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How to Save Tax for Salary above 20 Lakhs

Updated: May 24


How to Save Tax for Salary above 20 Lakhs

Is your salary income more than INR 20 lakhs? Do you feel the pinch of higher tax rates? With strategic planning and smart financial decisions, you can significantly reduce your tax liability and maximize the amount of your take-home salary. The complexity of Income Tax is known to all. However, with the right guidance, one can unlock substantial savings. In this article we will explore a variety of tax-saving strategies especially designed for high income groups.

 

Table of Contents:

 

We will take you through essential tips, from how to use the deductions under the appropriate Sections of the Income Tax Act to making wise investment decisions so that you not only remain compliant with the tax laws but also get the best value for your hard-earned money. Let's get into the details on how to keep more of your salary above 20 lakhs in your pocket.


Understanding the Impact of Crossing the 20 Lakhs Threshold on Tax Liabilities


The tax system in India is designed into brackets, meaning that as the income rises, so does the tax rate. For individuals whose income exceeds 20 lakhs, the applicable tax rate also increases, so their income falls under a higher tax slab. More specifically, the tax rate is 30% for the income slab above 10 lakhs up to 50 lakhs. This rate is exclusive of the health and education cess of 4% and any applicable surcharge, which is 10% for income between 50 lakhs and 1 crore.


Impact of Crossing the 20 Lakh Threshold on Your Tax Liabilities: Crossing the 20 lakh income threshold significantly increases your tax liabilities. You move from a 20% to a 30% tax slab for your income exceeding 10 lakhs. This transition means that every incremental income earned above that limit is now taxed at a higher rate, thus increasing your overall tax burden. Efficient tax planning becomes crucial to minimize this liability through legal channels and smart investments.


How to Save Tax for Salary above 20 Lakhs by Using Available Deductions


It is very important that you avail all the possible deductions under the Income Tax Act to bring down the taxable income to the best possible extent. Here's how you can avail yourself of some key sections:


Section 80C: Maximize the INR 1.5 Lakh Limit

Section 80C allows for a deduction of up to INR 1.5 lakhs from your taxable income. You can manage to get this if you invest in Public Provident Fund (PPF), National Savings Certificates (NSC), Equity-Linked Savings Scheme (ELSS), and others. These investments will not only cut your tax down but will also help you save money and ensure your financial security.


Section 80D: Deductions for Health Insurance Premiums

Under Section 80D, the premium paid on health insurance for self and family is allowed for deductions. The limit for deduction is INR 25,000 for individuals below 60 years, which can increase to INR 50,000 if the insurance covers senior citizens. The deduction is over and above the limits allowed under Section 80C.


Section 80E: Deduction on Interest Paid on Education Loans

If you have taken an education loan, the interest that you pay on that loan is deductible under Section 80E. It is available for a maximum period of 8 years or till the interest is paid, whichever is earlier. There is no limit on the amount which can be claimed under this section. It is, therefore, a very valuable option in reducing the tax base, especially for high-income earners supporting higher education for themselves or their children.


How to Save Tax for Salary above 20 Lakhs Through Additional Deduction Avenues


In addition to the basic deductions under the Income Tax Act, there are several other sections that provide opportunities to further reduce your taxable income. Here's a detailed look at some of these sections which can be particularly beneficial for those with a salary above 20 lakhs:


Section 80CCD(1B): Additional Deduction for Investment in NPS


National Pension System (NPS): An additional deduction of up to INR 50,000 is available under Section 80CCD(1B) for investments made in the NPS. This is over and above the deduction of INR 1.5 lakh available under Section 80C. NPS is a government-sponsored pension scheme that not only helps in tax saving but also secures your retirement with a steady pension.


Section 24: Deduction on Home Loan Interest


Home Loan Interest: If you have a home loan, the interest paid on the loan can be claimed as a deduction under Section 24. The limit for this deduction is up to INR 2 lakh per annum for a self-occupied property. There is no upper limit for the deduction on rental properties, but the loss under the head of house property that can be set off against other heads of income is restricted to INR 2 lakh per annum. This deduction can significantly reduce your taxable income, especially if you are in the higher income bracket.


Section 80GG: Deductions for Rent Paid


Rent Paid: For those who do not receive House Rent Allowance (HRA) as part of their salary and are paying rent, Section 80GG offers a deduction. The deduction allowed is the least of the following:

  • Rent paid minus 10% of adjusted total income.

  • INR 5,000 per month.

  • 25% of the adjusted total income.


To claim this deduction, you must not own any residential accommodation at the place where you currently reside, perform office duties, or carry on business or profession.


