The problem in today’s world is that everyone puts their entire efforts in earning money. Both the partners work hard to satisfy family needs from the financial perspective. In doing so we are compromising on various aspects like health, parenting, reading books, spend time on self etc.
We are so stressed out that we do not think of anything else. We have huge monthly saving to invest but we don’t plan and we are not sure where to invest. Most of the time the money lies ideal in saving accounts or they are made to invest in real estate by by non professionals. Or some bank agent sees their bank balance and manages to sell them a ULIP or some other high commission product in the name of their child's future. By the time we realise that we made a bad investment, we would have already lost a lot of money in these products.
To be a winner, you have to put efforts into something!!
We all are so busy doing so many things that regular financial planning takes a back seat. Further, lack of knowledge and enough information delays it even more.
People don’t realise the importance of financial discipline. You make money, but do not put efforts to make the money you have made to make more money for you.
If you channelize your savings properly you can easily achieve your dreams. With financial planning, you can do goal-based planning and ensure that you live the quality of life you always desired, ensure your children's future, plan and retire early comfortably, spend time with your kids etc.
Financial discipline also includes proper tax planning and timely tax filling. There are various benefits available for an individual under the income tax Act which are considered while preparing a financial plan. However, many people just invest for the purpose of tax savings and nothing more or less than that. This is not enough, you must get more discplined, define your goals, understand your savings, reduce your expenses and invest accordingly.
The main purpose of this article is to encourage individuals to inculcate financial discipline. In our other articles, we have discussed about how to convert a financial discipline into gains by investing properly.
To buy or not to buy is an old story. The new story is to be this or that. We are definitely spending on one thing or another. It is not that we are not spending at all. The only thing we as a consumer are doing is deciding whether to buy this or that. Some of us do not even do that, we just end up buying everything because of our 2 best shopping companions’ credit cards and EMIs.
People have stopped justifying their expenses and this is the reason why there are not enough savings and thus, reduced investments. You can save only when you spend less and thus, I have dedicated this article on how and where we spend extra and how can we control our spending.
Buying on Impulse – This would be the most common way of going off-budget. Have you bought something and then realized that you don’t enjoy it anymore or you aren’t as excited about it as you were at the time of buying it. It is very common to do the same, especially when you are not feeling very good, you see your neighbour own something that you always wanted. To avoid this, don’t buy something that you like when you see due to certain emotions/influences immediately. Go back. Sleep overnight on that purchase. If next morning you wish to own it, go back and then buy it.
Carrying credit card balance – Using a credit card to buy the new laptop, phone or even those expensive shoes online. Having that credit card balance has become the way of life for most of us where consumer credit is so easily available. The problem arises when it is used for regular purchases. Paying interest as a failure to pay off credit card bills makes the prices of the charged items a great deal more expensive. We have written it in detail in our Article - Why you must avoid credit cards.
Avoid paying bills on time – Have you ever missed paying your telephone bills or other utility bills at home? In this time of auto debit/email reminders/ Paytm reminders, it is still so surprising that so many people with balances in their bank accounts forget to pay their bills on time and are completely ok with doing the same. For instance, if you have 4 credit cards and you are not clearing the minimum dues on time, you would be paying at least Rs. 2,000 in late charges alone. However, if the same amount is invested every month in a scheme that earns, say 10% annually, it can actually fetch you 32 lakhs in 25 years.
Spending by habit: Quite often a lot of our spending is a daily habit, which could be unnecessary too. For example, if you buy a takeaway coffee every day for your office staff/visitors why not invest in a coffee machine? Re-evaluate your habitual spending patterns and decide whether that is necessary.
Having unused memberships/subscriptions – Everyone has an account on Netflix, Hotstar, Amazon Prime, Voot TV, the unlimited data pack, household cable with HD. All of this totals to around 2000 INR per month. The same is equivalent to Rs. 24,000 per annum. Do you have enough time and resources to go online and watch movies on all of them? A person on average is spending 24,000 per annum for his entertainment solely through online channels. I have not even considered the money spent on theatres and other modes of entertainment. Gym memberships are other classic examples of unused memberships.
