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Earning less than Rs 10 lakh per annum? Save Rs 89K in taxes
With the curtains down on the New Year party, many investors head right into their frenzy to save tax and to beat the March 31 deadline.
In a three-part series on how salaried employees can optimise their tax outgo, Anil Rego of Right Horizons explains how those earning Rs 10 lakh per annum can save up to Rs 89,000 in taxes. In the two weeks that follow, Anil will explain how employees earning between Rs 10 lakh to Rs 25 lakh per annum and Rs 25 lakh and more per annum can plan smartly to optimise their tax outgo.
For an employee earning an annual income of less than Rs 10 lakh, there are a whole lot of venues that can help reduce the taxes.
Karthik, 27, working as a software engineer, has finally decided to take a quick look at how best to save on taxes for the current year. His salary details are as mentioned in the table.
There are a few more details to consider, before we proceed further with how Karthik can optimise his tax outgo.
- Karthik stays in a rented house and pays a total rent of Rs 6,500 per month
- He has a housing loan on a house that he owns back at his native place and his provisional home loan statement shows he paid Rs 66,927 towards interest and Rs 8297 towards principal during the financial year
- Investments include the following: ULIP policy: Rs 32,839, ELSS: Rs 12,000, and a medical policy: Rs 15,309
Tax saving without investing
As a first step towards tax saving, one should identify how to save tax without investing. Tax exemptions help save taxes; based on Karthik's salary details and other inputs, he could claim the following exemptions.
House rent allowance
Up to Rs 3,000 per month of rental payment needs only a self-declaration; most companies will not insist on rental receipts. However, he pays a rent of Rs 6,500 per month, hence has to submit his proofs. However HRA exemption is allowed as a minimum of the following three conditions; the computation for Karthik is mentioned below:
Conveyance allowance: One could claim Rs 800 per month, and this does not require any proof submission
Medical allowance: One could claim Rs 15,000 per annum by producing medical bills of self or dependant
Leave travel allowance: Karthik travelled with family members to his native place and had Rs 20,000 worth of travel bills; but only travel expenses are exempt under LTA rules, not lodging and food
Claiming home loan exemption
Since, he lives in a different city, he is eligible to claim both HRA and housing loan. The house back in his native could be claimed as 'self-occupied property'. If one were in the same city, then the individual cannot claim both home loan and HRA simultaneously. The interest component of the home loan EMI (equated monthly installment) can be claimed u/s 24 up to Rs 1.5 lakh per annum (his interest component is well within this limit) and principal could be claimed u/s 80C with the maximum limit of Rs 1 lakh including other investments.
Deductions u/s 80C and 80D
Section 80C deductions
Investment up to Rs 1 lakh will qualify as deduction u/s 80C but there are numerous options within this arena. The investment options can be divided broadly into equity oriented and traditional (non-equity) instruments.
One has to carefully choose the investments to ensure that they are inline with one's financial goals and risk appetite. Karthik has dabbled with equities, however, in an ad hoc manner and therefore it was important for him to desist from further haphazard investments.
Section 80D
Medical premiums would qualify for deduction u/s 80D to a maximum of Rs 15,000. One can also avail medical insurance for aging parents and claim additional Rs 20,000 as deduction u/s 80D. Karthik's parents were well within the insurable age and hence, he chose to avail a plan for them as well.
Given below in a tabular form is a snapshot of the various tax saving investment options:
| Item | Investment amount | Term | Withdrawal | Returns | Risk profile | ||
| Min. | Max. | Pre-tax | Post-tax | ||||
| Non-equity investments | |||||||
| PPF | Rs 500 | Rs 70,000 | 15 years | 7 year onwards (Partial) | 8 per cent | 8 per cent | Low |
| NSC | Rs 100 | No limit | 6 years | None | 8 per cent | 5.6 per cent | Low |
| Infrastructure bonds | Rs 5,000 | No limit | 3 - 5 years | None | 5 per cent - 6 per cent | 3.5 per cent - 4.2 per cent | Low |
| Fixed deposits | Rs 1,000* | No limit | Min. 5 years (For tax benefit) | None | 7 per cent | 4.9 per cent | Low |
| Traditional insurance | Rs 10,000 | No limit | Min. 10 years | None | 5.5 per cent - 6.5 per cent | 5.5 per cent - 6.5 per cent | Low |
| Traditional Pension Plans | Rs 10,000 | No limit | Depends on your age & vesting | None | 5.5 per cent - 6.5 per cent | 3.85 per cent -4.55 per cent | Low |
| Equity investments | |||||||
| Unit Linked Insurance Plan (ULIP) | Rs 10,000 | No limit | Min. 4 years | 4 year onwards (Partial) | 10 per cent - 15 per cent * | 10 per cent - 15 per cent * | Moderate - High |
| Unit Linked Pension Plan | Rs 10,000 | No limit | Min. 10 years | 4 year onwards (Partial) | 10 per cent - 15 per cent * | 7 per cent - 10.5 per cent * | Moderate - High |
| Equity Linked Savings Scheme | Rs 500 | No limit | 3 year lock-in | None | 10 per cent - 15 per cent * | 10 per cent - 15 per cent * | High |
How you can save Rs 89,000 in taxes
Now, we are ready to assess Karthik's tax liability at this stage and ascertain the amount that he needs to invest to gain the benefits u/s 80C and 80D:
This clearly translates to a net benefit of Rs 89,000, merely by claiming tax breaks appropriately. Tax optimisation can help achieve higher wealth, especially in the long term. It is also pertinent to ensure that you are invested in the right avenues: the ones that provide tax free returns.
Karthik is now richer just by making the sensible decision to optimise on taxes. It's time you too did your tax optimisation and increased your take home.
Tax tips for the week:
- Avail all your exemptions -- this is the way to reduce taxes even without investing
- For medical & leave travel allowance -- bills & boarding passes/tickets are required
- To claim LTA, one may have to take leave from company (normally 2 days are mandatory, however, number of days may differ from year to year)
- Home loan and HRA cannot be claimed simultaneously in the same city
- Avail your deductions 80C and 80D appropriately
- Align all your investments with your financial goals and invest according to your risk appetite
Anil Rego is the founder and CEO of Right Horizons , an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.