Investing money in various tax-saving instruments is not the only way to lower your tax liability. Although it is impossible for salaried individuals to avoid tax, there are ways that can help minimise the total tax outgo.
Many components of your salary, such as allowances for leave and travel allowance and medical expenses, can come handy in saving your money.
On the other hand, if you get certain benefits, such as bonus and employee stock options, keep in mind that there will be some taxes on these as well.
Leave travel allowance:
Under Section 10 (5) of the Income Tax Act, you can claim tax exemptions using your leave allowance. The exemption can be claimed twice in a block of four years by an individual.
One needs to produce domestic travel bills for that.
It may happen that one is unable to go on leave and ends up losing the tax exemption. Such individuals can claim an additional exemption in the next block of four years.
For instance, you don't travel between 2009-13 and are not able to claim this exemption.
You can carry forward the exemption for one journey to the next block (2013-17) and claim it in the first calendar year, that is, 2013. You can also claim the remaining two journeys for the years 2013-17.
Therefore, you will be eligible to avail yourself of three exemptions between 2013-17.
Chartered Accountant Anirudha Hatwalne says, "LTA is mainly for dependants. In the case of a working couple, if both get the benefit from their respective employers, they can claim separate exemptions for separate journeys. Then, they can also claim it for dependant parents."
Medical allowance Medical expenditure, up to a limit of Rs 15,000 a year, can be claimed as a deduction. Employees can reduce their tax burden by claiming
this allowance.
"If your bill exceeds Rs 15,000 annually, the extra amount is treated as a perquisite and subject to the guidelines for the same," says Kaushik Mukherjee, executive director, PricewaterhouseCoopers.
Bonus This is fully taxable on receipt basis and is included in your gross salary for the year in which you receive it.
Here, at best you can spread the resulting liability on the bonus over the remaining months in that financial year. Say, you got a bonus of Rs 50,000 in October 2010 and your tax liability works out to be Rs 5,000.
"Your employer could deduct the tax at source over the remaining six months of the financial year instead of deducting a lump sum at once," says Mukherjee. This way you can ensure that your overall cash flow is better managed.
Ensure you give your tax-saving investment details to the employer beforehand to be able to get the maximum bonus in hand because your TDS could be worked out on that basis, advise tax experts.
ESOPs: Employee Stock Options are preferred by many employees but, unfortunately, they are taxable on allocation and on sale.
When the company allocates shares to you, they will be liable for taxation by taking into account the 'fair valuation' of the stock options.
As per the perquisites guidelines, the difference between the fair market value on the date of exercising the option and the grant price would be added to income.
So, if the grant price is Rs 100 and the fair market value on the date of exercise price is Rs 500, Rs 400 would be added to the employee's income.
Secondly, depending on the time period you hold the shares for, long- or short-term capital gains tax will be applicable.
Investing money in various tax-saving instruments is not the only way to lower your tax liability. Although it is impossible for salaried individuals to avoid tax, there are ways that can help minimise the total tax outgo.
