written by khatabook | June 30, 2021

How To Save Income Tax on Income From Salary For Individuals

Each filing season taxpayers are a worried lot since they have to file their Income Tax Returns. The form has several components that make it very confusing when you don’t understand all the components of your salary. A better understanding of the salary and its components can help you in your tax planning and save on tax. Read on to discover how you too can save on Income Tax while filing your Income Tax Returns this financial year.

Tax Saving Options for Salaried Individuals

Income Tax Deductions For Salaried Employees

There are seven important heads you find in your payslip that affect the income tax paid and the tax-saving options for salaried persons. Understanding these will help you to use the exemptions under them and save tax.  

A Brief Outline of Salary Deduction 

  • You need to understand the various components of the payslip to understand exemptions under its heads. It will help you to calculate tax on salary and learn to save under these heads. The next thing to understand is the differences between the CTC (Cost to Company) and the take-home salary.   
  • The professional tax deduction in income tax affects not only the salaried class but also the self-employed. Besides, you will also need to understand various other deductions. Understanding gratuity and pension payments, leave encashment, receipts at the time of VRS etc will help you in your tax planning.  
  • Finally, you need to study the tax slabs. It gives you information on which income is chargeable to tax, the amount of TDS, the Forms like Form16, 16-A, 26AS and which deductions to apply.  

Components of The Pay-slip

First, what does your payslip reflect and how does it impact your income tax calculation

  • The Basic Salary
  • Leave Travel Assistance/ Allowance
  • House Rent Allowances
  • PF (Provident Fund) contributions by the Employee
  • Professional Tax
  • Bonus
  • Standard Deductions

Basic Salary: This is the largest part of your salary. It is the fixed part of the salary used for calculating allowances. Eg: PF deductions are a fixed 12% and HRA a fixed percentage of the basic salary.

LTA (Leave Travel Allowance): This allowance helps employees to travel within India and is tax-exempt. You can use it for a trip with your children, spouse and parents but it does not include other relatives. The exemption covers the actual expenses incurred. It means that you have to take a holiday trip at least once a year and spend family time to be eligible for this exemption. You need to submit the bills about your trip to your employer to claim this deduction.  

HRA (House Rent Allowance): You can claim complete or partial tax exemption under the income tax laws for the house rent you pay. It reflects in your payslip and your employer decides the percentage value of the basic salary.   

Do note that if your payslip reflects HRA and you live in your own house or with your parents and not for rent, then the entire HRA amount is also taxable. So, how to save the HRA from taxes? You can pay rent to your parents by entering into a rental agreement. So, parents get a monthly payment, you get an HRA deduction. This way everybody wins when filing income tax returns. But your parents should file their IT returns showing the amount paid as rent received from you. 

EPF Contributions by employee: This EPF Act-1952 retirement benefit applies to all companies having 20 employees or more and is compulsory.  Both the employer and employee make contributions. The employer deducts 12 per cent of the basic salary towards the provident fund and employee's pension. It also earns interest on the contributions. You can deduct your contributions to EPF.  

PT (Professional Tax): Professional tax is a state tax while the income tax is central government levied. The employer deducts and deposits the amount to the state government. You can claim the professional tax deducted by your employer. 

Bonus: The performance incentive or bonus may be monthly, quarterly or annual etc. Your employer decides how much bonus you receive. It usually depends on your performance and the company's profits. It is fully taxable. 

Standard Deduction: Previous deductions under medical, conveyance allowances etc are now replaced with the Standard Deduction announced in the 2018 budget. The employees with taxable income can claim a fixed deduction of Rs 50,000. So the total income tax payable gets reduced.

Also Read: All About Tax Deducted At Source(TDS)

Differences in CTC and Take Home Salary

Income from salary plus the cumulative benefits like the cab service, food coupons etc forms the CTC- cost to the company. Take an example of the CTC components given below.

Components

Amount

Salary Basic 

Rs 3,50,000

Allowances

Rs 1,00,000

HRA

Rs 75,000

Medical insurance cover

Rs 5,000

PF @12% 

Rs 42,000

Bonus (performance linked)

Rs 50,000

CTC

Rs 6,22,000

                                                                                                                       Here’s how the payslip will look.
 

                                                       Taxable Salary

Components

Amount

Basic salary

Rs 3,50,000

Special allowance

Rs 1,00,000

HRA

Rs 75,000

Bonus received

Rs 50,000

Total salary

Rs 5,75,000

Less: 12% PF

Rs 42,000

Less: Tax payable*

Rs 20,000

Take-home salary

Rs 5,15,000

Note:

The above is just an example and meant to clarify the definition.

