Tax planning for salaried employees
Saving taxes can be a complicated process, if not planned well in advance. To understand the gross tax you are supposed to pay each year, let’s take a closer look at your salary slip.
You may have noticed that your salary slip consists of different components. The biggest clue to saving taxes more efficiently lies in your salary slip. It contains the following major components:
Your earnings are reflected as your basic pay. With regard to contributions, you may receive dearness allowance, House Rent Allowance (HRA), conveyance allowance and a Leave Travel Allowance (LTA). The section may also include deductions like Income Tax, Professional Tax and Provident Fund.
Here are a few tips you may want to consider when you go about planning your taxes.
- Look at your salary slip closely
You need to pay an Income Tax on your basic pay. Your HRA is exempt from taxes. However, HRA exemption is only applicable if you are living in a rented house and paying a monthly rent. A fixed amount of conveyance allowance also falls under the tax exemption scheme.
For some employees, income tax is deducted at source. Tax benefits for this can be claimed by providing supporting documents related to tax saving investments. These documents can save your income from excess tax deductions, towards the end of the financial year. Plan your investments in advance to save taxes more effectively.
- Take a good look at the Section 80C mandate
Having a more in-depth look at Section 80C can help you maximise your take-home salary. You are allowed to invest INR 1.5 lakh in various tax-saving instruments. Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), Public Provident Fund (PPF) and 5-year Bank Fixed Deposit (FD) are some of the available instruments you can employ to make tax saving investments. HDFC Bank offers a variety of tax saving products. Click here to know more about them.
- Avoid last-minute tax planning
Planning your taxes at the last moment leaves little time for you to study different investment options. It may also become a burden to invest a lump sum amount just to save tax. You can invest small amounts regularly through Mutual Funds and SIPs all through the year, thereby not eating into a chunk of your savings at the last moment.
- Invest to meet your financial goals
Investing, not just to save taxes but also to fulfil your goals, can prove beneficial in tax planning. You can convert your tax-saving investments into high return ones. For example, let’s say you intend to buy a new car in three years. You can invest small and regular amounts in an ELSS. After three years, when the ELSS lock-in period ends, you withdraw and reinvest to meet your goal. Thus, your tax-saving investments can also help you reach your financial goals.
- Have a look at other sections as well
Apart from Section 80C, there are several other sections that can help you save taxes. Here is a list of sections that you may consider to avail tax benefits. These details can also be found in the investment declaration form, given by your employer.
-You can claim tax benefit on LTA, once every two years. However, you will need to submit a proof of travel for this.
-Avail tax benefits on the premium paid for any health insurance policy (Section 80D).
-Interest paid on an education loan also comes under tax exemption (Section 80E).
To sum up
Effective tax planning involves early and regular investments. Studying your salary slip should also be a part of your tax planning checklist. The investment declaration form given by your employer also holds many tax saving clues, so don’t ignore it.
* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.