‘People in my office were suggesting me as to how I should make a fixed deposit from now itself to save my taxes at the end of the financial year.’
‘Do I have an LIC policy? Do you think that would be enough to avoid taxes on my payslip?’
‘I do not have money at the end of the year to invest to reduce taxes.’
I am sure most of us have either said such statements or heard people make them. Irrespective of the above, most of us do wonder why our salary is being taxed and we want to know how to avoid paying taxes or pay the least possible taxes ever.
I have mentioned ways to reduce your taxes without making any investments i.e. just by understanding your salary structure and its components.
It is very important to know that the entire CTC amount of an individual is not taxed at the same rate but various components in the salary structure affect your taxability differently. This is the main reason why we are not paid an X amount as salary but the same is divided into the components. We have discussed the compensation structure in our Article - Understand your salary structure
As discussed earlier, salary can be divided into 4 basic components and we shall discuss the taxability with respect to each component now
Running away from your tax queries is not the solution to reduce your taxes.
Reimbursements and allowance: You can reduce your taxes on the reimbursements and allowances by submitting proper bills and other required documents/forms withing the due dates provided by your employer.
Leave Travel Allowance (LTA) – Did you know that the annual leaves and holiday that you were taking would actually help you to reduce your taxes? LTA lets you do just that. LTA remunerates employees for their travel within the country. The amount of LTA would be mentioned in your salary structure. Where you submit appropriate and eligible bills of your travel to your employer, the amount shall be paid to you and will be considered tax-free. There are a few conditions/rules which are to be followed while claiming for your tax-free. We have mentioned the same in our article How to save taxes through LTA.
House Rent Allowance (HRA) – Your Company pays for your rent and when you submit appropriate rent receipts, no taxes are charged on the same. This benefit is available only to those employees who are staying on rent. Given that in metro cities, many of us are living on rent, it is a great benefit to save taxes. As always, there are certain rules based on which this becomes tax-free, we have mentioned the rules in our Article How to save taxes through HRA.
Standard deduction towards medical and conveyance: From April 2018, a standard deduction of INR 40,000 is available towards medical and conveyance expenses of the employees. You are not required to submit any bills to claim this benefit. INR 40,000 would be directly deducted from your gross salary to compute the taxable salary numbers. Ensure that the same is deducted when you receive your Form 16.
Food, telephone, internet and other reimbursements – Some employees have other reimbursement items such as food, telephone, internet, uniform, newspaper etc. which are reimbursable and no taxes will be deducted on these if you submit bills as required by your employer.
Taxability of various salary components
Contributions – Payments made by the employer on behalf of their employees towards EPF, NPS, insurance or gratuity for the retirement benefits or otherwise
Employee’s provident fund (EPF) - Contributions made by the employer and employee (which are deducted from the CTC) is tax-free. The same is not included as a part of your taxable salary. Please refer to our Article – Taxability of EPF to understand the same in detail.
National Pension Scheme (NPS) – Deductions made from your salary each month towards NPS and your employers’ contribution is tax-free. In fact, NPS provides additional tax benefits to the employees. We have discussed the same in detail in our Article – Taxability of NPS.
Gratuity – Gratuity is only received when on resignation (after completion of 5 years of service), death or retirement. A part of the gratuity amount received is exempt based on the formula specified under the Income-tax Act. We have discussed the same in detail in our Article – Taxability of Gratuity.
Insurance - Any premium paid by your employer towards your health insurance, life and others which is included in your CTC is tax-free and the same is not included in your total taxable salary.
Variable salary i.e. Bonus paid in any form is taxable. Bonus is added to your total taxable salary and taxed based on the slab rate you fall under after the receipt of the bonus.
Fixed Salary Components: This includes the basic salary, special allowance, Dearness allowance etc. They are generally fully taxable.
Basic salary is generally is 40% - 50% of the CTC amount.
Dearness allowance is not paid by many private companies; it is generally paid by government companies.
Special allowances are the balancing number in your CTC. Whatever may be the amount, it is fully taxable.
Professional Tax - Professional tax is the tax levied by Governments of certain states on salaried employees. The states where professional tax is applicable are Karnataka, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, and Sikkim. The amount of profession Tax that is deducted varies from state to state where they are applicable. You get a credit of the professional tax paid while computing your income-tax liability.
From this article, you would have understood the simple ways (if applied) that can reduce the taxes without making any additional insurance or investments. These ways are inbuilt in your salary components and not many people know how to make most of it.
Understand your salary structure and work on reducing your taxes. It is the first step towards a healthy financial life. In our salary series of articles, we have discussed the taxability of each component.
Listed below are the specific rules regarding EPF for your reference.
You can increase the contribution to EPF
You can contribute more than 12% mandatory contribution to your EPF account. You can contribute up to 100% of your basic pay if you want but the employer is under no obligation to match your EPF contribution. You will get the benefit of your personal contribution (in excess of the basic limit) in section 80C of the Act. All other rules of EPF will apply to the additional contribution.
EPF withdrawal is taxable
The investment in the provident fund is tax-free. According to the rules of EPF, the maturity proceeds and interest on it are tax-free. We take the tax benefit of EPF contribution. We never think of the tax on EPF Withdrawal amount.
