paying due taxes.
All tax deductions claimed must have adequate proof that should be submitted to the employer and retained as records in case of any future audit from Income Tax authorities.
Tax planning starts in April and not in December/March: How should you plan your investments and taxes in April?
If you are using a CA to file your tax return, ensure that you have added them to the Income Tax portal in the right way: Do not share login and password of the Income Tax portal with your CA. Here is what you should do instead..
Related:
When should you verify your Income Tax return as per the new rules effective from 1st April 2024?
Choosing Old vs New Tax Regime
The new tax regime, introduced in Budget 2020 as Section 115BAC, is a more straightforward taxation system that forgoes a few regular deductions (like 80C, HRA etc.) in return for lower tax slabs. Every taxpayer must check, based on their investments and expenses like a house on rent, life insurance premiums and investments like EPF etc., whether the new tax regime is applicable to them or not, and if not, they should choose the old tax regime. Generally, if your taxable income is more than ₹15 lakhs and you have deductions like 80C and HRA, then you should take the old tax regime.
As per Budget 2023 (1st Feb 2023), the new tax regime will be the default option from 1st April 2023 onwards. We have an easy-to-use calculator here: Which is the best tax regime to choose from April?
Standard Deduction and Reimbursement
An amount of ₹50,000 deduction is available for salaried taxpayers that replaces the previous deductions on transport allowance and medical bills. Some companies offer mobile/internet bill reimbursements as well as food coupons that are tax-free.
Budget 2024 (July 2024) has increased the deduction to ₹75,000 for the new tax regime.
Leave Travel Allowance (LTA)
LTA allows you to claim tax deduction on the actual journey cost by air/rail/bus inside India for self and family. The deduction is available twice in a block of four calendar years. The current block year is 2022-25, and the next one will be 2026-29.
80C Deductions
Under 80C, you can claim a deduction of ₹1.5 lakhs/year. At the 30% tax bracket, you can save ₹45,000 (plus cess) as taxes.
We will use a waterfall approach to fill the 80C limit by moving to the next step only if anything is left within the 150,000 limits:
- Step 1: Mandatory EPF contribution if you are salaried
- Step 2: Life Insurance premium - Why you should have term insurance?
- Step 3: Housing loan principal
- Step 4: Children’s school tuition fees
- Step 5: Long-term investments as per goals - NSC, PPF, ELSS, NPS, five-year tax saving FD etc.
Read more about 80C deductions here: How to best use 80C deductions to plan your taxes?
80D Deduction for Medical Insurance Premiums
If you are paying health insurance premiums, and you must before starting investing, you can claim a deduction on the premium and GST on the premium. The deduction is:
- up to ₹25,000 for self, spouse and dependent children (₹50,000 if the taxpayer is a senior citizen)
- for parents who are not senior citizens (<60y), an additional deduction of ₹25,000
- for parents who are senior citizens (>60y), the additional deduction is ₹50,000
₹5,000 is available as a separate deduction for preventive health check-ups. If you have spent money on medical treatment for dependents, then under 80DDB, you can get up to ₹40,000 as a deduction. For senior citizens, this deduction is up to ₹1 lakh. For disability of self and dependents, there are Section 80U and Section 80DD.
80E Deduction on Educational Loan Interest
If you have an educational loan, you can claim the entire interest amount without any limit as a deduction. For example, if you have paid ₹3 lakhs as total EMI on your educational loan in the financial year and of that ₹1 lakh is interest, then your taxable income reduces by ₹1 lakh.
There has been an argument given by taxpayers that an educational loan should be allowed to continue since there is tax benefit on the interest. This is an example of the spend-100-to-save-30 fallacy since you are paying ₹1 lakh as interest and saving ₹30,000 on tax. However, you are still paying a net ₹70,000 to the bank as interest.
Prepaying a loan depends on how you are investing. If you are investing enough for long-term goals in equity mutual funds or stocks and the loan interest rate is low, you can only then consider prepaying the loan. Of course, if you decide to be loan-free since that gives you the feeling of freedom, please go ahead and prepay the loan.
Deduction for Interest on Home Loan
Section 24 exists to allow deduction of up to ₹200,000 on interest payable on a home loan. First-time home buyers also have an option of saving an extra ₹50,000 deduction (Section 80EE) on the interest paid under certain conditions. There are a lot of conditions associated with both these deductions and should be carefully researched before going for the loan.
