As the financial year progresses, salaried employees seek ways to optimize earnings and minimize tax liabilities. Effective tax planning not only aids in financial planning but also ensures compliance with tax regulations. With the financial year-end approaching, it’s crucial to understand your tax slab and salary components. This knowledge helps in identifying available deductions and saving on taxes.
The Income Tax Department follows a progressive tax regime, where the tax rate increases with income. High-income individuals generally bear a higher tax rate, while those in the low or middle-income groups bear a lesser rate. Consequently, high-income earners often seek tax-saving measures to reduce their burdens. Here are some smart strategies to save tax on your salary for 2024.
Top 10 Tips for Saving Tax on Salary
Utilize Section 80C Deductions
Section 80C of the Income Tax Act offers a maximum deduction of up to ₹1.5 lakhs. Here are some popular options:
1. Employee Provident Fund (EPF)
The Employee’s Provident Fund (EPF) involves a 12% contribution from both employer and employee on the employee’s basic salary. Contributions up to ₹1.5 lakhs are tax-exempt under Section 80C, and the current interest rate is about 8.65%.
2. Public Provident Fund (PPF)
The Public Provident Fund (PPF) is a government-backed savings scheme available at most banks and post offices in India. It has a 15-year tenure with a current interest rate of 7.10%, which is tax-free and changes quarterly. Partial withdrawals are allowed after 7 years.
3. National Savings Certificate (NSC)
The National Savings Certificate (NSC) is a 5-year savings scheme with a 6.80% interest rate, compounded annually. Contributions up to ₹1.5 lakhs qualify for tax exemption under Section 80C. This scheme has a minimum lock-in period of 5 years.
4. Equity Linked Savings Scheme (ELSS)
Equity Linked Savings Scheme (ELSS) are tax-saving mutual funds with a minimum lock-in period of 3 years. At least 80% of the assets are invested in equities, offering high market-linked returns. Investments qualify for tax exemption under Section 80C, and gains above ₹1 lakh are subject to a 10% Long Term Capital Gains Tax.
5. Life Insurance Premiums
Life insurance policies, including endowment policies, ULIPs, and term insurances, offer tax deductions up to ₹1.5 lakhs under Section 80C. To qualify, the insurance coverage must be at least 10 times the annual premium.
Claim House Rent Allowance (HRA)
House Rent Allowance (HRA) helps employees save on taxes under Section 80GG. To claim HRA, the lowest of the following is exempted:
- Actual HRA received
- 50% of (Basic salary + DA) for metro cities or 40% for non-metro cities
- Rent paid minus 10% of (Basic salary + DA)
- For annual rent exceeding ₹1 lakh, proof such as the landlord’s PAN card and lease agreement is required.
Leverage Section 80D for Medical Insurance
Section 80D allows salaried employees to claim deductions for medical insurance premiums paid for self, spouse, children, and parents.
- ₹25,000 deduction for medical insurance premiums paid for self, spouse, and dependent children.
- Additional ₹25,000 deduction (₹50,000 for senior citizen parents) for premiums paid for parents.
- Reduces taxable income and supports comprehensive health coverage for the family.
Interest on Home Loan (Section 24)
Interest paid on home loans is eligible for tax deductions under Section 24 of the Income Tax Act:
- Up to ₹2 lakhs deduction is available for interest paid on a self-occupied property.
- There is no upper limit on deduction if the property is rented out.
- First-time homebuyers can claim an additional ₹1.5 lakhs deduction under Section 80EEA.
- Principal repayments qualify for deductions under Section 80C, up to ₹1.5 lakhs annually.
Education Loan Interest (Section 80E)
Interest on education loans for higher education is eligible for tax deduction under Section 80E. Key points include:
- No upper limit on the deduction amount.
- Can be claimed for up to 8 years.
- The loan must be taken from a financial or approved charitable institution.
- Applicable for loans taken for self, spouse, children, or a legal ward
National Pension Scheme (NPS) – Section 80CCD(1B)
Contributions to the National Pension Scheme (NPS) offer an additional tax deduction of ₹50,000 under Section 80CCD(1B), over and above the ₹1.5 lakh limit under Section 80C. This makes NPS a valuable tool for long-term retirement planning and tax savings.
Leave Travel Allowance (LTA)
Leave Travel Allowance (LTA) is tax-exempt twice in a block of four years for travel within India. The exemption covers travel costs for trips with your spouse, children, and parents but does not include hotel or food expenses. To claim LTA, submit travel expense bills to your employer.
Claim Deductions for Donations (Section 80G)
Under Section 80G, donations to charitable institutions and relief funds are eligible for tax deductions. Depending on the institution, you can claim 50% or 100% of the donated amount. Donations to NGOs can be claimed up to 50%, and the NGO must provide an 80G certificate. Contributions to political parties also qualify for deductions under Section 80GGC, subject to certain conditions.
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Conclusion
Effective tax planning involves understanding and leveraging the various deductions and exemptions available under the Income Tax Act. By investing wisely and claiming legitimate deductions, you can significantly reduce your tax liability and increase your savings. Always stay updated with the latest tax laws and consider consulting a tax professional for personalized advice.
Prudent tax planning not only helps in saving money but also ensures compliance with tax regulations, avoiding any legal hassles in the future. Happy saving!
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