CTC = [Salary per month] + [benefits at retirement like gratuity, PF etc] + [benefits like free meals, medical insurance, cab services, reimbursable phone bills etc.]

Take home Salary = [Salary per month] - [exemptions like LTA, HRA etc] - [tax payable after accounting for section 80 exemptions and deductions]

Relief Offered For Retirement Benefits

1. Policy of Leave Encashment: Check out your leave encashment facilities which if used as leave encashment is taxable. State and Central government employees are exempt. Others are exempt to the least of the 3 below.

  • Leave encashment received (Since 2nd April 1998 it is limited on retirement to Rs 3 lakhs) 
  • The average salary for ten months if resigning or retiring (Salary includes DA, allowances, perquisites and basic).
  • If cashing in earned leave, salary payable for those days but not greater than 30 days for each year of service.

The taxable amount is the total leave encashment minus the exempt amount. Add the result to the income from salary.

2. Relief u/s 89:

U/s 89 (1) of the IT laws you get relief from salary or family pension received as advance or arrears.

3. Voluntary retirement exemptions: 

Voluntary retirement compensation is tax-exempt under these conditions.

  • Compensation is towards voluntary retirement, as per Rule 2BA and within a maximum of Rs 5 lakhs.
  • The taxable individual is a state/central government employee or an employee of the university, local authority, IIT, company, cooperative society, PSU, notified institutes of importance/ management etc. 
  • No other exemption has been claimed u/s 89 

4. Gratuity: Gratuity is receivable on completion of 5 service years and paid on resignation or retirement. It is fully exempt if a central or state government employee retires or on their death. For private employees, it depends on whether the employer is under the Payment of Gratuity Act. 

With employers under the Payment of Gratuity Act, the least of the below is tax-exempt for employees: 

  • Gratuity received.
  • Rs 20 lakhs.
  • 15 days salary for each completed service year (or more than 6 months of the year).

If the employer is not covered under the conditions are

  • Gratuity received.
  • Rs 20 lakhs.
  • Salary for a half month for each completed service year or part, where you calculate salary as 10 months average salary before retirement.

5. Pension: Pension is similar to salary but after retirement. It is taxable as salary. You can avail of commuted lump-sum pension, periodical monthly payments and even an advance percentage as an advance commuted pension.

The uncommuted and commuted pension exemptions are: 

  • For government employees, UN employees/ family members and armed forces the commuted pension is fully exempt. 
  • Uncommuted and monthly payment of pension are fully taxable as salary.
  • When you receive pension and gratuity, only one-third of the 100% commuted pension is exempt.
  • When you don't receive a pension, half of the commuted pension is exempt.
  • Family member pensions are exempt up to Rs 15,000. One-third of the uncommuted pension or 100% of commuted pension received as a lump sum also is exempt.

Tax-Saving Tips

You can reduce the income tax on salary u/s 80C using any of the several tax saving for salaried options totalling Rs 1.50 lakh as given below: 

The tax saving heads and instruments are mentioned below:

