Income Tax Planning for a Salary Individual

Most of the employees are paying higher income tax because of non inclusion of certain components which are exempted. Restructuring their salary components and investing in certain specified investments might help them in reducing their tax liability.

Restructure your Salary

You can include following components to your salary to reduce your tax liability:

Medical expenses

Income Tax Planning for a Salary IndividualAny medical expenses reimbursed by the employer are exempt up to Rs 15,000 per year. You can include this component to your salary as a monthly medical reimbursement of Rs. 1, 250 and claim it from your employer on monthly or yearly basis. To claim this as a exemption, you need to produce medicine bill or any doctor charges receipt or any other receipt in original to your employer. If you don’t claim this amount then at the end of the year, your employer will deduct income tax as applicable to you while paying salary.  

House Rent Allowance

House rent allowance is a major portion of your salary component. You can claim exemption on house rent allowance received by you by producing rent paid and the rent agreement to your employer. Before such submission you need to disclose your rent paid to your employer at the beginning of the year. if you have newly joined a organization then contact your employer IT help desk to provide with the details of IT declaration. At the beginning of the year your employer will be deducting tax based on the declaration you have provided to them. At the end of the year they will be asking for documents in support of your declaration and you need to produce them to your employer or else full income tax will be deducted from your salary.

Transport Allowance

You are eligible for a yearly exempted transport allowance of Rs. 9, 600. include this component to your salary.

Leave Travel Allowance

You are eligible for a leave travel allowance twice in a block of four years for your domestic travel. To claim this amount you need to produce all your travel bills and other bills to your employer. During that time you have to take compulsory leave from your job. If you are a frequent traveler then you can claim this exemption available to you. There is no limit on this type of exemption. You can claim your entire allowance amount that you have disclosed to your employer.

Food coupons

Non transferable Food coupons are exempted from income tax if such coupons are usable at eating joints only. Food coupons like Sodexo and Ticket Restaurant are eligible for this deduction. One can avail exemption under this provision up to a maximum of Rs. 50 per meal. So assuming that you are having 4 meals per day and working 22 days in a month, your eligibility for tax exemption will be Rs. 52, 800 (4*50*22*12). As the amount of exemption mentioned is 50 per meal one can argue for a higher exemption under this head.

One can even consider working on holidays and over time as working hours for this purpose i.e. if you worked on holidays or worked extra hours then your are eligible for Rs. 50 per meal exemption.

For this reason Sodexo cards are available at a denomination of Rs. 50 or lesser value.

Claim your Eligible Deductions from your Salary

Home loan

The principal amount paid for a home loan is eligible for IT deduction under section 80C of IT act and the interest amount can be claimed as a deduction from your house property income. If you have self occupied house property then the interest amount of Rs. 1, 50,000 can be claimed as a deduction and the loss that you arrived at can be set off against your salary income.

If you and your spouse both are taxpayers then it is suggested to take a joint home loan and can claim IT deduction for there share of holding in such loan amount. If any one of you are in higher tax bracket then they can hold major portion of the loan amount to claim higher IT deduction.

Get a deduction of Rs. 1, 00,000

A salary individual can claim a deduction of Rs. 1, 00,000 by investing in some smart investments available for him under section 80C of IT act. Followings are some of the better options to get invested for tax benefit:

  • Life Insurance Policy

You can invest in any life insurance policy to get eligible for your deduction of Rs. 1, 00,000. The benefit of investing in life insurance policy is your can get ensured and at the same time get a good tax free return at the time of maturity. For the details provision on life insurance policy please read this article.

  • Investment in Public Provident Fund Scheme

This is one of the best options to start investing. You can invest up to a maximum of Rs. 1, 00,000 under this scheme and at the same time can claim tax deduction. The interest amount and the maturity amount is tax free.

As a salary employee, the contribution to employee provident fund is also eligible for income tax deduction. In addition to your employee account you have a public provident fund account to get invested and take both deductions from income tax.

  • There are other options available under section 80C to invest for tax benefit. But we recommend the above two investments based on its tax exemption and investment return you can get. You can also invest in notified mutual fund and ULIP to get deduction but investment into these carry higher risk. If you are opting for a high risk and high return option then you can start investing in to these funds.

FAQ on Salary Tax Planning

I don’t receive any house rent allowance. Is there any way to claim IT deduction for my house rent that I am paying to my land lord?

Yes, you can claim rent paid for residential accommodation as a deduction from your taxable income if House Rent Allowance doesn’t form part of your salary.

This deduction is available under Section 80GG and is least of the following:

  • 25% of the total income or,
  • Rs 2,000 per month or,
  • Excess of rent paid over 10% of total income

If you or your spouse or minor child owns a residential accommodation in India then deduction under this section will not be available. Deduction is not available if such house owned by you or your spouse or minor child is in abroad.

I have invested in life insurance policy and according to IT act I also claimed deduction during that year. Now after a year of such policy, I want to discontinue and want to invest some where else. Please let me know if there is any income tax impact on it.

If you are investing in Life Insurance Policy for IT deduction under section 80 C of IT act then you have to stay invested for a period of 2 years to get the deduction. If you are withdrawing such policy then the entire amount will be taxable in your hand. So our suggestion is to withdraw the policy after 2 years for income tax benefit purpose.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.