How to Save Tax for Salary above 10 Lakhs
Understanding how to effectively reduce your tax liability, especially for those earning over INR 10 lakhs annually, is crucial in India where tax rates are higher on hard-earned income in a manner that can take a large portion of it.
Table of Contents:
This article explores tax-saving strategies for higher income brackets. We will go through a series of actionable steps starting with deductions, investing, and restructuring salaries to help you not only save but also make your income work for you. With these techniques at your fingertips, you shall be assured of maximizing your earnings through informed, strategic tax planning.
How To Save Tax For Salary Above 10 Lakhs: Understanding your Tax Bracket
High-income earners face specific challenges such as: complex tax slabs and additional levies like surcharges and cess, which can immensely increase the overall tax burden. Without any strategic tax planning, the taxpayer might see a good amount of money going towards the income tax instead of savings or investment.
If your yearly income is above INR 10 lakhs, you fall into the higher tax brackets according to the Income Tax Act of India. Following is how your tax rate increases:
For income between INR 10 lakh and INR 50 lakh, the tax rate is 30%. Tax rate continues to increase for further income levels, it goes up to 30% plus the additional surcharges and cess for income crossing certain specified levels.
On top of the basic rate of tax, a surcharge is levied on higher income levels. For example, income between INR 50 lakh and INR 1 crore is subject to a 10% surcharge, while income above INR 1 crore is subject to a 15% surcharge.
A health and education cess of 4% is levied over the total tax plus surcharge, hence again increasing the tax outlay.
Utilizing Section 80C Deductions
Among the best ways to reduce your taxable income, Section 80C of the Income Tax Act will prove to be very worthwhile. This section offers many options that can help you save up to INR 1.5 lakh on your taxes annually. Here's how you can use the Section 80C deductions to your advantage:
Section 80C Meaning
Section 80C covers various investment and expense options that qualify for tax deductions. The total deduction under this section is restricted to INR 1.5 lakhs per annum, which could work out to be a considerably large sum for saving on your taxes.
Investment Options Under Section 80C
Public Provident Fund (PPF): PPF is a safe investment option with handsome interest rates and tax-free returns. The PPF account matures after 15 years and is a solid option for saving up for the long term.
Equity-Linked Savings Scheme (ELSS): For those who are ready to take moderate risks, ELSS funds invest in equities, offering the potential for higher returns with tax benefits. They have a lock-in period of just 3 years, the shortest among Section 80C investments.
National Savings Certificate (NSC): NSC is a fixed-income investment scheme that you can purchase from post offices. It offers tax benefits and a fixed return, with a maturity period of 5 years.
Life Insurance Premiums: Premiums paid for life insurance policies for self, spouse, or children may also be claimed under Section 80C.
Employees' Provident Fund (EPF): Contributions made towards your EPF account are eligible for a deduction under Section 80C. This not only helps in tax saving but also builds a retirement corpus.
Expense-Related Deductions Under Section 80C
Home Loan Principal Repayment: The principal component of your home loan EMIs is eligible for deduction under Section 80C, which can be a substantial amount.
Tuition Fees: Tuition fees paid for the education of up to two children are eligible for deduction under this section.
Senior Citizens Savings Scheme (SCSS): Investments in SCSS also fall under Section 80C, which may be deducted. It is a very good option for senior citizens looking for a safe and higher interest-bearing option.
Benefits of Section 80D: Medical Insurance
Health insurance is a very important element in securing good health and, therefore, a very effective tool for tax saving. Under Section 80D of the Income Tax Act, taxpayers are encouraged to secure health insurance, and in doing so, can enjoy substantial tax deductions on premiums paid. This is a benefit that ensures the health of your family while reducing your tax liability.
Under Section 80D, claiming deductions is pretty simple. If you pay premiums for insurance on yourself, your spouse, or dependent children, you can claim a tax deduction of up to INR 25,000 from your taxable income. Additionally, if you pay premiums for insurance on your parents aged 60 years or more, you can claim up to INR 50,000 as a tax deduction. In case you and your parents are senior citizens, you can claim a total deduction of up to INR 100,000 per annum. To avail of these tax benefits, ensure that the premiums are paid out of your assessable income and not in cash.
Taking Advantage of Home Loan Benefits
The biggest tax relief available for salaried people is the deduction available on home loan interest under Section 24 of the Income Tax Act. You are allowed to claim a deduction up to INR 2,00,000 on interest paid for a self-occupied house availed of a home loan. The deduction could save taxes worth a handsome amount, more so for a person in higher tax brackets.
Apart from interest deductions, the principal portion of the home loan repayment is allowed as a deduction under Section 80C up to the overall limit of INR 1,50,000 per annum. This also includes other eligible investments and expenditures within the same section, thus enabling you to make the most of your income for both tax savings and investment growth.
