We have two options to save tax in the case of Salaried Income. First is salary restructuring and second is tax saving instruments.
Salary restructuring: As the term implies, salary restructuring allows you to redesign your salary, so as to reduce your total tax liability. Here are some steps you can take in order to reduce your tax liability.
• Do you need a house? Does your employer offer Rent Free Accommodation or House Rent Allowance? Then go for it, as the amount gets deducted from your total taxable income.
• Does your company expect you to wear uniform at work? If so, the expenses incurred on buying and maintenance the uniform will not be taxed.
• Does your employer provide you with allowance for your children’s education and hostel accommodation? Then use it to claim exemption under section 10 (14).
• Does your company provide you with a telephone facility in your home? Then it not taxed. However be warned against taking telephone allowance, since it is totally taxable and will increase your taxable income.
• Opt for the car facility, since the value of the perk is much lower than the actual expenditure incurred on the car.
• As we all have to visit the doctor at some point of time, save tax by claiming medical reimbursements up to Rs.15,000/- p.a. But don’t take any medical allowance, since it is completely taxable.
• Always ask your employer to include dearness allowance and dearness pay along with commissions earned in your salary. It will lower your tax liability on house rent allowance, gratuity and pension.
• If you are eligible for a pension, always get it commuted, as commuted pension is tax-free for government employees and partially exempted for others. You can get tax relief under section 89(1).
• If your current employer is participating in an authorized provident fund, and you change your employer within 5 years of joining the firm, ensure your new employer is also a member of the authorized provident fund. It will let you transfer the corpus in your provident fund to the new company without paying any tax. Further, insist your employer to fix the contribution to your provident fund as 12% of your salary, as it is the highest limit for tax exemption.
• Plan your retirement or resignation at the start of the financial year in order to lower the tax on retirement benefits.
• As leave travel concession is not taxed if certain criteria are fulfilled, try to claim this incentive to the highest possible level, without having to pay any tax.
Tax saving instruments: While these instruments do help you save tax, they have a maximum limit of Rs. 1,20,000/-, out of which Rs.20,000/- should be Infrastructure bonds.
• Insurance: All payments made towards both life and health insurance are eligible for tax benefits. Even contributions made towards pension payments can be eligible for tax benefits.
• PPF (Public Provident Fund): It is one of the safest tax saving investments available. Both interest and capital withdrawals from the fund are tax free. However its drawback is the lock-in period of 15 years.
• NSC (National Savings Certificate), Post office (CTD) accounts: These are government savings schemes available at post office, with a lock-in period of 5 years.
• Bank deposits: These are special tax saving FDs offered by banks with a lock-in period of 5 years.
• ELSS (Equity Linked Savings Scheme): These are tax savings instruments offered by mutual funds, with a lock-in period of 3 years. They invest in various quality stocks.
• Investments in approved Infrastructure bonds up to a maximum of Rs.20,000/- (w.e.f. the A.Y.2011-12).
All these instruments carry different degrees of risks. While PPF, NSC, Post office accounts, insurance (except ULIPs) and FDs are safer, they offer lower returns and are not very liquid, due to their long lock-in period. On the other hand, ELSS ( (Equity Linked Savings Scheme) has a short lock-in period but is more risky, while ULIPs carry the risk of ELSS but without the liquidity benefit. So while investing for tax saving purpose, take into account factors like your risk appetite, returns generated by the instrument, liquidity, capital appreciation and safety of capital. Remember, younger you are, riskier options are better for you, since over a long time, these instruments can generate higher returns for you, and minimize the risk of capital erosion. Also diversify your investment portfolio.
If these options are not enough for you, then here are some more:
• Housing loan and education loan:
• Donation to charities/religious trusts.
To summarize, first thing to do is to restructure your salary so as to minimize your tax liability. This will minimize the need to invest for tax saving.
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