House Rent Allowance - HRA
If you are salaried and live in a rented house, you can deduct a part of your taxable income under the HRA head. The deduction amount is the minimum of:
- actual HRA, which is a part of CTC
- X% of basic salary plus dearness allowance (X = 50 for metro cities, 40 otherwise)
- rent paid minus 10% of (basic salary plus dearness allowance)
You can pay rent to your parents or family members as long as they own the house. If you declare HRA to your company, you need the landlord’s PAN card, which will show up in the landlord’s own Annual Information Statement (AIS). This last step has been brought in to prevent fake rent receipts from being submitted and to ensure the landlord pays taxes on rental income. If HRA is not given by the company, Section 80GG can help to claim a deduction.
NPS Contribution
It is our view that young investors should not invest in NPS at all due to blocking the amount until age 60 and compulsory ann
uity purchase requirement for 40% of the corpus. We will cover the details here.
If you still must invest in NPS, restrict the amount to get the ₹50,000 deduction under Section 80CCD, which does not really give much benefit if your retirement is far away, and to get any employer match under the corporate NPS scheme since that is a part of CTC. Up to 10% of salary can go to NPS (limit of ₹7.5L) under corporate NPS as company’s contribution, just like EPF. Under the new tax regime, this limit has been increased to 14% in Budget 2024 (23-Jul-2024).
80G Donations
There is a tax deduction available on donations that are made under section 80G. You will get a receipt post donation that has the PAN of the charity/organisation. Depending on the type of charity, there is a 50% or 100% deduction on the amount donated.
80TTA Savings Bank Interest
Section 80TTA allows for a deduction of interest from the savings account in any bank or post office up to ₹10,000 per year. Your taxable income is therefore reduced by a maximum of ₹10,000 leading to tax savings. If the total interest exceeds ₹10,000, you need to pay tax at slab rates on the amount above ₹10,000.
This section is only for savings bank interest and not for Fixed Deposit interest. Since bank accounts are linked to PAN, not disclosing this interest in the income tax return might lead to a tax notice. 80TTA, like all other tax deductions, is not available under the New Tax Regime.
To claim the deduction, you need to fill numbers in two places in the income tax return form:
- Add the actual interest in the section on Income from other sources by adding up all the bank accounts under your PAN
- Add the amount up to ₹10,000 in Section 80TTA
The form will calculate the deduction accordingly.
Proof Submission
Submitting Proofs
Companies generally ask for proofs starting December. You need to retain the original receipts and only send the scanned copy as proof. If you miss a deduction or the company did not accept it, it can be claimed while filing taxes. If the company has deducted more tax, you can ask for a refund while filing.
The general way to submit these proofs is:
- Investments done online like PPF, NPS, ELSS etc. have PDF statements that you can submit
- Expenses like insurance payments will similarly have a receipt which is either digital or physical. Either is fine
- For HRA, usually, the rent agreement is sufficient. However, some companies ask for the rent receipts, which should be scanned and submitted. No rent receipt is needed if the total rent is less than ₹1 lakh per year: Which mistakes in tax-proof submission can make you lose your HRA exemption?
Actual vs Declared Deductions
If you are submitting proofs in Dec-Jan and the expenses happen after that, like ELSS SIP deduction, insurance payments, rent for Feb-Mar etc., then you can handle it like this:
- some companies allow a bank statement where SIP deductions have been shown for the previous months
- you can prepare rent receipts for advance rent and get them signed by the landlord
- last year’s insurance payment receipt and this year’s declaration
Glass is Half-Empty vs Half-Full
A salaried person has limited options to save tax. Once those options are exhausted, there is no point in thinking more about taxation. As your salary increases, you will pay around ₹34,500 as taxes in the higher slabs per lakh of additional income. It is your wish if you want to anguish over the ₹34,500 tax paid or spend and invest the ₹65,500 income. Overall, tax planning is a subset of investment planning. Invest as per goals and optimise tax deductions so that you can meet the goals with a minimum amount of taxes paid.
Related Articles
- Interim Budget 2024: which is the best tax regime to choose from 1st April 2024?
- Which tax regime is better if you want to invest in PPF or ELSS or have a home loan?
- Should you choose the new tax regime from 1st April 2023?
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This post titled How to plan tax deductions for salaried income? first appeared on 18 Jan 2022 at https://arthgyaan.com
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