Tax Planning for Salaried Employees

Tax Planning refers to financial planning that leads to a reduction in Tax Liability by way of investing in certain tax-saving investments and incurring expenses which are deductible for tax purposes.

Tax Planning is very much necessary for salaried employees in order to reduce tax outflow. It is mandatory to file ITR for salaried employees whose income is exceeding the basic exemption limit because TDS has already been deducted from their salary and the details of their gross salary are available with the tax authorities through information provided by their employers by way of filing TDS returns.

By making various investments for the purpose of tax planning, one can also earn favourable returns over a specific period of time involving minimum risk.

Let's see various ways in which individuals can plan their taxes.

There are various provisions for salaried employees to reduce their tax burden. A Salaried Individual has to make sure to avail of all the following deductions:

1) Repayment towards Housing Loan:

Any person who is having a Housing Loan can claim a deduction from their income towards the repayment of such loan. Here interest paid up to INR 2 lakhs is available for deduction under Section 24 while Principal paid up to INR 1.5 lakhs is available for deduction under Section 80C.

2) House Rent Allowance:

When an individual relocates to a different city for employment purposes and such person is not owning any house property at the place of employment nor employer offer any accommodation, the rental expenses incurred by the employee can be allowed as a deduction from their taxable income.

House Rent Allowance (HRA) is given by several employers as a part of the salary. This HRA is subtracted from the gross income of the employee. However, the maximum amount of HRA that is exempt under section 10(13A) shall be calculated by lower of the following three amounts:

(a) Actual HRA received.

(b) 50% (In case of Metro Cities)/ 40% (In case of Non-Metro Cities) of basic salary plus DA.

(c) House rent paid by the employee, less 10% of their basic salary plus DA.

Every employee needs to make sure that they have entered into a rental agreement with the owner and also obtain rent paid receipts every month to avoid disputes with the department when asked for the proofs.

3) Exemption of Leave Travel Allowance:

Leave Travel Allowance (LTA) received as part of the salary can be claimed as exempt under section 10(5) only on satisfaction of the following conditions:

• Only the actual expenditure incurred can be claimed as exempt.
• This can be availed only two times within a block of 4 calendar years.
• Travel should be within India.
• Travel should be from the shortest route.
• A claim can be made for AC-I for your train journey and for air travel you can claim only for the economy class.

4) Deductions that are allowable under section 80C:

The Following are allowed as deductions under section 80C subject to a maximum of INR 1.5 lakhs-

• Contribution to EPF account: The contribution made by the employer to its employee's EPF account is tax-exempt, wherein the contribution made by the employee himself is tax deductible as per section 80C.
• Deposit in PPF account: Contribution made to PPF account is tax deductible. Even Interest accrued and maturity proceeds from such account are exempt.
• Investments in tax-saving mutual funds/ Equity Linked Saving Scheme (ELSS): Equity linked saving scheme offers 3 years of the lock-in period. The Investment made under these funds is tax deductible.
• National Saving Certificate (NSC): The national saving certificate is issued to the client for about 5 years by the post office. The interest rate of this scheme is around 8.5% and tax benefits are provided by NSC under section 80C.
• Tax Saving Fixed Deposit: A Fixed Deposit which is made during the year with a maturity period of more than 5 years is tax deductible under section 80C.
• Sukanya Samriddhi Account: The amount of Investment made into and maturity proceeds from this account are tax-free.

The following expenses will also come under section 80C within the limit of INR 1.5 lakhs.

• Tuition fees for children and oneself.
• Premium for Life Insurance scheme.

Additional deduction under section 80CCD(1b) of Rs 50,000 is allowed for the amount deposited to the NPS account. Contributions to Atal Pension Yojana are also eligible for deduction. This deduction shall be in addition to INR 1,50,000 under section 80C.

5) Medical Insurance Premium and Medical Expenses for senior citizens:

An individual or HUF can claim a deduction of INR 25,000 under section 80D for the premium paid on health insurance for self, spouse and dependent children. An additional deduction for the insurance and medical expenditure of parents is available upto INR 25,000.

If they are less than 60 years of age. If the parents are aged above 60, the deduction amount is INR 50,000. If both the taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to INR 1 lakh.

6) Donations:

Charitable donations are allowed for exemptions under section 80G. A taxpayer should maintain the receipts indicating the PAN of Donee. Payments should be made in cash or cheque and not in any other form. If payment is made in cash, the amount in excess of INR 2,000 will not be eligible for deduction under section 80G.

7) Repayment of Education Loan:

A taxpayer can get a deduction towards repayment of education loan taken for the education of self/ spouse/ children under section 80E for a period of seven years from the disbursement of the loan.

Taxpayers shall not miss claiming exemptions regarding the following allowances: Conveyance, Magazine, Driver, Uniform, Mobile, Personality Development, Medical Treatment and Office Entertainment upto the limits provided in the Act.

08. Interest paid for Electrical Vehicle Loan 

A deduction for interest payments up to Rs 1,50,000 is available under Section 80EEB. An individual taxpayer may have an electric vehicle for personal use or for business use. This deduction would facilitate individuals having an electric vehicle for personal use to claim the interest paid on the vehicle loan.

In case of business use, an individual can also claim the deduction up to Rs 1,50,000 under section 80EEB. Any interest payments above Rs 1,50,000 can be claimed as a business expense. To claim as a business expense, it is necessary that the vehicle should be registered in the name of the owner or the business enterprise.

Do note that an individual taxpayer should obtain the interest paid certificate and keep the necessary documents such as tax invoice and loan documents handy at the time of filing of the return

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Hemanth Uppala

Chartered Accountant

Content Writer | TAX DESTINATION