  • Public Provident Fund (PPF) the government’s tax-saving instrument has a term of 15- years. It comes with a tax-free interest rate of 8% which changes every quarter. It is available at post offices and banks.   
  • 5-year tax-saver FDs carry 7 to 8% taxable interest. You can get a total tax deduction of up to Rs 1.5 lakh. 
  • ELSS Mutual Funds invest in equity up to 80% with a lock-in tenure of 3 years. Returns are chargeable to tax at LTCG (Long Term Capital Gains) tax @ 10% when they exceed the 1 lakh exemption.
  • EPF payments @12% of basic pay comes under the total exemption limit of Rs 1.5 lakh u/s 80C. 
  • Tuition fee payments of dependent children are exempt from tax up to Rs 1.5 lakh pa.
  • Premiums on Life Insurance are tax-exempt for term/endowment insurance policies, ULIPs etc when the cover amount exceeds 10 times premiums paid.
  • National Saving Certificate (NSC)has a 5-year maturity period and earns about 8% fixed interest rate. It is part of the total exemption available under section 80C.
  • NPS (National Pension System) falls under u/s 80CCD and adds to the exemption limit of Rs 1.5 lakh. Such deductions are above the u/s 80 CCD(1B) exemption of Rs 50,000.
  • SCSS (Seniors Citizens Scheme Savings) has a 5-year term and available post 60 years. The interest rate is 0.5 to 0.75% higher and taxable.
  • SSY (Sukanya Samriddhi Yojana) helps the parents of a girl child below 10 years to invest for her future.  Its 21-year tenure provides tax-free interest and continues till the girl marries or on reaching 18 years of age
  • Premiums on Health Insurance provide deductions of Rs 25,000 u/s 80D for health insurance premiums over and above insurance premium limits. The senior citizens limit is Rs 50,000. Thus you can avail up to Rs 75,000 when paying premiums for yourself and senior citizens dependent on you.
  • Rent deductions are available when you pay rent and do not get HRA. You can deduct rent up to Rs 60,000 per year. If you get HRA, the whole amount can be deductible if you stay on rent. 
  • Repayments of Home Loan is available for the Home Loan principal amount and is exempt up to Rs 1.5 lakhs. 
  • Home Loan Interest deduction is up to 2 lakh per year. But you need to get an interest-charged certificate from the bank. 
  • Charitable donations have no upper limit. If donated to an NGO 50% or up to 10% of total income adjusted is exempt when the NGOs have an 80G certificate.
  • Savings account interest is tax-deductible up to Rs 10,000 per year u/s 80TTA. The exemption limit for senior citizens is Rs 50,000 including both FDs and savings account interest earned.

Also Read: Guide For Uploading Tax Returns on The Income Tax Portal

Conclusion

We hope you have understood the terms and the ways on how to get tax exemption. We have explained the differences between CTC and take home salary, all relevant employment tax deductions and calculating the income tax from salary. You can use the various exemptions and save tax on salary.

FAQs

1. How do I calculate the Chargeable Taxable Income?

Total income accrues not only from salary but from other sources as well. Here’s a list of incomes that you should include under the total income head as your gross total income.

  • Salary income.
  • Loss/income from a profession like self-employed taxpayers.
  • Savings and FD accounts interest accrued.
  • House Property owned and rented/self-occupied.
  • Capital gains from the sale of mutual funds, property etc.

2. What are the FY ending 2017, 2018, 2019 Tax Rates:

Use an income tax calculator to calculate the gross total income and deduct the U/S 80 deductions to arrive at the taxable income.

The tax slabs are: 

IT slab rates for under 60 years of age in FY 2016-17, 2017-18 and 2018-19.  

Tax Slab

% rate FYs 2017-18 and 2018-19

Tax Slab

% rate FY 2016-17

Up to Rs 2.50 lakh

No tax

Up to Rs 2.50 lakh 

No tax

Rs 2.50 to 5 lakh

5%

Rs 2.50 to 5 lakh 

10%

Rs 5 to 10 lakh

20%

Rs 5 to 10 lakhs

20%

Beyond 10 lakh

30%

Beyond 10 lakh 

30%
 

3. How is Cess calculated?

  • For FY 2018-19 – Education and Health cess of 4% of total income tax plus surcharge is applicable for FY 2018-19.
  • For FYs 2016-17 and 2017-18, the cess is 3% of total income tax plus surcharge.

The exemptions are:

  • Exemption for senior citizens 60-80 years in FYs 2016-17, 2017-18 is Rs 3 lakh.
  • Exemption for senior citizens above 80 years is Rs 5 lakh for FY 2017-18, 2018-19.

4. What are TDS deductions?

TDS is employer deducted and is based on annual total salary and total tax-saving investments. The employer issues a Form 16 in June/July reflecting the TDS amounts. Banks also deduct 10% as TDS on interest earned on FDs. If there is no PAN number this amount is 20%. 

5. What is Form 16?

Form 16 is a 2-part mandatory employer-deducted TDS certificate deposited to the Income Tax Department on behalf of the employee. Part A has employer and employee details, PAN/TAN, address and name with the TDS deductions. The Form-16 Part B shows salary paid, deductions allowed, other income, tax payable etc. It is necessary to have Form-16 to file income tax. 

6. What is Form 26AS?

This gives the taxes summary, paid by you/ on your behalf and is provided by the Income Tax Dept. It contains all tax deductions, deposited taxes and refunds received for the FY. It can be downloaded from the IT website.

7. What are deductions?

Lower taxes apply to lower taxable income slabs. By claiming exemptions available U/S 80, 80E, 80C, 80D, 80 U, 80GG etc and the tax benefits/deductions applicable, you can reduce the gross taxable limit and save taxes.

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