Salaried? Follow These Steps to Become a Master at Tax Planning

by Jena Shepherd | January 26, 2018 4:57 am

In order to become a master of anything, you first need to understand the components thoroughly. In the same way, if you wish to be a master at tax planning then you need to understand the components of your income.

Keeping tax planning simple is the smart way. You do not need to get advice from multiple sources that may be confusing. It is important you plan right from the start of the financial year and not wait until the last minute.

The Income Tax Act provides various deductions and exemptions. You may use some simple ways to reduce your tax liability during the financial year.

  1. Understand the components of your salary

There are several components of your salary, which are eligible for tax benefits. In case you require any clarifications, you may consider seeking help from the accounts department. These professional experts assist you to understand tax planning for salaried employees.

An amount of INR 100 per month for two children is eligible for tax exemption under section 10(14) of the Income Tax Act. In addition, you are allowed to take tax benefits for expenses incurred on the hostel stay of two children.

An amount of INR 1,600 per month or INR 19,200 annually is allowed as tax exemption towards transportation allowance under section 10(14) of the Income Tax Act.

If you are living in a rented house, then you may claim tax exemption towards HRA. The exempted amount is regulated by the provisions of section 10(13A) of the Income Tax Act.

Under the rules of 3(7)(ix) of Income Tax Rules 1962, you may claim the entire telephone bill amount for exemption from your taxable income. However, your nature of employment must require the use of the mobile or telephone.

An amount of up to INR15,000 per year is eligible for exemption from your taxable income. To claim this exemption, you need to submit medical bills.

You may claim two trips in a block of four years as the tax exemption. However, the   following conditions must be satisfied:

  1. Section 80C investments

 Section C offers the best investment options for a salaried person to reduce his tax liability. You may claim up to INR 1.5 lakh per annum as tax deductions from your gross income. Here are some excellent investment options.

If you have a home loan, you may claim the principal portion of the installments paid during the year as tax exemption for up to INR 1.5 lakh. Furthermore, the interest component of the monthly installment is tax exempt under Section 24 for up to INR 2 lakh per year.

A maximum of INR 25,000 per annum is exempt from taxable salary towards medical insurance for self, spouse, and children. An additional of INR 30000 per year is exempt towards medical insurance for your parents aged over 60 years.

Equity Linked Savings Scheme (ELSS)

Until a few years ago, some of the best investment options for a salaried person were traditional instruments, such as Public Provident Fund (PPF), Fixed Deposits (FDs), or National Pension System (NPS). However, these have longer lock-in periods and do not deliver high returns during the long-term. Today, you may invest in ELSS funds to earn higher returns. The fund corpus is invested in equity and related instruments, which enables you to accumulate a higher corpus in the longer period. Furthermore, these come with only a three-year lock-in period. Investing in ELSS funds through the Systematic Investment Plan (SIP) route is one of the best ways to save tax for a salaried employee.

Keeping the above components, you need to plan your year and set monthly budgets. The savings that you make should be in line with your financial goals and be one of the highest priorities in your budget. These are some of the best ways to save tax for a salaried employee.

Before you make an investment decision, it is crucial you evaluate various available options. You must clearly understand the gestation period, investment philosophy, and maturity conditions before investing.

Tax planning for salaried employees must be done early to avoid last-minute hassles and rush into inappropriate investments.

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