How salary individuals can save income tax through 80C and beyond?

How salary individuals can save income tax through 80C and beyondHow salary individuals can save income tax through 80C and beyond?

Are you wondering whether you are getting salary or peanuts? Your offer letter or appointment letter might be showing good CTC, but you might be getting low salary after income tax. As a salary individual, I always used to struggle on how to save income tax on my salary. In this article, I would discuss about what constitutes salary and the ways to save income tax on your salary. This post looks lenthy as we wanted to cover major parts of the tax saving options in detailed way.

What is salary?

Salary is chargeable to tax on "due" or "receipt" basis whichever is earlier. As per Sec. 17(1), salary includes the following:

  • Wages
  • Annuity or Pension
  • Gratuity
  • Any fees, commissions, perquisites or profit in lieu of or in addition to any salary or wages
  • Any advance of salary
  • Any payment received by an employee in respect of any period of leave not availed by him
  • The balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable
  • Transferred balance in a recognized provident fund to the extent it is taxable
  • Contribution by the Central Government or any other employer to the account of an employee under a pension scheme referred to in Sec. 80CCD.
  • Finally, the assessee i.e. the person liable to tax would sum total his or her salary and would pay tax according to the slab applicable to him/her.

Also read: Complete guide on New Pension Scheme (NPS) in India

The various tax slabs one needs to select according to their age are:

India Income tax slabs 2013-2014 for General taxpayers and Women

Income tax slab (in Rs.)       

  • 0 to 2,00,000                         No tax
  • 2,00,001 to 5,00,000             10%
  • 5,00,001 to 10,00,000            20%
  • Above 10,00,000                   30%

India Income tax slabs 2013-2014 for Senior citizens (Aged 60 years but less than 80 years)

Income tax slab (in Rs.)       

  • 0 to 2,50,000                        No tax
  • 2,50,001 to 5,00,000            10%
  • 5,00,001 to 10,00,000           20%
  • Above 10,00,000                  30%

India Income tax slabs 2013-2014 for very senior citizens (Aged 80 and above)

Income tax slab (in Rs.)

  • Up to 500000             No tax
  • 5,00,001 to 10,00,000 20%
  • Above 10,00,000        30%

Sur charge/cess extra

Income above 1 crore to attract 10% tax surcharge.

How are salaried employees getting less income by paying tax?

Tax laws change every year. The taxation system prevalent in India is progressive. That is, if you earn more you pay more. But if you earn more than Rs.10 Lakhs year then there is no escape from the maximum tax bracket of 30%. Another major reason is lack of knowledge. These are a number of ways a salaried employee can save taxes being within the purview of the Income Tax act. I am making a small attempt to help you understand these provisions, which should help you taking better decisions.

How salary individuals can save income tax through 80C and beyond?

The aggregate of income computed under different heads after clubbing of incomes and set off of losses is known as Gross Total Income. An assessee can make investments under the following sections and thus save tax by reducing the amount chargeable to tax. These Sections are:

1) Tax savings by investing in 80C (LIC, PPF, and ULIP etc)

This is stated under section 80C and maximum eligible deduction is Rs 1 Lakh.

Deduction allowed for individual and HUF assessee.

Deduction in respect of:

  • Life insurance premia (max deduction shall be limited to 10% of sum assured if the life policy is issued on or after 1-4-2012)
  • Deferred annuity
  • Contribution to statutory/recognized provision fund/PPF
  • ULIP
  • Subscription towards certain eligible equity shares or equity linked saving scheme (ELSS) mutual funds.
  • Investment in National Saving Certificate
  • Repayment of housing loan
  • Tuition fees of any @ children of the individual
  • Term deposit (lock in period would be 5 years)
  • Subscription to notified bonds issued by NABARD
  • 5 year time deposit in an account under post office time deposit rules
  • Tuition fees: Tuition fees paid for full-time education in an Indian university, college, school, educational institution, for any two children are eligible for deduction under Section 80C. It is pertinent to note that tuition fees do not include payment towards any development fees or donation or payment of similar nature.
  • Quantum of deduction: Actual amount paid/ deposited subject to a maximum of Rs. 100000.

