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An employee works for long hours in the office, and in metro cities often undertakes long commuting hours. With all the hard work and rising inflation, the employee finds that at the end of the month after putting maximum effort into his professional life he has saved very little money. A person can save money if he is aware of the tax exemptions available to him. There is a number of tax-saving options available for salaried persons. Investing in certain financial products and claiming deductions under certain allowances an individual can reduce the taxable income. After all, a penny saved is a penny earned.
Listed below are the tax saving options available for the salaried employees-
Employee Provident Fund-
The Employees Provident fund is a popular tax saving option for salaried persons, and the Employees provident fund and Miscellaneous Provisions Act 1952, applies to factories and establishments engaging 20 or more employees. It is managed by the Central Board of Trustees.
The employer and the employee each contribute 12% of the employee’s basic salary and dearness allowance towards EPF. There is no age restriction for becoming a member of EPF but an employee who has already reached the age of 58 years can’t become a member of EPF.
The EPF scheme helps in building a retirement corpus for the employee and builds a habit of saving money regularly. When a person retires he receives lump sum money with interest. The interest rate of EPF for the financial year 2020-21 is 8.5% per annum.
The employees’ contribution to the EPF and the interest is exempt from tax. The person can claim tax deduction under section 80C up to a limit of 1.5 lakhs. When the amount is withdrawn at maturity there is no tax but in case withdrawn partially during an emergency, the amount would be taxable to the employee.
Public Provident Fund-
Public Provident Fund also popularly called PPF is a tax saving option where a salaried employee can invest money to save tax as well as earn interest. The account can be opened with a minimum investment amount of Rs. 500 and a maximum of Rs. 1.5 lakh can be invested each financial year. The principal amount remains safe as it is backed by the government and high stable returns are ensured. It is ideal for individuals who prefer taking low financial risks.
The public provident fund account has a lock-in period of 15 years on the amount of money invested. The loan can be availed against the investment amount. Interest paid on the public provident fund scheme is decided by the government of India and currently stands at 7.1%.
The PPF has EEE status which is Exempt-Exempt-Exempt and this means that the amount invested, interest earned and the maturity sum are all exempt from tax. So it is a good tax-saving instrument.
Equity Linked Saving Scheme-
An equity-linked saving scheme is a mutual fund scheme that invests in equity. It provides dual benefits i.e. tax benefit and wealth creation over a longer time horizon.
The ELSS scheme has a lock-in period of 3 years which is the shortest among tax-saving instruments but has the ability to provide the highest returns as compared to other 80C investments. The ELSS scheme mutual fund has 65% of its portfolio invested in equity and the remaining towards fixed income instruments. A person can invest up to 1.5 lakhs in ELSS funds in a year to avail of benefits of section 80C of the income tax act.
Before investing in an ELSS mutual fund a person should be aware of his goals and the time horizon he may require to hold as the equity schemes may require a longer holding period to handle volatility. Though the mandatory lock-in period is 3 years, holding the ELSS funds for a longer period of 5 years or more can provide better returns than other tax-saving instruments. Investment in the ELSS mutual fund can be made in either a systematic investment plan (SIP) or a lump sum investment can also be considered.
There can be no short-term gains from ELSS funds as there is a lock-in period of 3 years, but there could be long-term capital gains. The gains up to Rs 1 lakh are tax-free and above this limit, they attract a capital gains tax of 10%.
National Pension Scheme-
The National Pension Scheme introduced by the government of India helps in having a regular income after retirement. The governing body for National Pension Scheme is the PFRDA (Pension Fund Regulatory and Development Authority.)
Since the scheme is regulated by the government of India there is transparency in the procedures. It encourages people to save, the government has made the scheme attractive and the added advantage is the security. An individual can invest any amount in the NPS scheme. A person can select a fund according to his comfort with the alternative to switch from one investment option to another (equity, government bonds, corporate bonds, and alternate assets.)
The pension wealth accumulates till the time of retirement providing the benefit of the power of compounding. The account maintenance charges are quite low. An NPS account can be opened through the eNPS portal and managed online.
An individual can claim tax exemption up to Rs. 50,000 under section 80 CCD (1B) which is over and above the limit of Rs. 1.5 lakh under section 80C.
Life insurance is a great way to save money, provides financial protection to the family during an unforeseen event of death of a person, delivers maturity benefits (sum assured along with bonuses) when a person survives the term, and also helps in tax savings. Premiums paid towards a life insurance policy are eligible for deduction under section 80C, and under section 10(10D) the sum assured received on maturity, is tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.
