Tax Exemptions

Tax exemptions for the salaried class

We are already nearing the end of the second quarter for fiscal 2020, and very soon, the salaried class will have to share the supporting investment proofs to the HR department. This is required for taxation for the fiscal as every company is required to deduct tax at source.

We believe, it is not advisable to leave tax planning for the last moment, as December/January should be utilized for baking plum cake and planning winter vacation and not tax planning. You can do this only if you have planned for your taxes, in accordance to the income tax guidelines, beforehand when the fiscal begins.

In this blog, we seek to discuss what the salaried class should do to save tax, but before that, we shall also see the generic break up of salary so that you understand different components of the salary.

Read on!

Let us first understand your payslip and its components. Following is also available in ITR details.

Basic Salary

The fixed component of the salary is known as the basic salary. This is the base, and other components are computed using this number.

House Rent Allowance (HRA)

Individuals residing in a rented apartment can claim HRA to reduce tax liability. The HRA is exempted (partially or fully depending on the location) from the tax.

Leave Travel Allowance

Salaried individuals get their travel expense within India exempted from tax. This exemption is allowed only for the shortest distance between two places and can be claimed only twice in every four-year block. The salaried individual may accompany his family, including spouse, parents, and children for the trip. The expense is exempted from taxation only upon production of original bills.

Employee Provident Fund (EPF)

The EPF is a social security scheme offered by the government of India. In the scheme, both employee and employer contribute a fixed percentage (8-12% generally) of the basic salary and dearness allowance combined every month. The amount contributed is deposited towards the employee’s pension and provident fund and is available upon retirement. The government determines the interest on this amount where that gets credited to the account at the end of every fiscal. The contribution towards EPF is tax-free upon maturity and also provides relief in the Income Tax every year under section 80C of the Income Tax Act.

Standard Deduction

The standard deduction was reintroduced by the NDA government during the 2018 budget and has replaced the prevailing conveyance and medical allowance. A flat deduction of Rs 50,000 is allowed from the total income.

Professional Tax

Professional tax is levied by the state and is currently pegged at Rs 2500 annually. The amount is debited by the employer and is allowed for deduction from income.

Cost to Company (CTC) vs. In-hand salary

The CTC for an individual is different from the take-home salary. CTC includes the following –

Monthly salary

(Add), EPF and gratuity (added)

(Add), Non-monetary benefits (such as cab, insurance, telephone, fuel) (added)

In hand, salary comprises of the following –

Gross salary received each month.

(Minus), Exemptions such as LTA

(Minus), Income tax (after all tax-saving deduction), and professional Tax

Saving tax

The lower is your taxable income, better it is for you as your tax liability reduces. Many provisions allow a salaried individual to save tax. For example, 80C provides you to save Rs 1.5 Lakhs annually. Some of the instruments that help you to save tax are – ELSS (Equity Linked Savings Scheme), PPF (Public Provident Fund) and the likes.

The following table details the exemption available to a salaried class. The following table may serve as the income tax guide while sharing all income tax details/income tax information you may need to plan for your tax savings.

Source: Tarrakki Research

Of all the available sections, one section that helps in creating wealth is section 80C, and the instrument that allows for wealth accumulation is ELSS. This is because ELSS provides you with an opportunity to invest in equities, and comes with lowest lock-in period within the section. ELSS generates returns that are superior to inflation and thus helps in wealth creation.

To know more about the role of ELSS in tax saving, read our blog Reasons to opt for the mutual fund for tax saving.

To conclude, we believe you must make sure that you are aware of these allowances and use them to your benefit. Should you need any assistance, feel free to drop by to our office in Ahmedabad, Gujarat. Alternatively, you may drop in a mail at info@tarrakki.com, and we would be glad to assist.

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