Are you Ready to File Income Tax Return for FY 2019-20 ?
Tax Planning Avenues for Salaried Individuals
As we know income tax return filling season is approaching, so we at FIBOTA have made an attempt to help you with your return filing process and help you minimize your income tax liability in the most legitimate manner possible.
First of all, let us understand the various avenues that you can explore to reduce your taxable income.
We have divided the tax optimization avenues in the hands of a salaried individuals into two parts –
- Tax saving through Income deductions
- Tax saving through optimizing salary structure
a. First let us understand the deductions in the total income that can be availed by salaried individuals. Income tax act bifurcates eligible deduction from income into three parts –
- Investment linked deductions
- Expense Linked deductions
- Income Linked deductions
Let us understand each of it in detail.
A. Investment linked deductions (Popularly known as 80C deductions)
Section of Income Tax Act 1961 | Eligible Investment(s) | Maximum Deduction |
Section 80C | Various investment options under this section are as follows –
For whom? – Self, spouse or any child
For Whom? – Self, spouse or any child
For whom? – Parents of a girl child. For maximum 2 girl child per family.
Expenditure incurred on purchase/construction or repayment of housing loan
Conditions – Lock in period 5 years
Only tax saving investment option that offers market linked return.
Amount paid towards tuition fee component of fees paid to university, school, college is eligible for deduction |
1,50,000 |
Section 80CCC | This section provides deduction towards payments made towards purchase or continuing of any annuity plan of LIC or any other insurer. Key features – Also available for NRIs Returns depend on policy Interest or bonuses taxable in year of receipt |
1,50,000 |
Section 80CCD(1) | Contribution to National Pension Scheme notified by Government. Key Features – Lock in period till retirement (60 years) Return is generally market linked 40% amount exempt on complete withdrawal. On partial withdrawal 25% exempt. Minimum contribution–Rs. 250 |
10% of Basic salary + DA |
Combined deduction u/s 80C, 80CCC and 80CCD(1) shall not exceed 1,50,000 in total p.a. | ||
Section 80CCD(1B) | This section gives an additional limit on employees’ contribution to NPS over and above the combined limit of Rs. 1,50,000 | 50,000 |
B. Expense Linked deduction
Section of Income Tax Act 1961 | Eligible Expense | Maximum Deduction |
Section 80D | Medical Insurance premium and preventive health checkups Condition – Payment (Other than health check up to be made by mode other than cash) Limit – |
|
Self, Spouse, dependent child (None aged above 60 years) | 25,000 | |
Self, Spouse dependent child (Anyone aged above 60 years) | 50,000 | |
Parents (Aged below 60 years) | Additional 25,000 | |
Parents (Aged above 60 years) | Additional 50,000 | |
Section 80E | Interest on education loan is also eligible for deduction for higher education of self or relative) Condition – Eligible till 7 Assessment years or completion of loan whichever is earlier |
No limit |
Section 80G | Donation to certain trusts/organizations/funds Certain organizations are eligible for 100% deduction while certain organizations are eligible for 50% deduction. As a general rule it is better to check with the donee before making donations and obtain a 80G receipt. Further, PAN of the donee is to be mentioned in the ITR. |
No limit |
Section 80GG | HRA deduction for those salaried individuals who do not receive HRA Condition – Individual, spouse or minor child should not be owning a house in the city of occupation. House owned in any other city should not be claimed as self-occupied Rent should have been paid |
Least of following-
|
Deduction of interest on housing loan (Section 80EE and Section 80EEA)
Feature | Section 80EE | Section 80EEA |
SDV of House property | Up to Rs. 50 Lakh | Up to Rs. 45 Lakh |
Loan Amount | Up to 35 Lakhs | Not Specified |
Loan sanctioned during | FY 2016-17 | FY 2019-20 |
Maximum Deduction | Rs. 50,000 | Rs. 1,50,000 |
- Theses sections have been introduced to boost the central government’s “Housing for all by 2022” program
- Deduction available is of interest and not principle
- These sections are only applicable to first time home buyers
- Loan should be taken from financial institutions and not family and friends
- Loan should be for buying of house property and not renovation or reconstruction
- Section 80EEA is applicable from FY 2019-20 onwards
- Section 80EEA is not available if Section 80EE is available
- Interest deduction available under section 24(b) while computing income from house property is to be first exhausted only then benefit under these sections can be availed
C. Income Linked deduction
Section | Eligible Income | Maximum Deduction |
Section 80TTA (Resident or NR) |
Individual or HUF (Other than senior citizen) Interest on savings deposit with –
|
10,000 |
Section 80TTB (Resident) |
Senior Citizen Interest on savings deposit with –
|
50,000 |
b) Now, let us understand what are the ways in which you can optimally use the benefits embodied in your salary structure. Do note that you can avail these benefits if it already a part of your salary structure.
Component | Maximum Benefit | Conditions |
House Rent Allowance (HRA) | Least of the following –
|
– Available to employees who stay on rent. – Salary for this purpose includes basic salary, DA and Commission if it is paid on a fixed percentage of turnover – Metro cities are Delhi, Kolkata, Mumbai, Chennai |
Leave Travel Concession (LTC) | Actual expenditure within the limit of LTC component of salary |
|
Children Education Allowance | Rs. 100 per month per child | Maximum 2 Children |
Hostel Expenditure Allowance | Rs. 300 per month per child | Maximum 2 Children |
Phone bill Reimbursement | Based on actual expenditure |
|
Provision of food or Food Coupons | Rs. 50 per meal |
|
Professional Tax paid by employer | Generally, Rs. 200 per month i.e. Rs. 2400 per annum | If paid by employer, first add to salary then claim deduction |
Entertainment Allowance | Least of following –
|
|
Apart from the above, sometimes employer also provides reimbursement of the maintenance or running cost of the motor car/motor cycle/scooter owned by the employee. This is considered as a perquisite. This shall be partly exempt depending on certain conditions. Let us discuss the computation of taxable value of this perquisite.
Running and Maintenance charge of employee owned vehicle paid by employer – Taxable value per calendar month
Circumstance | Motor Car | Motor Cycle/Scooter | |||
Capacity up to 1600 CC | Capacity exceeding 1600 CC | ||||
A) | Used for official purpose only | Taxable value of perquisite is Nil | |||
B) | Used partly for official purpose and partly for personal purpose | Exp Incurred xxx Less: (1800)* Add: 900** Less: Recovery (xxx) Taxable Perquisite |
Exp Incurred xxx Less: (2400)* Add: 900** Less: Recovery (xxx) Taxable Perquisite |
Exp Incurred xxx Less: (900)*Less: Recovery (xxx) Taxable Perquisite |
|
C) | Used for Private Purpose only | Exp Incurred xxx Less: Recovery (xxx) Taxable Perquisite |
Exp Incurred xxx Less: Recovery (xxx) Taxable Perquisite |
Exp Incurred xxx Less: Recovery (xxx) Taxable Perquisite |
*This is the ad hoc value of vehicle used for official purpose
**It is to be added only if chauffer is also provided to run the car
And apart from all these all salaried individuals can claim benefit of Rs. 50,000 general deduction.