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All About Tax Planning for Salaried Employees

Updated: Jul 1

All About Tax Planning for Salaried Employees

As one advances in their job, their salary typically increases in tandem. However, there comes a point at which your income suddenly places you in the tax slab bracket. In actuality, anyone can become stressed out by taxes. However, for a novice in taxes, it's akin to entering a cave without any light. Nonetheless, tax preparation is crucial for both novices and experts. Thus, we'll cover everything there is to know about tax planning in this post and provide you with a list of the top investments that can reduce your overall tax liability.

 

Table of Contents

 

Understanding the Basics of Taxes for Salaried Employees

You must comprehend the ideas of taxable income and the tax slab to comprehend what tax planning is. The amount of your overall income that is subject to taxes by the government is known as your taxable income. It is computed by deducting from your gross income—which includes your salary, wages, interest income, rental income, and other earnings—all allowable deductions and exemptions. In essence, categories of income that you can deduct from your gross income before determining your tax due are called deductions and exemptions. A tax slab is a range of taxable income subject to varying rates of taxation. The idea is to create a sufficient system in which individuals with higher incomes pay a greater percentage of their income in taxes. 


Components of Salary 

If tax savings are not well thought out in advance, it can be a difficult procedure. Let's look more closely at your salary slip to help you understand the gross tax you are expected to pay annually. You may have noticed that there are various parts to your pay stub. Your salary slip contains the most important information for tax savings strategies. Its principal components are as follows:


Earnings

Your earnings make up the first part of your salary. For salaried employees, it is crucial to understand what this means to maximise tax planning. The following categories apply to earnings: 

  • Basic pay: The amount you are paid is determined by a set percentage that was agreed upon when you were hired. For as long as you work, you will receive this monthly payment, which is referred to as your basic salary.

  • Bonus: Your earnings may also include any bonuses you receive from festivals, for meeting performance targets, or if the business makes a profit and chooses to share a portion of it with you. These are one-time payments that could be made on a quarterly or annual basis.


Allowances

Allowances are sums of money that you receive in addition to your base pay. Allowances come in various forms, which are described below: 

  • House rent allowance: You may be eligible for an exemption from the house rent allowance (HRA) under Section 10(13A) if you are paying rent while residing in rented housing. Find out here how to compute your HRA exemption. 

  • Education allowance: Any educational reimbursement up to Rs. 100 per month for a maximum of two children and any employer-provided lodging for employees' children up to Rs. 300 per month for a maximum of two children may be claimed under Section 10(14).

  • Leave Travel Allowance: Under this, two trips within a four-year period are eligible for exemptions: i. when travelling by air, the exemption limit is the economy class airfare taken by the shortest route or the amount spent, whichever is less; ii. when travelling by rail, the exemption limit is the first-class air-conditioned rail fare taken by the shortest route or the amount spent, whichever is less.


Deductions

The amount deducted from your gross pay to determine your net salary is referred to as a deduction. Contributions to investment and savings plans such as Provident Fund (PF), professional and income taxes, insurance plan deductions, loan payments, and other items are a few examples of these.


Tax Planning Strategies for Salaried Professionals


Tax-Saving Investments under Section 80C

You can lower your tax bill by deducting a variety of investments and costs from your taxable income under Section 80C of the Income Tax Act. For the fiscal year 2023–2024, the maximum deduction allowed under Section 80C is Rs. 1,50,000 (subject to change in future budgets). The following are a few well-liked Section 80C investing options: 

  • Employee Provident Fund (EPF): An obligatory deduction from your pay towards the amount set up for retirement. A corresponding sum is also contributed by your company. 

  • Public Provident Fund (PPF): A government-backed long-term savings plan with favourable tax breaks and interest rates. 

  • Unit Linked Insurance Plans (ULIPs): Investment and insurance products combined. Invest cautiously because the costs could be substantial. 

  • Equity-linked savings schemes (ELSS): Stock-oriented mutual funds fall under the category of equity-linked savings schemes (ELSS). Although ELSS has a strong potential for growth, there is market risk.

  • National Pension System (NPS): A voluntary pension plan where you contribute to your retirement corpus is called the National Pension System (NPS). provides returns tied to the market and tax benefits. 

  • Life Insurance Premium: Under section 80C of the Income Tax Act, 1961, payments for life insurance up to Rs 1.5 lakh per year are free from taxation, even if they enable you to financially insure the future of your loved ones. Furthermore, subject to the limitations outlined in Section 10(10D), tax deductions are available for both the death benefit and the maturity benefit.


Exemption on House Rent Allowance (HRA)

HRA is a part of your pay that lowers the amount that is subject to taxes. If you satisfy the following requirements, you may be eligible for an exemption from HRA. This benefit is exclusively available to those who are employed. Rent for an approved residential space must be paid by you. Generally speaking, rent payments to immediate family members (parents, spouse's parents, siblings, etc.) do not qualify. You must have rent receipts that list your name, the name of your landlord, your address, your PAN (if your yearly rent exceeds Rs. 1 lakh), and the total amount of rent paid for the fiscal year. The amount of HRA that you can exempt depends on three factors: 

  • The HRA amount on your pay stub: This is the HRA amount that your employer offers.