Education Loans and Tax Savings
Section 80E of the Income Tax Act presents an attractive way of saving tax if you have undertaken an education loan. The following are a few advantages:
Deduction of interest: Unlike most other deductions, Section 80E allows you to deduct the interest paid as a whole on an education loan from your taxable income. You can claim any amount of interest paid.
Qualifying Loans: The deduction is available on loans taken for higher education of self, spouse, children, or a student for whom you are a legal guardian.
Duration: You will be able to claim the deduction on interest that is paid on the loan from the year you start repaying the loan, and you can continue to claim for a total period of 8 years or until the interest is paid, whichever comes first.
Eligible Courses: The loan is to be availed for pursuing higher education, which includes all fields of study pursued after the senior secondary examination or its equivalent exam, from any recognized educational institution.
Planning for Retirement: Section 80CCD
Section 80CCD of the Income-tax Act provides for deductions available for contributions made to the National Pension System. Here's how investing in NPS can save taxes:
Deduction under Section 80CCD(1): Contributions to NPS are deductible to the extent of 10% of salary (in case of employees) and 20% of gross total income in case of self-employed, subject to a ceiling of INR 1.5 lakh under Sec 80CCE.
Additional Deduction under Section 80CCD: An additional deduction for investment up to INR 50,000 in NPS is available under this subsection, which is over and above the limit of INR 1.5 lakhs provided under Section 80C. This means you can potentially save up to INR 2 lakhs in a year.
Tax Benefits at Maturity: Although NPS has some conditions on withdrawal and annuity purchase at retirement, it allows tax-free withdrawal up to 60% of the corpus at age 60, with the rest being used for the
How To Save Tax For Salary Above 10 Lakhs: Other Deductions to Consider
If you earn a salary above INR 10 lakhs, availing of every tax deduction can substantially reduce your tax liabilities. A closer look at some of the less common but very highly beneficial deductions under the Income Tax Act:
Section 80G: Section 80G allows claiming deductions for donations made to some prescribed funds and charitable institutions. It's a way of reducing your taxable income by making contributions that support social causes.
How to claim it:
Ensure the charity is registered to offer deductions under Section 80G and provides a receipt.
The receipt has to carry the name, address, PAN of the trust, and the amount donated.
Different organizations have different deduction limits, ranging between 50% to 100%, and some have a qualifying limit based on your gross income.
Section 80TTA: Section 80TTA provides for a deduction on interest received from savings bank accounts up to a maximum of INR 10,000 in a year. This is allowed for savings accounts held with banks, cooperative societies engaged in the business of banking, and post office accounts.
How to Claim it:
Interest income from your savings account needs to be declared under "Income from Other Sources" in your tax return.
Claim the deduction under Section 80TTA on the interest earned up to INR 10,000, which can be beneficial for salaried people who might not have large interest incomes.
Section 80GG: In cases where an individual does not receive House Rent Allowance (HRA) from his employer and still pays rent for residential accommodation, Section 80GG allows the individual to claim a deduction for rent paid.
How to claim it:
The least of the following is allowed as the deduction:
Rent paid minus 10% of adjusted total income.
INR 5,000 per month.
25% of the adjusted total income for the year.
The Individual needs to fill out Form 10BA with details of payment of rent.
Salary Restructuring
Salary restructuring would involve revising the components of your salary to avail full tax exemptions and deductions under various heads of the Income Tax Act. Here's how you can optimize your salary structure:
House Rent Allowance: HRA is partly exempt from tax, and specific calculations are made with respect to your salary, the HRA you receive, the actual rent you pay, and whether you live in a metro or a non-metro. If you are paying rent and can include it in your salary, you can save a lot of tax.
Leave Travel Allowance: The LTA covers all your expenses of travel within India when on leave from work. To claim this exemption, you have to produce proof of travel, and it can only be claimed for two journeys in a block of 4 years.
Food Coupons/Meal Cards: These are exempt from tax, up to a certain limit per meal. Including food coupons in your salary can be a tax-efficient way of dealing with food expenses.
Education Allowance: Get exemption on education expenditure incurred for your children. This includes tuition fees for up to two children.
Transport Allowance: Claim exemption for transport expenses incurred for commuting to work.
Advanced Tax Planning Strategies
Tax planning is much more than just making claims. Timing of investments and understanding the taxability of all your income sources can be strategic.
Time Your Investment and Claims: Investing early in the financial year helps in staggered financial burdens and prevents you from losing out on the claims. For example, investing in ELSS at the beginning of the year spreads out the risk and does not force you to make lump-sum investments at the end of the year, which might not be financially feasible.
Diversification of Income Sources: Understand how different sources of income, such as capital gains generated from the sale of assets, dividend, and rental income, are taxed. Each type of income has its own tax rules, and planning your investments to minimize higher taxes is very important. For example, gains that are short-term are taxed higher than long-term gains; hence, holding investments for the long term can bring down your tax liability.