Paying for unnecessary services/charges – When a seller is selling something new in the market, it is their job to create a requirement for their products but it is up to a consumer to judge sensibly if they actually need that product or service. You may sometimes need a car helpline service, but why to go for the extended warranty on a car or washing machine when that is hardly worth the price? Do you also really need all those extra features for your cell phone?
Not having clear needs in mind: People tend to overspend when they don’t have a clear objective of what they need to buy. Thus, they often end up buying things just because they ‘look nice’ and not because they are actually needed. Therefore, avoid getting inside a mall without a clear objective. Window shopping has put most of us into huge debts or low cash balances.
Living beyond one’s means – The availability of car loans to buy the first cars or easy access to credit cards can tempt anyone to indulge in buying things even without being able to afford the expense. But just because you own a credit card, it does not mean you should indulge in whatever you fancy at the moment.
Being ignorant of one’s spending – Ignorance is bliss? Think again! “Many chronic shopaholics live in denial about how much they spend. If you realize how much you spend on various items, this alone may be sufficient to reduce your spending.
The insurance policies that cover the child from their day of birth are rare. Once the baby completes 90 days, they become eligible for health insurance. Adding the child to the health policy of their family is also an available option like a family floater health insurance policy.
Age: Children cannot be insured from day one since that involves a lot of risks. But to cover them, one can add them to their parent’s policy which can cover early vaccinations and postnatal care. After completion of 90 days, the baby is eligible for insurance.
Options: The insurance company must be made aware of the child’s birth, within the seven days of birth. Then the insurance provider lets you know the applicable plans to cover the baby. The plan advised offers insurance cover to the baby after 90 days, and more options can be added while renewing the policy.
Required Documentation: While renewing the policy, a set of documents like a birth certificate and discharge card are to be included for submission.
Premium: After the submission of the required documents, the premium will be calculated and informed that when paid the health insurance policy will be covering the child.
It is very important to add your child to your health insurance. The costs related to the newborn baby can be huge and can shift your entire financial planning. A small increase in your premium can secure you from unforeseen financial expenses of your newborn and lets you enjoy the time with them carefree.
Leave Travel Allowance (LTA) is my favorite allowance. As per LTA, the government gives us tax benefits for our holiday. It is the best tax saving scheme ever – as I just don’t save tax, I take a vacation too!!
As per this allowance an employee gets to cover his travel expenses when he is on leave from work by his employer. Sometimes it is also known as Leave Travel Concession (LTC). LTA is exempt from tax u/s 10(5) of Income Tax Act, 1961.
It is the travel concession or assistance received by you (an employee) from your employer for yourself and your family towards your travel expenses within India while you are on leave from work or post-retirement or termination of service.
Family includes:
Spouse of individual
Children of individual
Parents of an individual (mainly or wholly dependent on the individual)
Brothers and sisters of an individual (mainly or wholly dependent on the individual)
Lets plan and travel from the tax perspective this time
There are certain rules that are to be followed:
LTA amount is generally fixed by the employer and is a part of your compensation structure (refer our article Understand your salary structure)
Thus, the relevant expenses incurred up to the specific limit are tax-free.
To claim the benefit, you must have a copy of your travel tickets and bills.
Expenses incurred only on traveling are permitted. Expenses made on food, shopping, etc. are not tax-free.
One drawback is that you cannot claim tax-free LTA each year. An exemption is allowed for only two travels within a block of four years.
LTA covers only domestic travel, i.e. only within India. International travel is not covered under this.
What are LTA block years?
An employee cannot decide his/her own block of four years depending on when they start the job. The blocks are fixed in the income-tax act. Exemptions can be claimed twice during each block period.
The current block consists of the following 4 years 2018, 2019, 2020 and 2021.
List of Expenses Exempt under LTAIn case of travel by air
The economy airfare of national carrier by the shortest route or the actual amount spent on travel whichever is less is exempt from tax.
In case oftravel by rail
The A.C. first class rail fare by shortest route or actual amount spent on travel whichever is less is exempt from tax.