Strategically Using These Deductions


By strategically planning and utilizing these additional deductions, individuals earning above 20 lakhs can effectively reduce their taxable income. It’s important to:

  • Invest wisely in schemes like NPS which provide long-term benefits along with tax savings.

  • Consider the tax implications when deciding on buying versus renting a home, especially if you have the option of claiming significant deductions on home loan interest.

  • Maintain proper documentation and receipts for rent payments and investments to substantiate claims during tax filing.


Save Tax for Salary above 20 Lakhs Through Allowances


For individuals with salaries above 20 lakhs, optimizing the structure of allowances in the salary can lead to significant tax savings. Here's a closer look at some of the key allowances that are exempt from tax under certain conditions, and strategies for structuring them effectively:


Key Allowances Exempt from Tax


  • House Rent Allowance (HRA):

  • Tax Benefit: HRA is provided to employees to meet the cost of renting a house. The exemption on HRA is the minimum of the following three amounts:

  • Actual HRA received.

  • 40% of salary (50% if you are residing in a metro city).

  • Excess of rent paid annually over 10% of annual salary.

  • Optimization Tip: If you live in a rented house and are paying a substantial rent, ensure your HRA is structured to maximize this benefit.


  • Travel Allowance (Conveyance Allowance):

  • Tax Benefit: Conveyance allowance is given to employees to compensate for the cost of commuting between home and work. Up to a certain limit, this allowance is exempt from tax.

  • Optimization Tip: While this exemption has been largely replaced by the Standard Deduction of INR 50,000, understanding its historical context is useful for specific cases where it might still apply.


  • Education Allowance for Children:

  • Tax Benefit: Exemption for children's education allowance is up to INR 100 per month per child for a maximum of two children.

  • Optimization Tip: Although the amount might seem small, every little bit helps, especially when combined with other educational benefits like tuition fees under Section 80C.


  • Leave Travel Allowance (LTA):

  • Tax Benefit: LTA covers the cost of travel for holidays within India, exempt twice in a block of four years.

  • Optimization Tip: Plan your vacations well to ensure you claim this exemption during the allowed blocks.


Structuring Your Salary to Maximize Allowances


  • Dialogue with Employer: Open a dialogue with the HR or payroll department to understand how your current salary is structured and what components can be restructured.

  • Flexibility in Salary Breakdown: Negotiate flexibility in your salary breakdown to include components that can attract tax exemption. For example, taking more HRA or restructuring the transport allowance as a reimbursement is more tax-friendly.

  • Fully Reimbursable Components: Structure your salary to have components that are fully reimbursable on bill submission, such as medical expenses, telephone expenses, and even food coupons, which are exempt up to a certain limit.

  • Review Annually: Tax laws and personal circumstances can change. Review your salary structure every year to make sure it is in line with the tax benefits.


Save Tax for Salary above 20 Lakhs Through Investment Strategies


For those with a salary above 20 lakhs, effective investment strategies are not only crucial in building wealth but also offer excellent tax benefits. Let's have a look at some long-term investment strategies that can be especially useful to high-income earners:


  • Equity-Linked Savings Scheme (ELSS)

  • Tax Benefits: Investment in ELSS qualifies for tax deduction under Section 80C of the Act, with an upper limit of INR 1.5 lakh per annum.

  • Features: ELSS funds put most of their corpus into equities and have a lock-in period of three years, shorter than most tax-saving investments like PPF or NSC.

  • Benefits: Besides the tax savings, ELSS funds offer the potential for higher returns, linked to stock market performance. The lock-in period will also help inculcate a habit of disciplined investment.


  • Unit Linked Insurance Plans (ULIPs)

  • Tax Benefits: Premiums paid for ULIPs are deductible under Section 80C. The maturity benefits are tax-free under Section 10(10D) if certain conditions are met.

  • Features: ULIPs are essentially a combination of insurance and investment where the policyholder can choose where to invest in various funds available under the plan based on their risk appetite.

  • Benefits: ULIPs offer dual benefits of life insurance and investment growth, thus suiting both long-term financial planning and tax saving.


  • Pension Plans

  • Tax Benefits: Contributions towards pension plans are deductible under Section 80CCC, which is within the overall limit of Section 80C. Then, there is the new pension scheme (NPS), which offers an exclusive deduction up to INR 50,000 under Section 80CCD(1B), over and above the Section 80C limit.

  • Features: These plans typically require contributions over a long period, with the funds being utilized to generate a retirement corpus.

