Tax Planning for Salaried Employees in India

Albert Einstein once said, “The hardest thing in the world to understand is the income tax.”

There are about 82.7 million taxpayers in the country, almost 6.25% of the entire population. Still, even the most brilliant minds can get confused when paying income tax.

And with several forms, like the ITR 1-4, and forms, it only adds to the complexity.

But fortunately, you do not have to suffer sleepless nights when the time for taxation arrives.

As the financial year (FY) 2022-2023 comes to an end, it is high-time salaried individuals start preparing their taxes.

As a salaried employee, you have tons of responsibilities. Proper tax planning can save you a lot of money on your taxable income and help you manage your cash flow better.

It can also help you adhere to the legal obligations as a citizen of India and fulfill the requirements of the income tax act of 1961.

How to Plan Tax for Salaried Employees in India?

According to Deloitte, India has one of the most complex tax systems in the world.

The various tax laws and constant amendments, such as the ones in the union budget 2022-23, make things more unpredictable.

In such scenarios, salaried individuals must take special care when planning their financial future.

So, you can follow the following steps when planning your taxes.

Understand Your Salary Slip

The pay slip is a vital tool for salaried employees as a proof of employment and helps in planning taxes.

Taking a good look at all its components can give you a better idea, especially when filing income tax returns.

Understanding the breakdown can help you take advantage of the standard deductions mentioned in the Income tax act of 1961.

Get an Idea About Your Tax Slab

There are two tax regimes in India after the latest Union budget.

You have the option to choose anyone when filing your taxes. However, once opted, you will likely not be able to change it later on.

Under the old regime, the different tax slabs are the following:

The new tax regime proposed in the latest budget is as follows:

Although the tax structure may seem simpler in the old regime, the taxation rate is higher.

On the other hand, the old tax regime offers many exemptions that the new one does not.

So, choose carefully and then find out which tax slab you belong you. This will be immensely helpful in planning your taxes accordingly.

Chalk out Your Investments

When planning your taxes, it is crucial to have a clear objective. Without it, you will not be able to plan your finances properly.

The Government of India offers many facilities and tax deductions for salaried individuals that you can benefit from and lower your tax liability.

For instance, 80C deductions, 80D deductions, etc., are all investment opportunities for lowering your net taxable income.

File Tax Returns on Time

Filing tax returns is equally important as the tax filing process. Sure, it can appear to be tedious, especially for first-time taxpayers.

However, you will become more financially responsible once you get accustomed to this annual activity.

Plus, filing for the returns allows the government to assess your annual expenditure properly and refund your claims.

Note: Even if your income does not fall under mandatory filing of returns, it is best practice to do it voluntarily.

Filing the returns on time can also help you with complex processes, such as registering immovable properties.

Since about three years of tax returns are required during the process, you will be in a better position if you start early.

Take Advantage of the Deductions When Tax Planning

As discussed earlier, there are many ways to get tax exemptions in India. In general, salaried individuals and pensioners are eligible for a standard deduction of flat Rs. 50000 under section 16 of the Income Tax Act. This is applicable in both the old and new tax regimes.

However, there are other deductions that can be claimed, like:

• Education allowances: Under section 10(14) of the Income Tax Act, up to Rs. 100 per month per child is exempted from taxation. But this is applicable if you do not have more than two children.

Similarly, up to Rs. 300 per month can be claimed for the hostel stay of the children of the employee.

• HRA Exemption: Under section 10(13A) of the Income Tax Act, salaried employees can claim tax exemption as per the house rent.
• Leave Travel Allowance: Employees can claim an exemption for going on up to two trips in a block of four calendar years under clause (5) of section 10.
• Section 80C: Under this section, salaried employees can claim tax deductions of up to Rs. 1.5 lakhs in an FY by investing in various financial instruments.

For instance, tax saving fixed deposits, ELSS (Equity-linked saving scheme) mutual funds, Employees Provident Funds, Public Provident Funds, senior citizens savings schemes, and infrastructure bonds.

You can also avail of another additional Rs. 50000 tax exemption under section 80 CCD by investing in the national pension scheme tier I (NPS).

Note: To claim the 80C deduction on investment in infrastructure bonds, you need to invest at least Rs. 20000 or higher.

• Section 80D: Deductions under this section allow salaried employees to claim tax exemption of up to Rs. 5000 on preventive health check-ups. This includes buying health insurance of up to Rs. 21000 for individuals below the age of 60.

Mistakes to Avoid When Tax Planning

Simply learning about the deductions and

When planning the taxes for a particular financial year, avoiding the following mistakes is important.

Planning at the Last Moment

Most salaried individuals make the mistake of planning their taxes at the end of the financial year, which is the 31st of March of every FY.

Even doing it in the last quarter can hamper your tax planning as you risk missing out on important details.

You need to remember that you must provide your employer with the necessary documents for claiming all the deductions and TDS refunds. If you put it away till the deadline, it may not be sufficient to link all your financial goals to your tax planning.

Investing in Tax-Saving Instruments Too Late

Your taxable income can be calculated only after deducting all the exemptions and deductions.

Hence, you need to make proper investments early throughout the financial year to take full advantage of these. This is especially true if you fall under the 20% and 30% tax brackets.

Apart from income tax, there are other forms of direct taxes too, that salaried individuals may incur as per their investments. Two common examples of these would be short-term and long-term capital gains taxes.

So, salaried individuals also need to plan these tax exemptions along with their income tax planning.

Note: Long-term capital gain up to Rs. One lakh is exempted under section 112A of the Income Tax Act.

Conclusion

As tax-abiding citizens of India, salaried employees are bound to pay their income tax on time. But it is equally important for them to be aware of their tax exemptions and deductions to plan their finances accordingly.

You will learn about the various ways to reduce your tax liability and actively plan for your financial goals. However, it is recommended to reach out to a licensed financial advisor to plan your taxes more efficiently.