If the origin and destination spots of the journey are connected by rail but the journey is performed by other modes of transport and not air or rail
The A.C. first class rail fare by shortest route or actual amount spent on travel, whichever is less is exempt from tax.
If the origin & destination points are not connected by rail or air (partly/fully) but connected by other recognized Public transport system
The first class or deluxe class fare of such transport by shortest route or actual amount spent on travel, whichever is less is exempt from tax.
If the place of origin & destination are not connected by rail or air (partly/fully) and also not connected by other recognized Public transport system
The AC first class rail fare by shortest route (assuming that the journey was performed by rail) or the amount actually spent on travel, whichever is less is exempt from tax.
What is Carryover Concession?
If you did not use LTA provided by your employer either once or twice (the permitted limit) in a 4 years block period, then you can still claim LTA exemption by using LTA in the year immediately succeeding the 4 years block period. It is known as carryover concession.
For Example, Mr. Shah claimed only one exemption during the 7th block of years which lasted from 2014-17. He still has one exemption remaining. So when can he claim it? He can claim this concession in the next year, i.e. 2018 which is a part of the next block. So, in the next block of 2018 – 2021, he can claim 3 exemptions in total but he needs to claim carryover concession of the previous block (2014-2017) in 2018 only and not later than that.
Example 2 – Mr Iyer had a LTA of INR. 30,000 per annum, in his compensation structure.
He did not travel anywhere in 2018 and thus, no LTA was claimed by him. He transferred the same to 2019.
He traveled in 2019 incurred an expense of INR 40,000
He submitted the proofs and will get an LTA of INR 40,000 from his employer. All of this is tax free INR 30,000 from 2018 and INR 10,000 from 2019.
In 2020, he again traveled and thus, claimed LTA of INR 35,000 which was given to him tax free from his employer.
In 2021, balance INR 45,000 was paid to Mr Iyer (INR 120,000 – INR 40,000 – INR 35,000).
However, Mr. Iyer will get only INR 36,000 in hand as INR 9,500 was deducted towards taxes by his employer indicating that the same was not tax-free.
Mr. Iyer has claimed the LTA twice in 4 years i.e. 2019 and 2020 and thus the balance payment received in 2021 was not tax-free.
You will have to check with your employer to check on this carry forward of LTA balance to next year. Some employers prefer clearing the balance in the same year itself.
Thus, if you want to save taxes on your salary, take a vacation with your family in India and maintain all your travel tickets to claim the LTA benefits. LTA is the only allowance which lets you travel and save taxes. In spite of LTA being such an easy allowance, many people do not claim LTA (i.e. they do not submit appropriate forms and proofs to their HR teams within valid timelines) and end up paying taxes on their LTA allowance.
“The number of INR 50,000 per month that the company has offered to pay you is it the in-hand number or your CTC?” I could not help but ask my friend, Leesha this question (and ruin her excitement) when all she wanted me was to be happy for her new job at a leading fashion house in Mumbai.She obviously did not understand the term CTC. She told me that she was offered INR 50,000 per month and reckoned it was sufficient to live a decent life in Mumbai. What she didn't understand was that the amount of INR 50,000 was the CTC amount and the actual amount she would receive in hand each month would be lower.I asked her ‘Have you heard about the IIT students getting a package of INR 24,00,000 and more?' After she answered in affirmative, I further questioned her ‘How much do you think, that person would be getting each month in his/her bank account?’ My friend answered with a bit of jealousy that the amount would be INR 200,000. I told her that it is not so, the student would get anything between INR 100,000 to INR 135,000 as his/her in-hand salary. The amount of INR 24,00,000 is their CTC and various components get deducted before receiving the final salary.I explained to her that the industry generally discusses salary in terms of CTC and not in-hand (which are not the same thing). By looking at her face, I realized either she has assumed the worst or is absolutely clueless about anything that I just said. Then I started to explain to her exactly in detail what I meant.In-hand salary (also known as take-home salary) is the amount that you actually receive in your bank account at the end of each month whereas CTC (also known as Cost to company) is the total salary amount before any taxes, insurance amount, bonus and other various deductions. This amount is generally printed on the offer letter issued to an employee.Salary is always offered on per annum basis. It is generally never negotiated or discussed on a per month basis. My friend would be expecting an amount of INR 600,000 (50,000*12) annually in-hand but the amount is actually INR 600,000 CTC. In short, in-hand salary = CTC minus DeductionsCTC is always a higher number than the in-hand salary number.The general deductions which are subtracted from the CTC amount to arrive at the final ' in-hand' or 'take-home' salary of an individual can include:
Telephone, car, and other allowance – Many employers reimburse their employees' telephone & internet bills, children's education and uniform allowance up to a specific limit. This amount is also included in the CTC as a part of your salary. However, this payment is not made at the end of each month but is made only when the bills (up to the limits specified in the offer letter) are submitted to the company. Thus, one can collect bills over 6 months and claim their reimbursements once in 6 months or not claim anything until the end of the year. Where an employee does not submit any bills throughout the year, the employer shall pay the amount due to an employee after deducting relevant taxes on the same at the end of the year. Where bills are submitted to the extent of the limits specified, no taxes are deducted by the employer while making these payments.
Leave Travel Allowance (LTA) - LTA is similar to the allowances mentioned above. The same is paid to you only after you submit the relevant bills and documents to your employer. There is a detailed article, written on How to save tax through LTA
Components of a salary structure
Gratuity - Gratuity is payable to an employee on the termination of his /her employment after they have rendered continuous service for not less than 5 years. It is important to know that gratuity is payable only on resignation (after 5 years of service), retirement or death. Thus, even where the same is included in your CTC, it is not paid to you until you serve 5 years. If you leave the company before completion of 5 years of service, this amount is not paid to you even though it formed a part of your CTC.
NPS (Employer Contribution) - An employer may contribute a % of your basic salary towards NPS - National Pension Scheme. Any money from NPS is received only post-retirement. There are certain conditions for withdrawing money before retirement. We have discussed in detail about NPS in our articles What is NPS and How can you withdraw money from NPS. The NPS amount is a part of your CTC but not paid each month to you and instead deposited with PFRDA each month to be paid to you on your retirement.
Employees' Provident fund (EPF)– An employer contributes 12% of the basic salary payable to the employee towards EPF. Where an employee opts for EPF, the employee contributes 12% of his basic salary in addition to the Employers Contribution. A total of 24% of your Basic salary is deducted from your CTC resulting in a lowered in-hand amount. There are many things to know about EPF apart from the impact on the in-hand amount. We have discussed the same in detail in our series of Article under EPF
Taxes –All employers are required to deduct taxes on the salary that they pay to the employees. If you are under the belief that you are hardly earning anything and should not be paying any taxes, you are mistaken. If an employee is earning more than INR 2.5 lakhs per annum (this amount is the CTC amount), the employer shall deduct appropriate taxes on the same. Apart from EPF, the major impact on the in-hand salary is the taxes which are deducted by the employer. Refer to our Articles Ways to reduce taxes without any investments and Investments which help you reduce taxes.
Health Insurance or medical-claim – Many employers provide their employees with health insurance cover and the premium amount of the same is included in the salary CTC amount. However, that amount is not received in-hand each month by the employee but is directly paid by the employer to the respective health insurance providers.
Bonus - The Bonus component in one's Salary is completely dependent on the performance and targets achieved. The maximum bonus that an employee is eligible to receive is included in the CTC. However, it is received only once a year and depends on your performance which is assessed by your employer. Where your offer letter states a bonus of INE 300,000 you may receive anything less than INR 300,000 based on the targets achieved by you and after deducting the applicable taxes on the bonus.
House Rent Allowance (HRA)- The amount paid as rent when the employee is settled in a new city. This is received in hand each month until you are living in accommodation provided by the employer.