  • 40% or 50% of your base pay plus DA: The acronym for Dearness Allowance is DA. (In metro areas, it is equal to 50% of your base pay + DA; in non-metro areas, it is 40%.) 

  • 10% percent of your base pay less actual rent paid plus DA: If you want to be eligible for the full HRA exemption, you must pay at least this much in rent. 

The HRA exemption you are eligible for is the lowest of these three sums.


Other Tax Deductions

  • Health insurance premium: Considering that health insurance covers both your income and medical costs, it's a prudent investment. Deductions for medical costs are permitted up to Rs 25,000 for individuals, their spouse, and their children, and an additional Rs 25,000 for parents who are both under 60. If both parties are older than 60, an exemption of up to Rs. 100,000 may be requested.

  • House Loan Interest Repayment: Section 24b permits you to deduct up to Rs. 2 lakh from your house loan interest each fiscal year, while Section 80EE permits first-time home buyers to deduct an extra Rs. 50,000 as long as the purchase price is less than Rs. 50 lakhs.

  • Education Loan: Individuals may deduct just the interest paid on education loans for postsecondary education in India or abroad under Section 80E of the Income Tax Act. The number of deductions that may be taken is unlimited, however there is an eight-year time limit.


Bonus Tip: Choose the Right Tax Regime

India currently has two main tax regimes: the Old Tax Regime and the New Tax Regime. The taxpayer has the choice to compute his tax burden under any one of these regimes. Both regimes have different tax liabilities based on a number of variables, including the tax rate, allowable deductions, and exemptions. Therefore, before the beginning of a new fiscal year, each employee should choose their preferred tax regime so that the company can calculate their tax liability appropriately. It should be mentioned that, unless someone notifies the department that they would prefer to use the previous tax system, the New Tax system is the default regime under the legislation. 



Benefits of Early Tax Planning for Salaried Professionals 

When the financial year is almost over, a lot of people rush to make tax-saving investments. This frequently results in snap judgements and lost chances. The following justifies your adoption of proactive tax planning: 

  • By investing a specific amount on a monthly basis, you might potentially profit from rupee-cost averaging and aid with budgeting. Tax-saving investments can also help throughout the year. This strategy averages out your buy price per unit over time, which can be helpful in erratic markets.

  • If you prepare ahead, you will have plenty of time to investigate various investment possibilities that fall under Section 80C and other pertinent sections. You can select investments that fit your risk tolerance and financial objectives by comparing features, risks, and returns.

  • Tax planning fosters financial self-control and aids in the development of a persistent investing habit.


Conclusion

A salaried employee's annual taxable income is used to determine how much income tax they must pay after deducting different tax-saving options. Because of this, tax preparation for salaried staff members is a crucial procedure. It is essential to file the Income Tax Return (ITR) to guarantee that the deductions are made. The employee must detail all of the investments they made in the relevant financial year and claim deductions for them under various provisions of the Income Tax Act, 1961, in their ITR filing. Therefore, it makes sense to plan in advance, choose wisely, and timely declare your investments in your ITR file.


FAQ

Q1. What are the tax exemptions for salaried persons?

For salaried workers, the House Rent Allowance (HRA) is a valuable benefit that lets you deduct a portion of your earnings if you pay rent. Comparably, the Standard Deduction significantly lowers your taxable income by being a set amount that can be subtracted from your pay to cover work-related costs. Up to a maximum (currently Rs. 1.5 lakh) you can deduct a variety of investments and costs (such as PPF, ELSS, and ULIPs) from your taxable income.



Q2. How can I save tax as a salaried professional?

Under its numerous sections, the Income Tax Act of 1961 permits tax deductions against a variety of investment kinds. Select the right tax-saving investments if you are a salaried worker in order to take advantage of the deductions. You will lessen the load and save money on taxes by doing this. 



Q3. How can I lower my salary to reduce taxes?

You can lower your net compensation by making larger payments to your employee provident fund and choosing exemptions like HRA, LTA, and other reimbursements. After that, make use of the tax deductions offered by sections 80C, 80D, 80E, and so on for a variety of investments, important expenses, home and school loans, health insurance, and so forth. 



Q4. Do salaried persons need to pay taxes on investments?

Yes, salaried individuals have to pay taxes on their investment income, which includes dividends, interest, and capital gains from asset sales, among other things.


Q5. What are the investment options under Section 80C?

A total annual exemption of Rs 1.5 lakh is permitted for cumulative investments made in various instruments under Section 80C of the Income Tax Act, 1961. Life insurance, Public Provident Fund (PPF), Equity-linked Savings Scheme (ELSS), National Savings Certificate (NSC), principal repayment of home loans, SSY, SCSS, and other choices are among them.



Q6. How can I save tax on my HRA?

To save income taxes, you might claim the exemption on the house rent allowance. This calls for providing the employer with proof in the form of rent agreements and receipts. When filing your ITR, you have the option of submitting the paperwork yourself. You are only eligible for this exemption, though, if you are paying rent on your residential property.



Q7. Is income up to 7 lakh tax-free?

In the former tax system, you were exempt from paying any tax if your taxable income (after all deductions) was less than Rs 5 lakh. Under the New Regime, all income up to Rs 3 lakh is tax-free, and if your taxable income is less than Rs 7 lakh, all of your income is tax-free.


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