Five Tax Saving Options for Salaried Employees

Published On: 24-Mar-2020

With a salary income of Rs. 20 lakh crores declared in the ITRs filed for the financial year 2017-18, 58% of the overall income of the Individual taxpayers is contributed by income from salaries. 

Source- Income Tax Return Statistics by Income Tax Department. 

Even in the Union Budget 2018-19 speech given by the Hon’ble Finance Minister mentioned certain statistics about salaried taxpayers while introducing standard deduction for them, including 1.89 crore salaried individuals filing their returns, paying Rs. 1.44 lakh crores tax, resulting in an average tax of Rs. 76,306 per salaried taxpayer. This acknowledged the role and contribution of salaried taxpayers in nation-building. However, amidst their essential role, it is also apparent for them to seek some tax relief through legitimate tax saving options available for them.

While there are many other tax benefits available under the Income Tax laws, some options tend to flow naturally to the salaried employees. For example, the Standard deduction of Rs. 40,000 is available to all the salaried taxpayers, without any additional action on their part. Similarly, there are other tax saving options, which an employee may achieve by restructuring their pay structures or planning their taxes wisely. This article aims to help the taxpayers to move effortlessly towards efficient tax planning for salaried employees. 

Here are five important tax-saving tips for Salaried employees:

Exempt Allowances

In simple terms, an allowance is a monthly payment made by your employer over and above the regular salary. Most of these allowances may be in nature of meeting expenses in the course of meeting official duties or meeting regular expenditure and include allowances like Dearness Allowance (DA), House Rent Allowance (HRA), conveyance allowance, uniform allowance, education allowance, professional development allowance, Leave Travel Allowance (LTA) etc. Income tax laws provide for certain exemption in respect of some of these allowances, which may be either fully exempt or exempt up to specified limits. As such, one may restructure their pay structures as per the tax benefits available, which may effectively reduce their tax liabilities. In case the existing pay structure does not allow enough tax benefits, one may also take it up with the HR division for modified structures/ allowances. 

Less Taxing Perquisites

A prerequisite is a benefit that one enjoys in terms of tangible services or periodic payments. Such perquisites may be in the form of monetary perquisites, which are mostly in the form of reimbursements or in the form of non-monetary perquisites in the form of some facilities provided to them by the employer. Such perquisites include rent-free accommodation, meal facilities, provision of a motor car, concessional loans, ESOPs etc. 

Such benefits have specific taxation rules, wherein the notional benefits may be taxed or exempt up to specified limits depending upon the type of perquisites. For example, a meal facility is exempt up to Rs. 50 per meal and hence, may be opted for by the employee to save on tax on the eligible amount. Similarly, the perquisite valuation rules for rent-free accommodation are specifically spelt out and may provide for lower tax incidence than the rent that would have been payable otherwise. As such, the pay structures may be customized by the employees in such a manner that reduces their tax liability in the best possible manner legitimately. 

Contribution to Employee Provident Fund (EPF)

The employer may deduct 12% of your salary (basic salary plus DA) as your contribution towards EPF. As such, this automatically provides you with the tax benefit under Section 80C up to Rs. 1.50 lakh in a financial year. This ceiling limit is, however, for all the investment options under Section 80C. Further, to fully avail of the tax benefit of Rs. 1.50 lakh, one may also opt for Voluntary Provident Fund (VPF) contribution, wherein the contribution gets deducted from monthly pay bills. As such, while you are saving taxes, you are also accumulating a certain sum towards your retirement plans. 

Contribution to the National Pension Scheme (NPS)

One may also opt to contribute voluntarily towards the Tier-1 account under NPS to avail an additional tax benefit under Section 80CCD(1B) up to Rs. 50,000 in a financial year. Further, one may also structure their salary to let the employers pay a part of their salary as employer’s contribution to NPS, which may be considered a tax-exempt perquisite up to 10% of your salary. However, any such contribution, whether self or by the employer, is generally not withdrawable before retirement, except certain specified and permitted withdrawals. Further, one may only partially commute the entire corpus at the time of retirement and for the balance, may only purchase an annuity. 

Relief under Section 89(1)

This is one of the rarely used tax benefits available for the lack of awareness amongst the salaried taxpayers. If you have received salary arrears or leave encashment or gratuity income during the current year, you may be eligible for claiming relief under Section 89(1) of the Income Tax Act. This section assumes that had such incomes been received in the respective years they were accrued in, the tax incidence would have been lower. The tax relief is allowed in such cases by recalculating the taxes payable in the earlier years and the tax being paid in the current year. Further, to claim the relief under Income Tax Return, one must also file Form 10E with the Income Tax Department before filing their ITR. 

So, now that you know how to save tax on salary have a happy tax-saving season ahead. Happy Tax Saving! 

Note: The tax provisions, as mentioned in the article, are only for illustrative purposes and updated as per the Finance (No. 2) Act, 2019. Contact your tax advisor for more details.