Also Read: Best ELSS Saving Mutual funds to invest in 2013

2) Tax savings by investing in certain pension funds

  • This is stated under section 80CCC, maximum allowed is Rs 1 Lakh.
  • Deduction in respect of investing in certain pension funds.
  • Quantum of deduction: Actual amount contributed subject to a maximum of Rs. 100000.
  • Any amount received on surrender and as pension received will be TAXABLE.

3) Tax savings by contributing towards notified pension schemes.

  • This is stated under section 80 CCD, maximum of Rs 1 Lakh.
  • Deduction in respect of contribution to pension scheme of Central government.
  • Eligible assessee: Individual employed by the Central Government or any other employer or to an individual who is self employed
  • Quantum of deduction: The amount of contribution not exceeding 10% of salary. Deduction allowed for both employer and employees’ contribution.10% of gross total income if the individual is self employed.
  • Salary= basic +dearness allowance (DA)
  • Any amount received on surrender and pension shall be taxable if it is not invested in the same previous year for annuity plan.

Also read: SBI Pension Plan Scheme – Annuity Plus-Review

Section 80CCE: Limits the deduction of section 80C, 80CCC, 80CCD (other than employer’s contribution) to Rs. 1 Lakh

5) Tax savings by investing under an equity savings scheme

  • This is stated under section 80CCG. 50% of amount invested or Rs. 250000 whichever is lower.
  • It allows deduction to a resident individual.
  • Deduction in respect of investment made under an equity savings scheme.
  • Only one time deduction in lifetime.
  • Lock in period =3 years
  • This scheme has started from FY 2012-13 onwards. You can invest in direct stock markets or through Rajiv Gandhi Equity Saving Scheme (RGESS) Mutual funds. These mutual funds would be issued every year and would have a lock-in period of 3 years.

Also read: How is the performance of RGESS mutual funds of Feb/Mar-2013

6) Deduction for making payments of MEDICLAIM INSURANCE PREMIUM or contribution to central govt. health scheme or any payment made on account of preventive health checkup of his or his family

  • This is stated under section 80D.
  • Available for Individual and HUF assessee.
  • Deduction in respect of any sum paid in the previous year to GENERAL INSURANCE CORPORATION (GIC) or any other insurer towards medical insurance premium on the health of himself/his family/his parents whether dependent or not. It also includes payment made on account of preventive health checkups of the assessee or his family or his spouse.
  • Quantum of deduction: An aggregate of amount paid with a maximum limit of Rs. 15000; In case of preventive health checkups: Max amount allowed is Rs. 5000.
  • Mode of payment: Any mode, including cash for preventive health checkups; Any mode other than cash in all other cases

7) Deduction in respect of payments made towards insurance premiums for dependents with disability

  • This is stated under section 80DD.
  • Eligible: Resident individual / HUF. Rs. 50,000 OR Rs. 100,000 in case of person with severe disability.
  • Deduction is respect of insurance premiums paid for the medical treatment of the dependent  physically disabled.
  • DEPENDENT: SPOUSE, CHILDREN, PARENTS, BROTHERS AND SISTERS DEPENDENT ON THE INDIVIDUAL.

8) Deduction in respect of payments made towards medical expenses for dependents with disability

  • This is stated under section 80DDE.
  • Eligible: Resident individual / HUF. Rs. 40,000 OR Rs actual amount whichever is less.
  • Deduction is respect of maintenance including medical treatment of a dependent who is a person with disability.
  • DEPENDENT: SPOUSE, CHILDREN, PARENTS, BROTHERS AND SISTERS DEPENDENT ON THE INDIVIDUAL.

9) Deduction in respect of payments made towards payment of interest for loan on higher education.

  • This is stated under section80E.
  • Eligible assessee: individual.
  • Loans to be taken only from institutions
  • Deduction for entire amount of interest paid on a loan taken from any financial institution or approved charitable institution for pursuing higher education of assessee himself or his relative on full time basis. No exemption for part-time courses.
  • RELATIVE HERE REFERS TO THE SPOUSE, CHILDERN OR THE STUDENT FOR WHOM, THE INDIVIUAL  IS A LEGAL GUARDIAN.
  • Quantum of Deduction: Entire amount of interest paid during previous year. Maximum period of deduction: 8 years

Also read: Best Investments to get regular or monthly income

10) Deduction in respect of rent paid satisfying certain conditions.