Tax Loss Harvesting: This technique involves the selling of investments to realize losses, which in turn can be set off against capital gains to cut down on tax. It is most helpful in managing capital gain taxability.
Rental Income: The choice between opting for a standard deduction of 30% and claiming actual expenses for maintenance of a rented property is what matters for a property owner. Planning those expenses and knowing their impact on the taxable amount can bring enormous tax savings.
Common Mistakes to Avoid
When you earn a salary above INR 10 lakhs, efficient tax planning can help you save significantly. Yet, there are several common pitfalls that may hinder your ability to optimize these benefits. Here's how to recognize and avoid these mistakes:
Several taxpayers miss out on deductions simply because they are not aware of them or do not know how they can qualify. Commonly overlooked deductions include:
Section 80C Investments: While most are aware of the INR 1.5 lakh limit, they might not know about lesser-known options like Sukanya Samriddhi Yojana for a daughter's future or Senior Citizens Savings Scheme for elderly dependents.
Health Insurance Premiums (Section 80D): Beyond just covering yourself and your family, you can also claim deductions for health insurance premiums paid for parents, which increases if your parents are senior citizens.
Interest on Savings Accounts (Section 80TTA): Many forget to claim up to INR 10,000 as a deduction on interest from savings accounts.
Donations (Section 80G): Contributions to charitable organizations can also offer deductions, but ensure they are made to approved entities.
Waiting until the end of the fiscal year to start planning your taxes can lead to rushed decisions, potentially overlooking better tax-saving investments or deductions. To avoid this:
Plan Early: The tax planning should begin at the start of the financial year. Spreading your investment burden allows you to better understand your financial flow and tax-saving options during the year.
Systematic Investment: Consider using systematic investment plans in ELSS or other eligible mutual funds, spreading the cost over the year, which can also help in capitalizing on the averaging of purchase costs in volatile markets.
Tax laws can be complex, and misunderstandings can lead to incorrect
filings:
Home Loan Benefits: Be clear on how much interest and repayment of the principal you can claim, particularly if you have a co-borrower.
HRA Exemptions: If you receive HRA, understand the conditions under which you can claim this exemption fully or partially.
New vs Old Tax Regime: With the option to choose between the new and old tax regimes, make a careful comparison of what one brings more benefits from, based on individual deductions and the income structure.
FAQ
Q1. What are the best tax-saving investments for someone with a salary above 10 lakhs?
Under Section 80C, one can make investments under Public Provident Fund (PPF), National Savings Certificate (NSC), ELSS (Equity Linked Savings Schemes), and tax-saving fixed deposits. Moreover, investment in the National Pension System (NPS) can also avail additional tax benefits under Section 80CCD(1B).
Q2. How can I use my home loan to save tax?
You can avail of deductions on the interest paid on the home loan up to INR 2 lakh under Section 24 and on the principal repayment under Section 80C up to the INR 1.5 lakh limit. Again, additional benefits are available under Section 80EEA for first-time homeowners if certain conditions are met.
Q3. Can I avail of tax benefits on health insurance premiums?
Yes, under Section 80D, you can claim a deduction for health insurance premiums paid for insurance for yourself, your spouse, children, and parents up to INR 25,000 for the family, and an additional INR 50,000 if you are paying for senior citizen parents as well.
Q4. Can I claim HRA if I am paying rent but also own a house?
Yes, you can claim HRA if you are paying rent for residence while owning a different property, provided that the one you rent is the one where you currently stay.
Q5. What is the benefit of the National Pension System (NPS) for high earners?
NPS allows for an additional deduction of INR 50,000 under Section 80CCD(1B) over and above the INR 1.5 lakh limit under Section 80C, which makes it a very attractive option for high earners looking to reduce their taxable income.
Q6. How can salary restructuring help in saving taxes?
The more allowances in your salary, the more exempt it becomes from taxes. Therefore, you would want your salary structure to include more allowances like HRA, LTA, etc., which are exempt partially or wholly from taxes.
Q7. Are there tax savings benefits associated with education loans?
Yes, under Section 80E, interest on education loans is deductible for 8 years, and there is no upper limit on the amount to be deducted.
Q8. What are the implications of opting between the new and old tax regimes?
The new tax regime has lower tax rates but with no benefits of most deductions like HRA, Section 80C, and so on. Therefore, comparison between the benefits offered under both the regimes concerning your financial position and deductions is necessary before making a decision.
Q9. Can I claim tax deductions on charitable contributions?
Yes, charitable contributions are deductible under Section 80G to the extent of 50% or 100% based on the charity to which the contribution is made.
Q10. What are some common mistakes to avoid in tax planning for a salary above 10 lakhs?
Common mistakes include not investing early enough in the financial year, not maintaining proper records of investments and expenses eligible for deductions, and not staying updated with the latest tax laws which can impact the decisions on where and how much to invest.
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