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Typically, a chunk of your hard-earned salary disappears in the form of taxes every month. And as an Indian employee, you are likely familiar with the high tax rates that can significantly reduce your take-home pay.
However, you can reduce your tax burden by taking advantage of the exemptions available towards various salary components and making designated expenditures and investments. In this article, we will discuss 10 such salary components that can help you save money on taxes.
Employees must understand salary components and tax implications to maximize their savings.
According to a recent survey conducted by Tax2win, a leading tax-filing platform, only 13% of Indian employees use all tax-saving benefits provided by their employers. It is a worrying statistic as employees could save thousands of rupees in taxes annually by taking advantage of these salary components.
Furthermore, the survey found that only 38% of employees were aware of the tax-saving benefits provided by their employers. And this lack of awareness might be one of the primary reasons employees fail to use these benefits.
Another survey conducted by ClearTax, a tax filing and investment platform, found that 76% of salaried individuals in India feel their tax liability is high. However, many need to take advantage of their employers’ tax-saving benefits.
Employers need to educate their employees about the various tax-saving benefits. Furthermore, they can help their employees save taxes by restructuring their salary components to include more tax-free components. For instance, HRA, LTA, and medical allowance.
In addition to these salary components, several other tax-saving investments and deductions are available to employees. These include public Provident Fund (PPF) investments, National Pension Scheme (NPS), tax-saving mutual funds, and insurance premiums.
The basic salary is the most important component of your salary, as it determines several other salary components. For instance, provident fund (PF), gratuity, and other allowances.
The whole amount of the base wage is taxable. However, some expenses are excluded under Section 80C of the Income Tax Act. The highest yearly exemption limit is INR 1,50,000.
If you are a tenant and pay rent for your accommodation, you can claim tax exemptions on your HRA.
The HRA is a portion of your salary paid by your employer to cover your housing expenses. The amount of HRA exempted from tax depends on the following factors:
This benefit is only eligible for the period during which you have occupied the rented house. Furthermore, the lowest of the following three will be tax-exempt:
The LTA is a salary component that allows you to claim tax exemptions for the expenses incurred during travel with family within India. And you can claim LTA twice in a block of four years. Furthermore, the exemption amount is limited to travel expenses incurred, subject to certain conditions.
As an employee, you can take advantage of this perk by showing your employer your plane tickets or other trip expenses.
Note.: The term “family” here includes:
These days, businesses are all over the place, operating in multiple locations across the country. And employees might have to move to a new city for work. However, moving can be expensive with all the costs involved. Luckily, the employer makes a direct payment for such costs. These include costs like car transportation, car registration, packaging, accommodation, train/air tickets, etc.
Books, newspapers, magazines, journals, and other items are costs for employees. An employee may get a tax-free reimbursement under the income tax code. The employee is eligible to be reimbursed up to the lesser of the actual expense incurred or the amount specified in the compensation plan.
Employers can provide food coupons to their employees as a tax-free benefit. However, the exemption limit for food coupons is up to Rs. 50 per meal and subject to certain conditions.
If you have children and are paying for their education, you can claim tax exemptions on the Children Education Allowance (CEA) provided by your employer. The exemption limit is up to Rs. 100 per month per child for a maximum of two children.
Additionally, you may claim deductions for tuition fees under Section 80C of the Income Tax Act.
If you must wear a uniform for your job, you can claim tax exemptions on the expenses incurred for purchasing or maintaining the uniform.
Professional tax is a state tax levied on individuals who earn a salary or income. And this tax is fully deductible from your taxable income. The maximum amount of professional tax deductions is Rs. 2,500 per annum.
India’s employees must contribute to the EPF, a retirement savings program. Each party contributes to the EPF based on a percentage of the worker’s base pay. Tax deductions on contributions up to INR. 1.5 lakh per annum is permitted under Section 80C of the Income Tax Act.
By taking advantage of the various tax-saving benefits provided by your employer, you can significantly reduce your tax burden and increase your take-home pay. With little research and preparation, you may reduce your annual tax bill by several thousand rupees.
Furthermore, employers have a role in educating their employees about these benefits and restructuring their salary components to include more tax-free components.
We are optimistic that after reading this blog, you have a fair idea of the salary components that can help you reduce your tax burdens. But if you still have questions, we are here to help. Experts from GJM & Co. will not only offer expert tax-saving guidance but also maximize your savings while reducing your tax burden.
Should you have any queries or need consultation, Schedule a Call today or write to us at info@gjmco.in.