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Tips to OPTIMISE your take-home salary
With the tax-filing season upon us here's a quick recap of what salaried employees can do to minimise their tax liability and increase take-home salary.
Financial planning is essentially the sum of many parts; it involves various aspects such as hedging risks, diversification, risk management and most importantly tax optimisation. While planning for taxes, individuals often ignore aligning them to financial goals, which is an essential part of the holistic financial planning process.
Approach to tax planning
Planning for tax optimisation should be guided by the goals that you intend to plan for. Tax planning is often conducted during the fag end of the year when employers call for proof of investment. Waiting till the last moment only causes one to conduct these investments in haste, which in turn leads one to invest in an adhoc manner.
Many times, individuals park all their funds into the nearest available investment avenue like Public Provident Fund (PPF) / Voluntary Provident Fund (VPF) or equity linked savings scheme (ELSS). This could lead to a portfolio which becomes essentially skewed towards a single avenue, thereby distorting the risk / return equation of the portfolio as a whole.
Tips to OPTIMISE your take-home salary
Two angles to tax optimisation
Tax planning essentially has two angles to it -- tax planning from the perspective of reducing outgo of income tax which will in turn enhance the take-home income. The other part to tax optimisation is to invest in tax efficient avenues, wherein returns would not be taxed or would be taxed at a lower rate. For example, while one invests in term deposits, individuals do not realise that the returns are taxed at normal rates (up to 30.9 per cent).
An alternate to this avenue would be investing in fixed maturity plans which have term deposits as underlying instruments. This route is more tax efficient as it would be taxed at maximum 10.3 per cent given the indexation benefit (under the growth option), if held for over a year. And if it is held for a shorter horizon, one could use the dividend option which will effectively reduce taxes with the tax applicable being 14.16 per cent.
Tips to OPTIMISE your take-home salary
Tax planning
There are a host of ways to optimise your taxes and these together fall under a few categories as follows:
- Exemptions
- Perquisites
- Home loan
- Deductions
These are the ones that are popular and are applicable for salaried investors. Here we discuss each of these briefly.
Exemptions
Exemptions can go a long way in enabling you to save taxes, but one often misses to take adequate advantage of these. We take a quick look at various exemptions that one can claim to reduce taxes significantly.
Tips to OPTIMISE your take-home salary
House rent allowance
Minimum of the three conditions would be exempt for taxes, the conditions being:
- HRA as part of salary stack
- Rent paid: 10 per cent of basic salary
- 40 per cent of basic (non-metro) or 50 per cent (metro)
An additional tax saving tip is that, rental proofs are not required if rent paid is less than or equal to Rs 3,000 per month. However, a self-declaration is mandatory.
Tips to OPTIMISE your take-home salary
Leave travel allowance
There was no maximum claim limit on LTA provisioned by the income tax law (like in the case of conveyance / medical allowance where the IT Act prescribes the maximum monetary limit). The company, however, would levy a limit on the maximum that the employee can claim. Two trips in a block of 4 years are allowed (current block being 2010-2013) for exemption. While for all income tax purposes one uses the financial year ending March 31, for LTA one would use the calendar year ending December 31.
One needs to provide relevant proofs for the trip conducted, wherein route opted for should be the shortest distance and the destination has to be a single place. Also, one needs to take leave from the company (min two days -- may vary based on company policy) for claiming this exemption.
Tips to OPTIMISE your take-home salary
Medical allowance: Medical allowance maximum of Rs 15,000 per annum is allowed; medical bills are to be produced for the same
Conveyance allowance: Maximum limit of Rs 800 per month allowed
Tax free perquisites: Company car EMI arrangement, food coupons, petrol / telephone re-imbursements are all items which can reduce your tax liability
Tips to OPTIMISE your take-home salary
Housing loan: Liability with a 'twist'
Not every liability enjoys tax-breaks. House loan is a unique differentiator of sorts. The EMI paid towards your home loan can help you save taxes! Housing loan EMI has two components 'interest + principal', both these components can help you reduce your taxability. The interest paid towards such loan can be claimed u/s 24 under the head 'Loss from house property' -- for a self-occupied property there is an overall limit of Rs 1.5 lakh.
For a let out property there is no such limit, however, in this case one has to bring in the rental income (from which you can reduce municipal taxes & 30 per cent towards maintenance) and set-off the interest against the same to avail the net amount as loss (if any) under house property.
The principal part in both cases will avail the benefit u/s 80C (as stated above). Both self and spouse can avail this benefit if the property and loan are jointly held.
Tips to OPTIMISE your take-home salary
Tax saving investments
Through section 80C investments alone, one can save a maximum of Rs 41,715 of taxes and in-turn increase take home income. This surplus can be used for monthly investments.
Over and above the returns that the investment delivers, the tax benefit helps significantly enhance one's returns. Today there is a whole range of risk-return options one can choose from, within tax savings investment options. A judicious choice of tax saving investments can help in wealth creation.
Section 80C offers a deduction of Rs 1 lakh, irrespective of income brackets; some of the items allowed herein are: employee contribution towards PF, NSC (National Savings Certificate), infrastructure bonds, fixed deposits (minimum lock-in of 5 years), ELSS (equity linked savings scheme), traditional insurance, ULIPs, pension plans.
Apart from the above investment items, 80C also allows claiming of children tuition fee to a maximum extent of Rs 1,000 per month per child for maximum of two children. Furthermore, if you have availed a housing loan, then the principal part of your EMI can be claimed u/s 80C. The overall limit is however, categorically restricted to Rs 1 lakh.
Section 80CCF allows an additional Rs 20,000 savings which have to be invested in long term infrastructure bonds.
Section 80D allows the benefit on premiums paid towards medical premium. Health hazard hedging is critical given the rapid escalation in healthcare costs. Also, many a times, what your company offers may not suffice. You can avail a medical plan in your parents' name and avail tax deduction to the extent of Rs 15,000 u/s 80D (apart from your individual limit of Rs 15,000). You can also avail a family floater plan to cover the entire family; this would also work out cheaper than individual covers.
There are thus many ways of planning and optimising on taxes. Hope this gives you a starting point to working towards greater efficiency in tax planning.
Anil Rego is the founder and CEO of Right Horizons , an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.