Income Tax Saving Guide for Salaried Employees (2017 updated)

People are always trying to save a little on tax. There are numerous ways to do that. Many tax saving instruments and exceptions are provided by the government. While some options are very well known, some are not. So here’s a list of all the options to save tax, specifically for salaried employees.

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1. Salary Restructuring

By understanding these points, and restructuring your salary with the help of your employer, you can save on paying some unnecessary tax.

The crux is that you incur numerous expenses because of the job. For example – travelling to work. You spend on the conveyance because of your job. Hence this should come under the employer’s account, and be paid by the employer. Such an expense is considered non-taxable by the government.

So what should you do?
Ask the employer to include this under Perks and Expenses. It should not be part of your salary. Remember that to avail these tax-free allowances, you need to provide proof of these expenses.

Some examples of such allowances which help in tax-saving are –

Conveyance
Driver
Newspaper, Books and Magazine
Medical Treatment
Uniform
Telephone and Mobile
Personality Development
Office Entertainment
House Rent

Find out from your employer whichever among the above you can avail.

2. Understanding House Rent Allowance (HRA)

It is often the case that the expense of house rent is incurred because of a particular job. For example – if you move to Bangalore for a job. You then have to rent an apartment there. By following the same argument as point 1, this expense is considered non-taxable.

While companies often provide a House Rent Allowance, it generally doesn’t cover the entire rent. According to the rules, you can deduct the lowest of the following from your gross income for tax deduction.

The actual HRA given by the employer
50% of the basic salary plus DA if you are staying in Delhi, Mumbai, Kolkata and Chennai.
40% of the basic salary plus DA if you are staying anywhere else.
Actual house rent paid by you, minus 10% of basic salary plus DA

Remember that you need to show the rent receipts as proof.

3. Medical Allowance

While a medical allowance is not essentially tax-free, it does become tax-free if you show the actual bills for expenses incurred.
The limit for the expenses to be tax-free is Rs.15,000 for a year.
This includes medical bills of your dependents as well.

So find out from your employer if you can get this allowance.

4. Leave Travel Allowances

Another tax-free allowance that you can get is the Leave Travel Allowance. While it is a personal expense, it is still included.

The travel is limited to two times in a block of 4 years within India. Remember that the travel should be while you are actually on the leave, and should be from the shortest route. For train journeys, you can claim the maximum of 1^st AC, and for flights, you can only claim travel in economy class.

5. Children’s Education Allowance

This is another expense that exempt from tax. The employer can provide this allowance of a maximum of Rs.100 per month. It is given only for two children.

Similarly, a hostel subsidy is given for children’s education. The maximum for this is Rs.300 per month. It is also given only for two children.

6. Housing Loan Interest Exemption

If you purchase a house on loan, due to relocating because of a job, the interest on the loan is exempt from tax. The maximum exemption is for about Rs.2,50,000 on interest. Remember that the house needs to be occupied by the owner. This exemption is available only if the house is under construction. And the construction has to be completed within a time span of 3 years.

7. Tax Saving through specific Investments

There are many investment options that come under section 80C. Investing in these leads to significant tax saving. The saving can be in one (or all) of these forms-

Investment amount is exempt from tax (the current limit of tax-free investment per year is Rs.1,50,000).
Interest earned on investment is exempt from tax.
The maturity amount is exempt from tax.

The tax saving investment options which come in this category are-

Employee Provident Fund – A provident fund scheme in which contributions are made both by the employee and the employer. You can read more about EPF taxation rules by clicking here.
Public Provident Fund – It is a provident fund account that can be opened in specified banks and post offices by anyone. You can read about opening a PPF account by clicking here.
Equity Linked Savings Scheme – This is a mutual fund scheme with a lock-in period of 3 years.
Sukanya Samriddhi Account – A government savings scheme specially for the girl child, it is gives the highest return among small savings schemes. The investment is locked till the child turns 18.
Tax Saving Fixed Deposit – While being very similar to most bank fixed deposits, it has a lock-in period of 5 years.
National Saving Certificate – It is a small post office savings scheme with an investment period of 5 years.
Senior Citizen Saving Scheme – It is a small government savings scheme designed specifically for senior citizens. It gives a higher return than NSC or PPF.
Post Office Time Deposit – A deposit in the post office that is eligible for tax benefits.

8. Tax – Saving Expenses under Section 80C

Under section 80C there are some expenses too that lead to reduction of tax. However, these should also come under the Rs.1,50,000 limit. The expenses which come under this section are:

Tuition fees for self and children
Insurance scheme premium
Home loan principal payment

9. Tax – Saving Expenses other than Section 80C

There are a few more expenses that have tax benefits. These don’t come under the Rs.1,50,000 limit. Some such expenses are:

Medical Insurance

You can deduct health insurance premium and health checkup expenses from your total taxable income under Section 80D.
The maximum amount you can deduct for health insurance of yourself and your family is Rs.25,000. Out of this Rs.25,000, Rs.5000 can be for health checkup.
The maximum amount you can deduct for health insurance of your dependent parents is Rs.25,000. If they are over 60 years of age, this amount goes up to Rs.30,000.

Home Loan Interest

The maximum limit for home loan interest payment deduction is Rs.2,00,000.
This leads to a seizable saving in tax.

Loan for Higher Education

Similar to interest on home loan, interest on educational loan is an expense that can be deducted from your total taxable income under Section 80E.
This tax benefit can be availed upto 7 years for an education loan taken from any financial institution.
Tax deduction can be claimed for a loan for self, spouse, or children. A legal guardian of a scholar can also claim this benefit.
It is applicable only on loans for higher education.

Saving Account Interest

Saving account interest is completely tax – free if the total taxable income for the year is less than Rs.10,000 under Section 80TTA.

Serious Ailment Treatment Expenses

Expenses incurred during the treatment of serious illnesses (for self or a dependent) can be deducted from total taxable income under Section 80DDB.
The maximum income tax deduction for this is Rs.40,000. It is Rs.80,000 for senior citizens.

Expenses for Maintenance of Differently Abled Dependent

You can avail a tax deduction of Rs.50,000 – Rs.1,00,000 under Section 80DD on expenses incurred for the rehabilitation, training treatment, and nursing of a physically or mentally disabled dependent.

Deductions for Specially Abled

People suffering from disabilities are given an extra tax benefit. They can deduct Rs.50,000 – Rs.1,00,000 from their total taxable income depending on the severity of the disability.
They can claim this deduction under Section 80U by getting a certificate from a doctor working in a government hospital.

House Rent

If a salaried employee is not given House Rent Allowance, he or she can deduct house rent from total taxable income subject to certain rules.

Donations

Donations to particular causes are eligible for 100% or 50% tax deduction under Section 80G.

10. Save on Capital Gains Tax

To save on capital gains tax, you can set off capital gains from one investment with the capital loss from another investment.
Remember that short-term capital gains can only be set off by short-term capital loss,and long-term capital gains can only be set off by long-term capital loss.
You can carry forward capital loss for upto 8 years, hence there is good chance of using it to set off capital gains.

Now that you know the various options, evaluate each one of them according to your situation and requirements, and start tax planning. And remember to make on time tax declarations. By following the above points, you can save on a considerable amount of tax.