If you try to withdraw the EPF balance before 5 years, you must pay back the tax benefit, you had availed at the time of investment. EPF will deduct the TDS on the withdrawn amount before depositing the same in your bank account (where money is withdrawn before 5 years).
An employer cannot withhold your EPF balance
After resignation, many employees leave the company without serving the notice period and sometimes on a bad note with their employer. In such a situation, the EPF balance is the only handle to arm-twist the employee. Some employer’s never forward the PF withdrawal form to the regional PF office.
The Employer has no right to do so. The Rules of EPF say that an employer can never withhold the EPF balance. The money never remains with them. The employers are the mere facilitator of the EPF scheme. The erring employer can be also punished for this behaviour.
You can withdraw your EPF balance without the signature of the employee. You can do the same by taking signatures and other formalities from the banker.
You cannot withdraw 100% of your EPF corpus
You can withdraw the EPF corpus if you have been unemployed for 2 months. But this withdrawal would not be for the full amount. The is a new rule of EPF withdrawal. Now, you can withdraw only your contribution to the EPF and interest on it. The employer’s contribution and interest will remain in the PF account till the retirement age (58 years).
You can opt out of EPF
We generally think EPF is a mandatory contribution. However, this is not the case. EPFO guidelines say that if an employee’s salary is more than INR 15,000 per month he/she can avail the option of not being a part of the EPF scheme. If this scheme has opted, the entire salary is paid out to the employee, without any deduction, towards EPF every month.
Having said that, it is important to note here that an employee has to opt out of Provident Fund at the start of his job and if he/she is part of EPF programme even once in his life, this option of opting out stands null and void.
EPF provides life insurance as well
A lot of people are not aware of this benefit. Let us explain how this works. If a company does not provide insurance coverage to its employees under the group life insurance plan, then the companies are required to contribute 0.5% of monthly basic pay towards Employees’ Deposit Linked Insurance (EDLI) scheme. This contribution is capped at INR 15000. Companies that are already covering employees for insurance are exempted from this plan of EPFO.
Check your personal details with EPFO
Many times people realize at the time of withdrawal or transfer of EPF that incorrect personal details are submitted with EPF. In such cases, you must check and rectify the same while creating an account with the UAN. You must inform your employer to get the same updated.
We will be posting a detailed article on how to change the same through UAN.
House Rent Allowance is a component of the salary provided by the employer to his/her employee. If you receive HRA as part of your salary and you live in a rented accommodation, then you can claim full or partial HRA exemption u/s 10. However, HRA is fully taxable if you don’t live in a rented accommodation.How to calculate HRA?
Your HRA depends upon the following 4 factors. They are:
Salary
HRA component
Rent Paid
Location of your rented house
Tax exemption on HRA is least of the following:
1) Actual HRA received
2) Actual rent paid reduced by 10% of salary
3) 50% of basic salary if the taxpayer is living in a metro city
4) 40% of basic salary if the taxpayer is living in a non-metro city
Since the least of the above is exempt from tax, you can ask your employer to restructure your salary to get maximum tax benefit.
Pay rent and save taxesWhat if my employer does not provide me with the HRA?
If you are making payments towards rent for any furnished or unfurnished residential accommodation occupied by you, but do not receive HRA from your employer, you can still claim the deduction and that would be under Section 80GG.
Conditions that must be fulfilled to claim this deduction:
You should be self-employed or salaried
You have not received HRA at any time during the year for which you are claiming 80GG
You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.
In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. That other property would be deemed to be let out in order to claim the deduction under section 80GG. Refer our Articles on Income from house property where we have discussed this in detail.
As per section 80GG of the Act, the least of the following will be considered as tax-free:
Rs 5,000 per month;
25% of adjusted total income*;
Actual Rent less 10% of adjusted total Income*
*Adjusted Total Income means Total Income Less long-term capital gain, short-term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).
How to Claim HRA When Living With Parents?
Where you are staying in your parents’ house and your parents are owner of the same, you can still claim the HRA. Youcan pay the rent to your parents and claim the allowance provided.
You will have to enter into a rent agreement with your parents, provide their PAN card to your employer, also generate rent receipts. In this case, please note that the rent amount that you showing as payment to your parents will be taxed as rental income in their hands.
Is my landlord's PAN mandatory to claim HRA?
Yes, it is where your annual rent crosses 1 lakh INR.
If your landlord does not have a PAN, then you (as the employee) have to obtain the declaration to this effect from the landlord along with the name and address of the landlord.
A Format of Deceleration May be as follows :-
Date
To
Name & Address
DECLARATION
I ____________(Full name and address of the declarant) aged ____ do hereby declare that I have leased the Flat No._______________________________ From 1st April’2018 to 31st March’2019 to ___________( Name of lessor) at a monthly rent of Rs. _______/- ( __________________ only). Further I do hereby declare that my total income during the financial year 2018-2019 did not exceed the statutory limit prescribed under Income tax Act,1962 and have not assessed to tax and does not have a PAN card .
Verification
I,_________________ do hereby declare that what is stated above is true to the best of my knowledge and belief.
Verified today, the _____________ day of _________________
Date : ________________Place : ________________
(Name of the declarant)
HRA is one of the most common component of a salary structure and hence, you must claim the same where you are staying on rent. If you are not staying on rent and living with your parents, it is important you analyse the overall family's taxability before declaring that you are paying rent to your parents.
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