  • Advantages: The pension plans are an attractive investment due to the tax benefits besides creating a retirement fund. It saves quite a bit of tax for high income earners.


  • Tax-Saving Fixed Deposits and Bonds

  • Tax Benefit: Tax-saving fixed deposits that come with a lock-in period of 5 years are available for deduction under Section 80C. Certain types of bonds, such as infrastructure bonds, also enjoy tax benefits.

  • Features: Fixed deposits are low-risk and have fixed returns. Bonds, depending on their type and issuer, have varying risk and return profiles.

  • Advantages: For conservative investors, these are good tax-saving instruments that are also extremely safe investments. They offer predictable returns with capital protection.


How to Save Tax for Salary above 20 Lakhs Through Smart Use of Loans


For people whose income is above 20 lakhs, loans, especially home loans, can be a very smart tool of tax planning. Knowing how these loans can be used to avail tax benefits is essentially the critical area of consideration.


Tax Benefits of Home Loans


  • Deduction on Principal Repayment: The principal amount repaid towards the home loan is eligible for a deduction of up to INR 1.5 lakh annually under Section 80C of the Income Tax Act. This amount is part of the overall limit under Section 80C for deductions up to INR 1.5 lakh, which also includes other investment avenues like PPF, NSC, ELSS, etc.

  • Deduction on Interest Payment: The interest amount payable on a home loan for a self-occupied property is eligible for a deduction of up to INR 2 lakh annually under Section 24 of the Income Tax Act. In case the property is let out, there is no upper limit on the interest amount that can be deducted; however, the loss that can be claimed against other heads of income in a year is capped at INR 2 lakh.


Advanced Tax Planning Strategies


For those earning above 20 lakhs, traditional tax-saving measures may not be enough to reduce tax liabilities. That is why they need to get involved with advanced tax planning. Here are some of the advanced strategies that can ensure tax payments are kept at an optimum and financial efficiency is maximized:


Income Splitting with Family Members


  • Concept: Income splitting entails the distribution of income among several family members to maximize the benefits of lower tax brackets, exemptions, and deductions available to them.

  • Implementation: This can be done by gifting money to adult family members or investing in instruments where the returns are taxed at the hands of the recipient. For example, interest from fixed deposits made in the name of a spouse or adult children can be taxed at their hands, mostly at a lower rate if they have no other significant income.

  • Benefits: This strategy not only helps in reducing the total tax liability but also aids in keeping the family's overall income under lower tax brackets.


Creation of HUF (Hindu Undivided Family)

  • Concept: A Hindu Undivided Family is a special tax entity recognized under the Indian tax laws. It allows the members of a Hindu family to pool their incomes as a family unit and enjoy tax benefits similar to an individual taxpayer.

  • Formation: A Hindu Undivided Family is automatically created at the time of marriage under Hindu law. However, for tax benefits, it needs to be registered separately and should have a separate PAN card.

  • Tax Benefits:

  • Separate Entity: HUF is treated as a separate entity under tax laws, which means it has its own slab rates and deduction under the Income Tax Act.

  • Deductions and Exemptions: Like an individual, the HUF will be able to claim deductions under sections 80C, 80D, etc., and other relevant provisions of the Income Tax Act. It could hold properties, invest, and run businesses that, with some planning, could be used to reduce tax liabilities.

  • Distribution of Income: Income from investments made out of the corpus of the HUF would be taxable in the hands of the HUF, thereby saving significant amounts of taxes for the family as a whole.


Considerations and Cautions


Though these strategies work very well, they demand careful planning and adherence to legal provisions to avoid undue attention from the tax authorities. It is important:

  • Ensure Legality: All transactions must be legal and adequately documented. Any form of income splitting must actually reflect the distribution of income and not be a mere arrangement to avoid taxes.

  • Consult Tax Professionals: The intricacies involved in the above make it advisable that tax professionals or financial advisors be consulted in this regard to ensure that these strategies are applied effectively and in compliance with the law.

  • Regular Review and Adjustment: Tax laws and family financial situations keep changing. Regularly reviewing the strategies and adjusting them to keep them relevant and effective and aligned with the law would be required.


The Role of Insurance in Tax Planning


  • Life Insurance: The premium paid towards life insurance policies is eligible for tax deduction under Section 80C of the Income Tax Act; the maximum limit is INR 1.5 lakhs. For people belonging to higher income brackets, life insurance serves dual purposes: financial protection to their dependents in case of an unfortunate event and reduction in taxable income to a considerable extent.

