One of the key financial concerns of working professionals is tax saving. As soon as it’s time to declare investments and the end of the financial year is near, there is a frenzy amongst all salaried employees about how to save tax and avoid paying any income tax. However, investments aren’t the only way for tax saving. There are quite a few other measures that you can avail in order to reduce your taxable income. Here’s some help with both kinds of measures of tax saving for working professionals.
5 Tax Saving Measures of Tax Saving for Working Professionals
The basic requirement for applying these measures is a good understanding of your salary breakup. Once you understand it thoroughly, go through the following points and apply tax saving strategies.
HRA (House Rent Allowance):
If you live in a rented house, you are eligible to claim HRA and lower your tax outgo for tax saving. HRA is a component of your salary, which is allotted for rent expenses, whether you actually live on rent, or not. It could be either partially or fully exempt from income tax. If you have your own house, your HRA will be fully taxable. In order to calculate the HRA portion which can be exempt, there are methods prescribed in the Income Tax Act.
HRA is deducted on the least out of the following 3 amounts:
a. Actual HRA;
b. 50% of [basic salary + DA] for professionals living in metro cities, 40% of the same for non-metros; or
c. Actual rent paid (minus) 10% of basic salary + DA
If you’re wondering how to save taxwith the help of meal vouchers, know that you can do it only if you choose the old tax regime. Exemption on meal vouchers has been discontinued in the new regime since 2020. If you don’t opt for the new tax regime, and you get meal vouchers, you can claim exemption to some extent upon them. The exemption is available on upto Rs. 50 per meal purchased with coupons.
LTA:
Tax saving for working professionals also includes LTA or Leave Travel Allowance. This exemption is only allowed for the shortest distance on a trip. Plus, it can only be claimed for a trip taken with your immediate family, i.e. spouse, children, parents. It won’t be applicable on trips taken with other relatives. The exemption is calculated upon actual expenses, and you will need to submit your travel bills to your employer for claiming it. This is very helpful as it literally helps you save tax when you’re enjoying a vacation!
Leave encashment:
This is something that you need to clarify with your employer. Some employers let employees carry leaves forward and encash them, while some others don’t allow you to use or encash them beyond the yearly limit. If it’s the former, then the amount received as compensation could be used for tax saving.
The full amount is exempt from tax for government employees. For private employees, the least of these three is exempt:
a. Average salary for 10 months preceding your resignation or retirement
b. Leave encashment actually received
c. Amount equal to salary for the leave earned
Section 80C:
If you opt for the old tax regime, this section is your best friend. This section can reduce your taxable income by a significant Rs. 1.5 lakh. There are numerous tax saving opportunities under this section. These include:
PPF (Public Provident Fund) investment
Tax saver FDs (Fixed Deposits) for a period of 5 years
ELSS (Equity Linked Savings Scheme) investment
Life insurance policy premiums for yourself, your spouse, and your children
Tuition fees for upto 2 children
ULIP (Unit-Linked Insurance Plan) for yourself, your spouse, and your children
Contribution to Sukanya Samriddhi Yojana (SSY) account for upto 2 daughters
You can also claim a deduction upon the principal amount of your home loan under this section. Plus, there are many other avenues under this section that you can find out with some research.
For example, Section 80D allows deduction on medical insurance upto Rs.1,00,000 depending on the age of the assesse and their family members and the amount of insurance premium actually paid. Furthermore, an NPS (Tier I) account can help you deduct tax upto Rs.2 lakhs under Sections 80CCD(1) and 80CCD(1B).
Now that you know the basics of how to save tax you can strategically plan your salary breakup and investments to lower or do away with your taxable income. Need some help with investments? Check out Tata Capital Wealth’s range of instruments such as ULIPs, ELSS, and insurance that come with convenience, privileges, lifestyle benefits, and much more.
11 March 2021
4 mins read
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