How to save tax on Salary income FY 19-20 A.Y 20-21

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One of the most asked questions of every salaried individual is How do I save tax on salary?. There are numerable exemptions and deductions allowed by the government itself which will allow you to save tax on salary. So in order to save tax on Salary, you will need to be familiar with the tax saving methods which are as follows:

House Rent Allowance

What is HRA?

It is an allowance paid to an employee by the employer if the employee is living in a residential flat or a house on rent. The HRA forms part of the salary structure and some part of the HRA is exempted u/s 10(13A) of the Income Tax Act.

How much of HRA is exempted?

The HRA exempt is the minimum of

  1. Actual HRA received
  2. If living in metro cities, then 50 percent of salary otherwise 40 percent salary.
  3. Difference of Actual rent paid and 10 percent of annual salary

The salary for the purposes of HRA would include Basic Dearness Allowance and Commission received on the basis of turnover if any.

This can be illustrated with an example.

Mr Ram draws a basic monthly salary of Rs 25000 with a monthly DA of 5000. He receives House Rent Allowance of Rs 10000 but pays Rs 9000 as rent for an accommodation in Delhi.

Here, the HRA exempt is least of:

  1. Actual HRA received (10000*12) 12000
  2. Since Delhi is a metro city, 50 percent of 360000 that is Rs 180000
  3. Rent paid – 10 percent of salary (108000-18000) 90000

Hence HRA that can be availed would be Rs 12000.

Now if an employee does not pay any rent during the year but receives HRA, he would not be allowed claim HRA benefit as the rent paid is 0.

What about the individuals who do not get HRA but pay rent?

Such individuals would be provided deduction u/s 80GG.

When can HRA be availed?

It can only be availed when rent receipts and rental agreement are submitted to your landlord. If the house rent paid is more than Rs 1 lakh annually, the PAN card of your landlord needs to be reported to your employer.

Leave Travel concession

When your employer pays you some monetary amount as a reimbursement to the cost of travel incurred by you when on leave from work, such monetary compensation is called Leave Travel Concession. As the name itself says, it is enjoying travel at a concessional amount. U/s 10(5) of the Income-tax act, you are allowed tax exemption for LTA.

How much exemption is provided?

Air travel: When you undertake a travel by air, the maximum exemption allowed is the economy fare of the National Carrier by the shortest route to where the employee is travelling.

By railway: If you are not travelling by air and the destination is connected to the point of origin by rail, then the maximum exemption allowed would be the fare of the 1st class air conditioned rail by the shortest route.

Not connected by Railway:

If the point of origin is not connected to the destination by rail and the you have not undertaken air travel, then the maximum exemption allowed would be:

If a recognized public transport system exists, the maximum exemption allowed is the fare of the 1st class or deluxe class fare on such transport by the shortest route.

If no recognized public transport system exists, the maximum exemption allowed would be equal to the air conditioned 1st class fare for distance by the shortest route as if the travel has been done by rail.

Now can the LTA be claimed for only employee himself?

LTA can also be claimed when fare expenses are incurred for his family members and 2 children. For the purposes of LTA, family would mean

  1. Parents, brothers, sisters, who are wholly dependent on the employee
  2. Spouse of the employee
  3. Up to 2 children of employee after 1/10/1998. The limit will not apply to children born before 1/10/1998 and also in case of multiple births after 1/10/1998 (assuming there was already a child before multiple births)

But it must be noted that LTA is available only when the trip is done in India.

Fully Exempt Allowances

The following allowances are fully exempt under Rule 2BB of the Income tax rules:

  1. Conveyance allowance
  2. Uniform allowance
  3. Daily allowance
  4. Academic Allowance
  5. Travelling allowance
  6. Helper Allowance

The above allowances are fully exempt provided you use it for the purpose intended.

Partially Exempt Allowances

In such allowances, there is a fixed limit of exemption provided to you unlike fully exempt allowances where entire allowance is tax free. Also such allowances must be used for the purpose intended.

Children Education Allowance (maximum 2 children) Rs. 100/- p.m. per child
Children Hostel Allowance (maximum 2 children) Rs. 300/- p.m. per child
Transport Allowance Rs. 800/- p.m.
      Or
Rs. 1600/- p.m. (for handicapped)
Allowances granted to employee working in transport system Rs. 10,000/- p.m.
Or
70% of allowance
(whichever is lower)
Tribal Area Allowance Rs. 200/- p.m.
Underground Allowance Rs. 800/- p.m.
Compensatory Field Area Allowance Rs. 2,600/- p.m.
Compensatory Modified Field Area Allowance Rs. 1,000/- p.m.
Counter-insurgency allowance to members of armed forces Rs. 3,900/-p.m.

How can you save tax if you have incurred a loss on house property?

There can be 2 reasons for having a loss on house property

  1. If you have a house which is self-occupied and you have paid municipal taxes on it or interest on a house loan, then your house property income would be a loss as Gross Annual value (GAV) of your house would be 0.
  2. In case of any property other than self-occupied property, your GAV would not be nil. But if the deductions u/s 24a and 24b exceed your GAV, your house property income would be a loss.

