Tax Planning

 

Whenever working-class people hear the word tax planning, the first thing that comes to the mind is deductions under different sections, but they fail to think of the first and the foremost thing that is “Salary optimization”. Salary optimization is a way of reducing your NET TAXABLE INCOME, organizing the different section in your compensation plan, and using the respective sections to make sure the net taxable income is as less as possible.

The two main parts of reducing tax amount is Exemptions and Deductions, people usually confuse between exemption and deduction which makes them think tax planning is a very complicated process, always remember these basic below formulas.

EARNING – EXCEMPTION = TAXABLE INCOME

TAXABLE INCOME – DEDUCTIONS = NET TAXABLE INCOME

EXCEMPTION

If you see under your salary slip, you will find different section like Basic, DA, HRA, LTA, Allowance, food coupons, reimbursement etc. Basic and DA are completely taxed but there are many exemptions for other sections in the salary, like

• HRA ( House rent allowance) – if you see an HRA section in your pay slip that will the amount deducted from you gross income to find out the taxable income or if there is no HRA in your compensation 50% of basic salary in case of metro cities and 40% of basic salary in case of non-metro cities is considered as HRA.

• LTA (leave and travel allowance) – If you receive a LTA from your company, the complete ticketing cost of your trips can be covered under LTA to reduce the taxable income, you can reach out to your HR for further details regarding any conditions.

• Children education allowance/Tuition fees and Hostel allowance – You can reduce the taxable income by making sure you claim the exemption on your children tuition fees and hostel fees, claims of up to 2 kids is permitted and up to 9600 per year can be claimed.

• Reimbursement – Any expenses made by you on behalf of you company or business can be added under reimbursement, like telephone bill, internet bill etc.

• Food coupons/ Sodexo – 2 meals per day at 50rs per meal can be exempted. Ex – if we consider there are 26 working days in a month – 2*50*26 = 2600 rupees per month or 2600 * 12 = 31,200 rupees per year can be exempted.

DEDUCTIONS

Now you have reduced your taxable income by opting all the above-mentioned exemptions, let’s take advantage of the deductions. Here are few of the deduction mentioned below,

• Standard deduction – 50,000 rupees standard deduction is given by the government; every salaried person is eligible for this deduction.

• 80C – In this section you can save the amount up to 1,50,000 rupees invested in Public Provident fund (PPF), Life insurance premium, National savings certificate, ELSS/Tax saving mutual funds, FD, ULIP, Sukanya samriddhi yojana etc.

• 80D – medical insurance of self/spouse/children (up to 25,000 rupees) and for parents (up to 50,000 rupees)

• 80E – Interest amount on your Education loan

• 80U – Interest on Home loan

• 80CCD – National Pension scheme (NPS) premium paid up to 2,00,000 rupees.

These are the few most used sections to claim deduction, there are few other sections like 80DDB, 80EEA, 80EEB etc. You can contact your HR if you need more details on any of the above-mentioned categories or any other special deductions or exemptions.

This is my small attempt to just simplify the tax planning for millennials.