  • This is stated under section 80GG.
  • Eligible assessee: individual.
  • Self/spouse/minor children/his HUF does not own house at any place.
  • Quantum of deduction: Minimum of the three limits:
  •                                      Rent paid -10%of adjusted total income
  •                                      2.25% of adjusted total income
  •                                      Rs 2,000 per month.

11) Deduction in respect of certain donations for approved research association or institution or rural development

  • Stated under section 80GGA.
  • Assessee has no business & profession income.
  • Quantum of deduction:100% of sum donated.
  • Note: No deduction shall be allowed under this section in respect of any sum exceeding Rs. 10000 unless such sum is paid by any mode other than cash. (Wef. AY 3013-14).

12) Housing loan interest u/s 24

An individual is eligible for Rs 1.50 Lakhs housing loan interest as deduction u/s 24. This amount is beyond housing loan capital repayment as per section 80C.

Now let us discuss a few sample terms which would be useful for you to start with.

PUBLIC PROVIDENT FUND:

  • Public Provident Fund (PPF) is a savings-cum-tax-saving instrument India. It also serves as a retirement-planning tool for many of those who do not have any structured pension plan covering them. The account can be opened in designated post offices, branches of SBI and branches of some nationalized banks was the first private sector bank, which was authorized to open PPF accounts.
  • His/her legal guardian may open a PPF account under the name of a minor.
  • A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account, and a maximum deposit of Rs.100000/ can be made in a PPF account in any given financial year, which is TAX FREE, subject to other provisions i.e. as mentioned above maximum deduction allowed would be Rs. 100000 with or without PPF.
  • The current interest rate effective from 1 April 2013 is 8.70% Per Annum (compounded annually).
  • After 15 years of maturity, full PPF amount can be withdrawn and all is tax free, including the interest amount.

HOUSE RENT ALLOWANCE:

HRA is given to the employee by the employer to meet the expenses for the rent of the accommodation, which the employee might have to take for his residential purpose. It is taxable under the head Income from salaries.

  • HRA received                          :  XXX
  • Less: exemption U/s 10(13A) :  XXX
  • TAXABLE AMOUNT                 :XXX

Exemption u/s 10(13A):

Minimum of these three

  • Actual HRA received
  • 50% of basic (if in metro) / 40% of basic (if in non metro)
  • Rent paid minus 10% of basic

Basic here means Basic + DA

Thus HRA is based on salary, place of residence, rent paid and HRA received.

Example: Let us consider a hypothetical case or evaluate with an example.

  • Consider the Salary Components as follows:
  • Basic: Rs. 20,000, Dearness Allowance (DA) =Rs. 5000 and HRA: Rs. 10,000
  • So a total salary of Rs 35,000
  • Let actual rent paid be: Rs. 10,000
  • You live in Mumbai (A metro city).
  • Now let us understand how the rule works.
  • – The actual HRA received from employer = This Amount is Rs. 10,000
  • – The actual rent paid for the house minus 10% of the salary (Excluding HRA Component)
  • – This would be Rs. 10,000 – 10% of (Rs. 20,000 + Rs. 5,000) = Rs. 10,000 – Rs. 2,500 = Rs. 7,500
  • – Fifty percent 50% of your basic salary=10000
  • Since you live in a metro, this would be 50% of Rs. 20,000 = Rs. 10,000
  • The minimum amount out of 1, 2 and 3 is Rs. 7,500. Therefore, the amount of HRA exempt from tax is Rs. 7,500 per month.
  • The remaining HRA amount of Rs. 2,500 (Actual HRA received Rs. 10,000 Minus exempt HRA Rs. 7,500 = Rs. 2,500) would be added to your taxable income.

Conclusion:  In my opinion, knowing these things about tax will be a good start for someone who is starting to earn. This is basic information that most people should have, and at the same time it’s not likely that it overwhelms you either. Thus save income tax and invest in best investments to grow your money.

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Suresh
How salary individuals can save income tax through 80C and beyond

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