In conclusion, the deductions from the CTC can broadly consist of five parts:
Contributions: Amount that is contributed by the employer on behalf of the employee towards EPF, Insurance, a gratuity fund or a pension fund. It is a part of your salary but is received by you only after you have completed a few years of service and on the fulfillment of certain conditions.
Taxes: Income-tax - the same is deducted when your income is more than INR 250,000 subject to some investments and profession tax - this is deducted for all professional employees.
Employer Expenses: House Rent and Health Insurance - Expenses incurred by the employer for your benefits but not paid in-hand to you.
Reimbursements and allowances: Amount that you receive as reimbursements/allowances (without taxes) after the relevant expenses proofs are submitted. Where you do not submit the proofs, the same is paid to you at the end of the year after deducting taxes from the same.
Variable salary: Amount that you receive as performances based incentives, profit-based bonus or sales based targets (Bonus).
By the end of this discussion, Leesha was not very happy as now she realised that she will receive only INR 40,800 in-hand each month and not the INR 50,000 CTC she was offered by her employer.
For a fresher, this can be an anxious phase as you do not want to be considered unaware by your new employer and yet know how much exactly you are going to earn. We, through are articles are educating you about your income as understanding and knowing your income is the first step towards financial wellbeing.
If you went to watch a movie and lost the ticket would you buy a new ticket? But if you lost a currency note of INR 500, would u not buy a movie ticket using your debit card?
After I came across this Question, I asked almost everyone I met for the next few days to understand if the response of people is the same and what do they think before taking a decision.
Most people said that they would not buy a second ticket if they lost the first one, but would borrow/use their debit card to buy the ticket if they lost the INR 500 note kept aside for the ticket.
The incidents are basically same; you lose INR 500 on the lost movie ticket or the INR 500 note, the amount lost is the same. The only difference is the way you lose the money but you tend to combine two financial outcomes depending on the perceived benefits from these two outcomes.How does it impact us?
Our mind segregates money into different accounts based on the situation we have derived the money from or spent in. Our mind is making different folders to categorize and treat money differently, depending on where it comes from, where it is kept and how it is spent.
This process makes us treat money earned through different sources differently, thus, increasing our spending habits. Let me explain this with more relatable examples.
In my article on cashback offer is a trap, I had discussed how cash back makes us spend more on things we do not need so that we can utilize the cash back. The reason why we do that is in our minds; we create a separate folder for cash back received and are ok to spend that because we do not treat it as our own money. Whereas, in the case of a direct discount, we just spend less in the first place thus leading to genuine savings.
In another article of Insurance frauds, I have discussed how I got duped into buying the wrong insurance product and had to surrender the same after 2 years. I had paid a premium of INR. 120,000 for that insurance but received only INR. 58,000 on surrendering my insurance policy. This money should have gone directly into my investment account as it was already invested money and only then the surrender would have made sense.
However, I treated it as a windfall money and ended up spending most of it for shopping, buying a new phone and taking an impromptu trip to Goa.
There are many times I have personally lost investment opportunities or incorrectly utilized the money received due to this mental accounting.
Some more examples could be treating your bonus income, income-tax refunds, buy-back offers, health insurance claim received (post hospitalization) etc differently than your regular source of income.
Creating mind folders of the money coming in based on its source leads to increased spending.Leads to slower growth in wealth
Mental Accounting is the reason why people continue to earn low-interest rates on fixed deposits in the bank while paying a high rate of interest on their credit card debt or a personal loan, instead of breaking the fixed deposit and repaying the debt. Remember that the interest you earn on your fixed deposit will always be lower than the interest you pay on your credit card debt.
We have also discussed how credit cards overspending are an act of mental accounting and how it impacts our spending behavior. We consider the credit card limits or the money used via credit card as different money and buy anything and everything through that without understanding that it is. Refer article Why you must avoid credit cards.
How to deal with it
Understand that money is fungible. All the money coming in (irrespective of the bank account and source) should be your income and the money going out - your expense. This simple 2-way categorisation can help one deal with their overspending, debt problem and earn higher interest rates through right investments.
This is why it is very important to develop the right attitude of managing finance along with the technical skill to understand the various financial products.
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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