PPF, NSC, Post office accounts, insurance (except ULIPs) and FDs are safer, they offer lower returns and are not very liquid, due to their long lock-in period. On the other hand, ELSS (Equity Linked Savings Scheme) has a short lock-in period but is more risky, while ULIPs (Unit Linked Insurance Plan) carry the risk of ELSS but without the liquidity benefit. So while investing for tax saving purpose, take into account factors like your risk appetite, returns generated by the instrument, liquidity, capital appreciation and safety of capital.
Earning a salary? Looking to save tax the smart way? Then you have two options. First is salary restructuring and second is tax saving instruments. Here we take a look at both these options and how to use them effectively.
Salary restructuring: As the term implies, salary restructuring allows you to redesign your salary, so as to reduce your total tax liability. Here are some steps you can take in order to reduce your tax liability.
- Do you need a house? Does your employer offer Rent Free Accommodation or House Rent Allowance? Then go for it, as the amount gets deducted from your total taxable income.
- Does your company expect you to wear uniform at work? If so, the expenses incurred on buying and maintenance the uniform will not be taxed.
- Does your employer provide you with allowance for your children’s education and hostel accommodation? Then use it to claim exemption under section 10 (14).
- Does your company provide you with a telephone facility in your home? Then it not taxed. However be warned against taking telephone allowance, since it is totally taxable and will increase your taxable income.
- Opt for the car facility, since the value of the perk is much lower than the actual expenditure incurred on the car.
- We all have to visit the doctor at some point of time. So save tax by claiming medical reimbursements up to Rs.15, 000.00 p.a. But don’t take any medical allowance, since it is completely taxable.
- If your employer pays Fringe Benefit tax (FBT), then sum of fringe benefits, is tax-free for you. Also if salary is paid in arrears or in advance, claim relief under section 89 (1).
- Always ask your employer to include dearness allowance and dearness pay along with commissions earned in your salary. It will lower your tax liability on house rent allowance, gratuity and pension.
- If you are eligible for a pension, always get it commuted, as commuted pension is tax-free for government employees and partially exempted for others. You can get tax relief under section 89(1).
- If your current employer is participating in an authorized provident fund, and you change your employer within 5 years of joining the firm, ensure your new employer is also a member of the authorized provident firm. It will let you transfer the corpus in your provident fund to the new company without paying any tax. Also insist your employer fix his contribution to your provident fund to 12% of your salary, as it is the highest limit for tax exemption.
- Plan your retirement or resignation at the start of the financial year in order to lower the tax on retirement benefits.
- As leave travel concession is not taxed if certain criteria are fulfilled, try to claim this incentive to the highest possible level, without having to pay any tax.
Let us assume your annual salary is Rs. 2,00,000. You get HRA of Rs. 10,000 and your medical reimbursement is Rs. 5,000. Your employer gives you an allowance of Rs. 15,000 for your son’s educational expenses. So instead of Rs. 2,00,000 your total taxable salary now becomes Rs. 1,70,000 (2,00,000 – 10,000 – 5,000 – 15,000). This will effectively reduce your tax liability.
Now that we have seen how to design your salary let us take a look at the most effective tax saving instruments available.
Tax saving instruments: While these instruments do help you save tax, they have a maximum limit of Rs. 1,00,000. Any income above this limit attracts tax.
- Insurance: All payments made towards both life and health insurance are eligible for tax benefits. Even contributions made towards pension payments can be eligible for tax benefits. Health insurance can let you save Rs. 15,000 over and above the ceiling of Rs. 1 lakh.
- PPF (Public Provident Fund): It is one of the safest tax saving investments available. Both interest and capital withdrawal from the fund are tax free. However its drawback is the lock-in period of 15 years.
- NSC (National Savings Certificate), Post office (CTD) accounts: These are government savings schemes available at post office, with a lock-in period of 5 years.
- Bank deposits: These are special tax saving FDs offered by banks with a lock-in period of 5 years.
- ELSS (Equity Linked Savings Scheme): These are tax savings instruments offered by mutual funds, with a lock-in period of 3 years. They invest in various quality stocks.
All these instruments carry different degrees of risks. While PPF, NSC, Post office accounts, insurance (except ULIPs) and FDs are safer, they offer lower returns and are not very liquid, due to their long lock-in period. On the other hand, ELSS ( (Equity Linked Savings Scheme) has a short lock-in period but is more risky, while ULIPs carry the risk of ELSS but without the liquidity benefit. So while investing for tax saving purpose, take into account factors like your risk appetite, returns generated by the instrument, liquidity, capital appreciation and safety of capital. Remember, younger you are, riskier options are better for you, since over a long time, these instruments can generate higher returns for you, and minimize the risk of capital erosion. Also diversify your investment portfolio.
If these options are not enough for you, then here are some more:
- Housing loan and education loan:
- Donation to charities/religious trusts
To summarize, first thing to do is to structure your salary so as to minimize your tax liability. This will minimize the need to invest for tax saving. This is because as with any investment, you must have the necessary capital to invest. Also the instruments that tend to be safer, have a longer lock-in period with low returns. This means you must keep on investing with fresh capital every year and in turn get meager returns. Those investments with higher returns mean you may not be able to withdraw your money even after the lock-in period, if the value of your investment is lesser than the capital invested. Take all these points into consideration before opting for tax saving plans.