There are insurance products like the ULIPs that provide insurance cover along with the investment part. The ULIPs can invest in equity funds, balanced funds, or debt funds. The lock-in period is 5 years. The ULIPs also provide for tax benefits under section 80C and section 10(10D) of the Income Tax Act.
Health insurance covers medical expenses that occur due to an illness which could be due to hospitalization, cost of medicines, or the fees for consultation by doctors. The sedentary lifestyle, unhealthy eating habits, and the long working hours nowadays have led to rising health-related diseases. Due to the rising medical inflation combating medical emergencies can lead to financial difficulties. Medical insurance provides financial assistance during these times. A person can claim section 80D tax benefits for the premiums paid for himself and his family.
Tax Saving Fixed Deposit-
Fixed deposits are provided by banks and help a person in the growth of his money. If you want to save tax you can consider a tax-saving fixed deposit. You can invest a lump sum amount of money that gets locked in and provides the same interest irrespective of the interest rate movements. The fixed deposit provides a better return than a saving bank account and is not exposed to market volatility like the equities.
An income tax exemption on investment up to Rs 1.5 lakh can be claimed under section 80C of the IT Act. The lock-in period is 5 years. You can opt for a monthly or quarterly payout of interest. The interest earned on the tax-saving fixed deposit is taxable and deducted at the source.
When you are nearing retirement a tax-saving fixed deposit is a good choice as it provides guaranteed returns, no risk, and helps in the growth of money. The added advantage is the tax benefit it provides. The minimum amount required to start a tax-saving fixed deposit is Rs. 100.
House Rent Allowance-
Persons who are living in rented accommodation as salaried employees can claim tax benefits. Though HRA for most employees is part of their salary structure, unlike the basic salary it is not fully taxable.
A part of the HRA is exempted under section 10(13A) of the Income Tax Act, 1961 subject to certain conditions. This is deducted from the total income before arriving at the taxable income and helps the employee to save tax. The HRA received from employers is fully taxable when a person lives in his own house and does not pay any rent.
How is HRA decided?
According to the income tax rules, the tax exemption for HRA is the minimum of the following amounts-
a) Actual HRA received.
b) 50% of the basic salary if a person resides in Metro cities and 40% if he resides in a non-metro city.
c) The actual rent paid minus 10% of the basic salary.
The document that is to be provided for claiming tax exemption for HRA is the rent receipt for the rental agreement.
Leave Travel Concession-
Leave travel concession (LTC) or LTA is provided by the employer to his employee, bearing the travel expenses and the employee also gets to save tax. The employee gets tax exemption under section 10(5) of the Income Tax Act. The expenses reimbursed cover only traveling and do not include food, shopping, or lodging. The travel expenses are covered twice in a period of four calendar years and cover expenses of the employee along with his family. The term ‘family’ includes the employee’s spouse and two children, dependent parents, and dependent brothers and sisters.
The amount that can be claimed as LTA includes-
a) When the employee travels by air, the economy class fare is allowed as an exemption.
b) When the employee travels by train, AC first-class fare is granted as an exemption.
c) When the places are not connected by either rail or air the actual amount spent on transport, first or deluxe class fare of such transport is considered as an exemption.
The employee has to fill up the form at the time of income tax proof declaration and along with it submit proof of the travel details like the train tickets, boarding pass, etc. to the employer.
Gratuity is a sum of money given to an individual on completion of his employment terms and is a form of gratitude to the employee for the services he has provided. It is one of the components of the gross salary of the individual. The gratuity is payable to persons who have completed five years of service in an organization and is payable under the Payment of Gratuity Act, 1972.
The employee gets gratuity on his superannuation or resignation from service. The condition of working for five years with a company does not apply when the employee becomes disabled or passes away and the employer should pay him the gratuity or to his nominee independent of the number of years of continuous service.
The gratuity amount is tax-exempt under section 10(10) of the income tax act up to a limit of Rs. 20 lakh.
Conveyance allowance also called transport allowance is the allowance given to an employee to compensate for their travel to and fro from their residence to their place of work. There is no limit on the amount of conveyance allowance a company can give to its employee but there is a limit on the amount of exemption under the Income Tax Act. Conveyance allowance is given exemption under section 10(14)(ii) of the Income Tax Act up to Rs. 19,200 per annum.
These tax-saving options for the salaried employees can be leveraged to reduce the tax burden. An effective tax planning happens due to regular investments and it should not be left for the last moment. All the investment options can be studied to invest not just to save tax but also to meet the financial goals like investing in ELSS mutual fund schemes.