scorecardresearch3 smart ways to save income tax for salaried individuals

3 smart ways to save income tax for salaried individuals

Updated: 06 Jun 2022, 08:53 AM IST

By opting for just these 3 components in your salary, you can save a huge amount of tax. Let’s understand this with an example

3 smart ways to save Income tax for salaried individuals

3 smart ways to save Income tax for salaried individuals

Rahul is a software engineer earning a CTC of Rs. 12 lakhs. His net take-home salary is about Rs. 75,000 per month.

Nimisha is another software engineer earning the same CTC of Rs. 12 lakhs. However, her net take-home salary is Rs. 90,000 per month.

Both of them have the same CTC, but Nimisha takes home 20% more than Rahul.

Why does this happen?

It’s because of taxes. Nimisha’s salary is structured in a way that she pays lesser Income Tax on her salary, whereas Rahul pays more Income Tax to the government, thereby reducing the salary that hits his bank account every month.

And these are classic cases of salaried employees not planning their taxes well.

When it comes to salary structuring, a lot of companies offer flexi-baskets to their employees. This means that the employee can choose which components they want as part of their salary. There are certain components that provide good tax exemptions, and employees should opt for such components, either by updating their flexi-basket or by requesting their HR (which may not always be feasible, but is definitely worth a shot!). Some components that enable employees to save tax are:

1. HRA: If you stay in a rented house, make sure that you opt for HRA as part of your salary structure. Based on the amount of rent that you pay and the city you live in (Metro/Non metro), you can avail an exemption on your total income, therefore helping you save tax. If you live with parents, you can pay rent to them too and claim HRA. However, if you do this, the rent should reflect as an income in your parents’ IT Return, which means your parents will have to pay tax on this income. So this should be done only if your parents’ income is lower than yours, in which case paying rent to your parents will be beneficial since the tax saved by you will be more than the tax paid by them on the same amount.

2. LTA: A relatively underrated salary component is the Leave Travel Allowance, or LTA. By opting for LTA, an employee can submit flight and train ticket bills of their personal travels to their employer, and get an exemption worth the amount of bills that are submitted (subject to the amount of LTA given by the employer). In fact, if the employee’s family has travelled with them, even the family members’ tickets can be claimed for this exemption.

While LTA is a great component to save tax, it can only be claimed twice in 4 years, and only for domestic train or air travel. In case where air and train is not available, then road journey tickets can be claimed if public transport is used. No accommodation or meals can be claimed as LTA exemptions.

3. Meal vouchers: The Income Tax Act allows tax exemption for meals, up to Rs. 50 per meal per day. That means that up to Rs. 3,000 per month can be claimed as a tax exemption. All you need to do is take Food/Meal vouchers as part of your salary, and you won’t need to pay tax on that amount. The good part is, a lot of food and grocery delivery apps also accept Meal vouchers, so utilizing them is generally not a problem for employees.

By opting for just these 3 components in their salary, employees can save a huge amount of tax. Let’s understand this with our example.

In Rahul’s case, if he gets an HRA exemption of Rs. 10,000 a month, has travel bills worth Rs. 60,000 in the year and opts for meal vouchers worth Rs. 3,000 a month, his total yearly taxable income reduces by (1,20,000 + 60,000 + 36,000) = Rs. 2,16,000. This means that his taxable income comes down by Rs. 2,16,000, thereby saving him Rs. 43,200 in taxes in the year!

That’s why we say, Personal Finance is not just about investment. Tax planning also plays a crucial role, and if done well, can help employees generate and preserve a great amount of wealth!

Ankur Jhaveri is the founder of Jackfruit - a tax and financial planning platform.

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First Published: 06 Jun 2022, 08:53 AM IST