How can you set off this loss and pay less tax?

House property loss unlike any other loss is allowed to be set off from any head of income during the year. The net income after deducting your house property loss would be taxable then.

As per the recent amendment introduced via Finance Act 2017, you can set off house property loss of only 2 lakhs during the year. For instance if you have an HP loss of Rs 5 lakhs during the year, you cannot deduct more than Rs 2 lakhs from any head during the year. You can only deduct Rs 2 lakhs, the rest 3 lakhs would be carried forward for deduction in the next 2 years. (Since another 2 lakhs would be deducted next year and the remaining 1 in the 3rd year)

But one must keep in mind that if you are setting off the Hp loss from Hp head itself, the limit of Rs 2 lakhs would not apply.

TDS on salary u/s 192

TDS on Salary has to be deducted monthly by the employer while paying salary to the employee. It has to be deducted at an average rate calculated on the basis of the Income-tax rates prevalent during the year. No TDS is required to be deducted if the annual salary is below the minimum amount not chargeable to tax.

Is it mandatory to furnish your PAN to your employer?

It is not mandatory to furnish your PAN but if you do not do so, you will have to pay a higher TDS of 20% to the government which means emptying more of your pockets. 

When do you have to deposit TDS?

Your employer will deduct the TDS from the salary payable to you and deposit the same to the government on or before the 7th of the following month from the end of month in which tax is deducted. For example if you are paid the salary in the month of January, your employee has to deposit the TDS by 7th of February.

But for the month of March, there are 2 cases for deduction of TDS

Case 1: If you are a government employee, your TDS would be deposited by 7th April.

Case 2: If you are a non Government employee, your TDS would be deposited by 30th April.

The TDS would be deposited to the government through Challan No. 281

Since TDS is calculated on an average rate, it may happen that excess tax is deposited with the government. In such cases you can expect a tax refund after you complete your e-filing procedure within 120 days of the filing of your income tax return.

Standard deduction

The Interim Budget announced by Finance Minister this year has brought a major relief to the salaried taxpayers and pensioners. The standard deduction of INR 40000 that was applicable for the AY 19–20 has been increased to INR 50000 for the AY 20–21.

What is standard deduction?

Earlier until the introduction of the Finance Act 2017, if you received transport allowances and medical reimbursements, you got a tax exemption of Rs 1600 per month and Rs 15000 respectively. But these exemptions had been replaced with a standard deduction of Rs 40000 to all salaried individuals. Through the interim budget, this deduction has been increased to Rs 50000.

Rebate u/s 87A

The interim budget announced by the Honorable Finance Minister of India, Piyush Goyal has made a major change in the rebate policy for the next Assessment Year i.e. 2020–21. The rebate u/s 87A that was earlier provided to you upto a taxable income of 3.5 lakhs has been increased to 5 lakhs. This increment has been a relief for the salaried taxpayers as their entire income upto 5 lakhs will be relieved from paying the tax through the amended rebate system.

80E Interest on Education Loan

If you had taken an education loan this year for

  1. Yourself
  2. Spouse
  3. Children

The interest on load repaid each year is allowed as a deduction u/s 80E. The deduction is allowed for a maximum of 8 years after which you cannot claim this deduction.

80GG House Rent Paid

If you had paid the house rent this year and you don’t get an HRA allowance, the deduction allowed to you would be the least of:

  1. Rent paid-10% of adjusted total income
  2. Rs 5000 per month
  3. 25% of adjusted total income.

What is adjusted total income (ATI)?

The adjusted total income means:

Gross Total Income

Less:

Long Term Capital Gain

Short Term Capital Gain

Deductions u/s 80C to 80U except section 80GG

80TTA Interest on Savings Bank Account

If you have a savings A/c and earn interest on it, you will get a deduction of up to Rs 40000. Earlier it was Rs 10000 but the interim budget this year has increased the amount to Rs 40000. If you are a senior citizen then you will be allowed deduction another section 80TTB which is up to Rs 5 lakhs.

Savings through section 80C

U/s 80C, some of the investments that will grant you deduction are:

Investment in PPF

 The amount invested in your PPF account is fully allowed to be deducted. Also the Interest earned during the year is tax free.

Investment in EPF

The amount deposited by you in your EPF or RPF account each year is tax free. Also if you withdraw entire money from your EPF after providing 5 years of continuous service, the entire withdrawal is tax free.

Education fees paid for your children

The school/college/University fees paid for the education of your children is eligible for deduction under this section. But remember that the deduction is not available for more than 2 children. Also remember that the fees paid for vocational training or a coaching institute is not eligible for deduction.

Repayment of house loan

 The repayment of the principal amount of your house loan is also eligible for deduction. But the repayment towards the interest part of it is not available for deduction.

Conclusion

These are the top ways in which you can save tax on your salary earned. This year after the introduction of the Interim budget favourable to the salaried taxpayers, you can save even more taxes for the next AY 20-21.

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