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Please expand your abbreviated scheme detail at least once in the article. What is the full form of ELSS – is it Equity Linked Savings Scheme ?
This article is very informative to non-accounting and non-finance professionals and entrepreneurs to aviod retrition of employees by designng their performance appraisal letter giving the maximum advantage to employees.
Yes Prashant, it is indeed Equity Linked Savings Scheme and thanks for the suggestion.
I belive locking perioud for PPF is just 5 years you can withdraw after 5 years however you can continue the account for max 15 years. Am I incorrect in assuming that.
Thanks.
Yes Amit, u can withdraw only some percentage of money after 5 years in ppf, whereas u can withdraw the whole amount only after 15 years. u can extend the account for 5 more years after the 15 year term.
Great post! I'll subscribe right now wth my feedreader software!
Being a salaried person can I deduct my drivers salary & perks for tax caculations? If so, under what section this is posssible
The amount of food coupouns given by the company also can be restructured for tax benefits.(only upto certain limit)
Hi, I worked with a company for 5.4 years and recently I joined another company. Should I withdraw the amount for my old employer EPF account as in new company new EPF account has been created.
Please also let me know will withdrawl from old EPF account lead to any tax?
Transfer all your EPF money from the old to the new EPF account rather than withdrawing.In case you reqire the money, then only withdraw. If it is in the same city then it is very simple .
Yes..transferring the PF account increases your pensionable service…which will benefit you at the time of retirement (govt or private).
This was an excellent piece of information. I have noted the suggestions for my use.
Thanks.
SP SAPRA
Delhi
very well wrtitten article…!!
articles are always nice.. wonder how much we save actually. so many clause so many documents and sections..yeah.
this is a great article for thr salary class people. good work!!!!
good luck. lets save some for the next dewali..yeah.
I have my own house on my name, but I want one other bye for tax saving purpose. & one property advises pls.
hey!! superb work done..the info solved some long lasting doubts of mine…wirtten in simple and interesting way.i'll surely use some of the suggestions..
Cheers !!
After investing all that money, you will hardly have anything to eat or wear!!!!!!! While saving and investing are good practices and one must start as early as possible, a person with a salary of 2 lakhs per annum can hardly hope to save anything in cities like Bangalore, Mumbai, Delhi, etc. One must try and save (invest) as much as possible before he/she gets married. For a few years after marriage, it is very difficult to save anything.
This is what i am looking for, quality content, thanks dolgkjxfg
If financial help through bank transfer/ direct payment to a builder by a daughter through NRO account being a NRI to her mother a senior citizen for purchase of a residential flat is exemted from income tax.The mother is a house wife and not a income tax payee.Will it be trated as gift? or how the mother can justify the source of money if questioned by income tax authorities. Please quote relevant regulation.
Fantastic website, must come back here , very interesting content, bookmarked your blog
regards fuserarvh
iam an govt servant due to sixth pay arrears my anual gross salary is touching 4.4 lacks and ihave already above one lac saving in gpf(80000)+lics(50000),money plus,endowment policy of 25000 each, living in own house i may get an tax of 17000/-any other source to save further tax
when is the new income tax act comming into vouge where in savings limit and taxable income limits are going to be hiked.
Cool blog, i want to start blogging too, what script is the best for my first blog ?
Hi, I would like to inform the following.
1. I worked for a Deemed University under Government of India for 6 and half years (11.06.01 to 11.12.07) with about Rs.3 lacs being deposited in my account, both the employer and employee contributions.
2. I worked for a MNC during 12.12.07 – 27.02.09 (14 and a half months)and my PF amount of 1 above was transferred to this MNC. The total amount as of today is about Rs.3.80 Lacs.
3. I joined a scientific institution under Government of India and was being given CONSOLIDATED Salary with no deductions being made , 13.03.09 – 16.12.09.
4. I have joined a private management institution on 18th December 2009 and am being given CONSOLIDATED Salary with no deductions being made as i am in probation for 6 months. I may be given SCALE in the month of June 2010.
Please help with info that if I withdraw may PF amount, will it be taxed.
Thanks n regards,
Dilip
I worked with a company for 5.4 years and recently I joined another company. Should I withdraw the amount for my old employer EPF account as in new company new EPF account has been created.
Please also let me know will withdrawl from old EPF account lead to any tax?
If some one knows please explain. Whether the medical expenses limit of 15K is applicable for tax deduction when the same is not reimbursed by the employer and the amount is purely spent by the individual at various occasions with proper bills and supporting proofs available.
I see a lot of good work here, keep us posting
I have joined a new company recently. In the previous company i served for 2.5 years and had a EPF account (In Karnataka). Even the present company has an EPF account for me but its in a diffenent state (Chennai).Now when i told the employer that i would like to get my EPF funds transferred, they tell me that I have to give my new EPF number to the previous organization's accounts department and get my money transferred. Is this how it works? Shouldn't this new company of mine be working towards getting my funds transferred. I am confused. Please help
I think its your current employer's job to transfer the old pf account to new pf account. 2 years back I was working in delhi when I shifted to bangalore, the new employer asked me the old pf account and I filled one pf transfer form of Govt of Karnataka to make this happen. Please ask your current employer to transfer the old pf account to new one.
Check with the PF office ppl they can guide you.