Taxation of salaried persons
inf by Ashok Hindocha M-94262 54999
By | 25 Jul, 2016, 05:14AM IST
Salary earners constitute large proportion of total taxpayers in India and contributes significantly to government treasury throughout the year without much efforts by the government due to mandatory monthly TDS deductions to be made by the employer.
Salary earners have no scope to manipulate their income to avoid tax liability. However, there are certain provisions in Income Tax Act to reduce their tax liability through allowances, exemptions and deductions.
Deductions for tax saving instruments
One prime provision which comes to the rescue of salaried persons to maximize take home salary, legally reduce income and lower tax liability is section 80C. This section allows a maximum limit of Rs 1.50 lakh across tax saving instruments ranging from Employees Provident Fund, Pension and Annuity Schemes, Life Insurance Premium, Tax Saving Mutual Funds (ELSS), Home Loan Principal Payment, Sukanya Samridhi Account, Public Provident Fund Account, National Saving Certificate VIIIth issue, interest accrued on NSC certificates, Tax Saving Fixed Deposits, tuition fees of children.
Each of these options has their own merits depending primarily on your financial goals, risk taking ability and income level.
In case salaried person does not own his residential house, it is advisable to have one with borrowed funds. This has triple advantages of emotional security to the family, appreciation in asset value and tax benefit of deduction of interest of home loan with separate limit for salaried person to have their own residential house which has triple advantages of appreciation in value better than any other class of asset emotional security and tax benefit of deduction of interest component on home loan with a separate limit of Rs 2 lakhs U/s 24(b)
You can arrange pension for you after retirement by contributing upto Rs 50,000 every year to New Pension Scheme u/s 80CCD (1B). This is tax deductible.
One should have medical health policy to take care of hospitalization expenses of your family which is getting prohibitive day by day. Premium paid upto Rs 25,000 is tax deductible. Additional deduction of Rs 30,000 is available if senior citizen parents are covered. Every year you can have health checkup for your family by making payment of Rs 5,000 within this limit.
In case you are taking care of any dependent relative suffering from physical disability, expenditure from Rs 50,000 to Rs 1,00,000 can be claimed depending on severity u/s 80DD.
You can provide good higher education to your children by taking loan from financial institution. Entire interest is deductible u/s 80E. Note that loan repayment is not tax deductible.
If your employer provides you with rent free accommodation or car for personal use, same is liable for tax as perquisites which are valued as per Income Tax Valuation Rules.
Those who don’t get HRA from their employer and are staying in rented house can claim deduction upto Rs 5000 per month subject to conditions. To avail this benefit he should not get house rent allowance and should not own residential accommodation.
Deduction for special allowances
Salaried employee can avail benefit of exemption under section 10 of IT Act in respect of various specific allowances provided by his employer during tenure of service as component of salary package such as House Rent Allowances, Leave Travel Allowances, uniform allowances, helpers allowance for official purpose, academic allowance to pursue academic and research pursuits, travel allowances for official duties, medical allowances upto Rs 15,000, reimbursement of telephone charges for office use. House Rent Allowance and Leave Travel Allowances are subject to certain terms and conditions. To avail these exemptions, the employee should actually spend the amount and produce proof.
A ridiculous provision exists in I-T Act to provide education allowance of Rs 100 per child for maximum 2 and hostel allowance of Rs 300 per child upto 2 children, introduced long ago. Mandarins in Finance Ministry seem to have forgotten huge inflation taken place over the years.
Conveyance and transport allowances for commutation of employees upto limit of Rs 19,200 pa (Rs 1,600 pm) is tax exempt, irrespective to of actual expenses. No need to produce proof. However, this is permissible only if this allowance is part of the pay package.
If you wish to make charity for any noble cause, you should contribute to an institution which holds certificate u/s 80G. Deduction for eligible donations is upto 50% of the tax due and in some cases 100% is available.
Employers should structure pay package of the employees by suitably incorporating the allowances, to reduce tax burden of the staff without any loss to them since these are tax deductible.
Relief for Salary Arrears
Receipt of arrears of salaries of past years are included in the year of receipts due to which total income assessed at higher rate than that at which it would otherwise have been assessed. In such a situation, section 89 comes to the rescue. Under this section, arrears of salaries can be spread in the respective years to calculate additional tax dues at each year in form 10E. The employer after taking this into account will deduct tax at source at lower amount. Government employees who expect to get benefit of tax arrears under 7th Pay Commission should take note of this.
A salaried person can set off income from salary against loss under other heads of income such as house property, business in the same year except capital gains.
Employers are required to deduct tax at source from your salary every month. The TDS is deducted according to estimated tax liability for that financial year. If you give your projected tax saving instruments to claim deductions late then employer may deduct more TDS than required which you may have to claim by way of tax refund by filing your income tax returns. It is advisable to make tax saving investment from beginning of the year to avoid big burden of investing at the end of the year or have big tax cut.