  • Health Insurance: Premiums paid for health insurance will yield a deduction under Section 80D. This offers a deduction of up to INR 25,000 for insurance premiums paid for self, spouse, and dependent children, and another INR 25,000 for parents—if parents are senior citizens, up to INR 50,000. Given the high prices of medical care, health insurance will be for two purposes—financial planning for health emergencies and tax reduction.

  • Critical Illness and Rider Benefits: Benefits such as critical illness or riders may also be considered. Premiums paid towards such additional benefits are mostly allowed as tax deductions, increasing the value of the policy and giving extended coverage while tax is optimized.


Maximizing Benefits: To maximize the tax benefits of insurance:

  • Select plans on the basis of coverage required and then look at the tax benefits.

  • Keep track of premiums paid and ensure they do not cross the limit of deduction allowed under respective sections.

  • Review and revise the coverage periodically to match changing financial and family circumstances.


Common Mistakes to Avoid

Tax planning is a must to maximize tax savings and avoid unnecessary financial strain. However, many individuals make mistakes that result in suboptimal results:


  • Not Maximizing Deduction Limits: Most of them fail to utilize the deduction limits in the respective sections like 80C, 80D, etc. to the optimum level. This happens mostly because of either a lack of awareness or lack of proper planning.

  • Ignorance of Timing of Investments: Last-minute investments, instead of aligning with one's financial goals and risk profile, can turn out to be mere hasty decisions. This is a big blunder. The latter part of the year is usually the most hectic; early and planned investments always hold greater financial and tax planning advantages.

  • Overlooking Other Eligible Deductions: Other eligible deductions that usually go unnoticed are in respect of education loans (Section 80E) and donations (Section 80G). By ignoring the opportunities available to reduce the tax liability, most of us end up increasing our taxable income.

  • Inadequate Documentation: Maintaining proper receipts and documents is the most important thing; the lack of it can prevent one from claiming eligible deductions at the time of filing the return of income.

  • Not Seeking Professional Advice: Due to the complexities in the tax laws, a tax professional could help people, especially in higher tax brackets with diverse income and investment sources.


FAQ

Q1. What tax slab applies to a salary above 20 lakhs?

Beyond 10 lakh up to 50 lakh, the income tax is levied at 30% tax rate. This tax rate does not include the health and education cess of 4% and the surcharge on the tax, if applicable for high-income earners.


Q2. How can I reduce my taxable income if I earn above 20 lakhs?

Make full use of the deductions that you get for investments made under section 80C up to INR 1.5 lakh on PPF, ELSS, etc., 80D for health insurance premiums, and 80E on interest paid on education loans. You can also make use of other available deductions such as 80G for donations to charitable institutions.


Q3. Are there any tax benefits specific to high-income earners?

High-income earners can make use of schemes that offer tax deduction but might not have a limit, such as the National Pension System, which provides an additional deduction of INR 50,000 under 80CCD(1B).


Q4. Can a home loan help save on taxes for someone earning more than 20 lakhs?

Yes, interest on the home loan can be claimed as a deduction under Section 24 up to INR 2 lakh. In addition, the repayment of the principal amount can be claimed as a deduction under Section 80C.


Q5. Which is the best tax-saving investment for an income earner above 20 lakhs and in the 30% tax slab?

Equity-Linked Saving Schemes (ELSS) are a popular choice for high-income earners as they offer the potential for high returns along with a tax break. Other options include PPF and NPS, which offer good returns with tax benefits.


Q6. How does the surcharge work on my tax liability?

For incomes above 50 lakh to 1 crore, a surcharge of 10% will be levied on the tax amount. For incomes above 1 crore to 2 crores, the surcharge increases to 15%. The surcharge is in addition to the basic tax and cess.


Q7. Is there any benefit to high-income earners in filing returns early?

Filing returns early does not benefit directly in regard to tax liabilities, but it does help in better planning of cash flows and avoids last-minute errors, with potential penalties.


Q8. Can tax professional advice help high earners save taxes?

Professional tax advisors may provide tailored planning strategies, assist in managing complex investments, and ensure that all potential deductions are used effectively.


Q9. What are the implications of not utilizing all available tax deductions?

Not taking full advantage of the available deductions means that you end up paying more tax than you have to. At that level of income, it could be a considerable implication on your disposable income and savings potential.


Q10. Are there any tax-saving tips exclusively for senior executives who have salaries above 20 lakhs?

Senior executives should consider plans that defer compensation, tax-efficient structuring of bonuses, and other employment perks which can be optimized for tax efficiency. Besides, investing in long-term wealth-creation tools which are tax-efficient shall be helpful.


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