How to structure your salary to save tax

Getting your pay structure right is one of the best ways to make use of every paisa from your salary. If done smartly, it would help increase your take-home salary and reduce tax liabilities to a great extent. It is better to sit with your employer while structuring your salary. 

Here are some changes you can introduce:

The Ideal Salary Structure

Salaries vary from individual to individual and so do the salary structures. However, there are certain steps that every employee must take to restructure their salary and minimize tax payouts. The best is to use different allowances, such as House Rent Allowance (HRA), transport, medical and education allowances, to your advantage when paying taxes.

 1. House Rent Allowance: HRA is a very important component of your salary. In some cases, the rent that is paid for accommodation can be fully exempt from taxes. Employees who live with their parents are entitled to full HRA tax exemption. Full HRA exemption is possible on these three conditions:
a. Actual HRA received.
b. Rent paid minus 10% of the basic pay.
c. 50% of the basic pay if you live in a metro city and 40% of the basic pay in other cities.
The main documents that are required for an HRA exemption claim include the rent agreement and receipts or cheque payments made towards the monthly rents in a financial year.

 2. Medical Reimbursements: As an employee, you can get tax exemptions on all medical expenses incurred on your own health or that of your family. If you have original bills to submit to prove the expenses incurred, you can claim a tax exemption up to Rs 15,000 per annum. That means you can boost your take-home pay by Rs. 1250 each month.

 3. Transport Allowance: A nominal transport allowance of Rs 1600 is permitted to employees without having to show any documents. That means one can get Rs 19,200 per annum of tax free income in the form of transport allowance. For those employees whose transport allowance expense exceeds Rs 19,200, it is compulsory to furnish the related expense documents.

 4. Children Education Allowance: The Income Tax Department permits employees with children to get Rs. 100 each month per kid, for up to two children. That means you can get a maximum of Rs. 200 in the form of children education allowance per month. For those employees whose kids stay in hostels, this amount increases to Rs 300 per child each month. For those with two children studying in a boarding school, with necessary documents in place, you can add Rs 600 more to the take-home salary.

 5. Leave Travel Allowance: Popularly known as LTA, this allowance is another good option for employees when it comes to saving on tax charges and increasing the take-home salary. The Income Tax Department applies a four-years block provision for the same. This means you can claim LTA for a maximum of two times in one 4 year block. You can even get it fully exempted once in two years. This allowance is a special scheme for employees and their employers. However, evading this tax charge is subject to preconditions that need to be fulfilled when filing for an LTA claim.

few lesser known TAX DEDUCTION before filing your tax return

Home loan charges &fee
People are well aware about home loan interest and principal repayment but lesser know fact is even processing fee qualifies for deduction under section 24. The processing fee  and other charges  can be treated as interest and claimed as deduction under section 24.

Interest on personal loan
Section 24 coves not jest  interest on home loan, it covers any loan taken for the renovation or reconstruction of a home. It also covers loan taken from friends and family member. Assess should furnish loan agreement between two parties and the interest earned by the lender will be taxed as his income.

Tax deduction for disabilities
If a taxpayer suffers from 40% disability (as certified by a government hospital), he can claim deduction of Rs 50,000 under Sec 80U. For a disabled dependent, he can claim a deduction of Rs 50,000 under Sec 80DD. In both cases, if the disability is severe (80% or above), the deduction is Rs 1 lakh.
This is a flat deduction and does not depend on actual amount spent. However, the disabled person should be wholly or mainly dependent on the taxpayer for maintenance, and should not have claimed deduction for disability under Section 80U separately.

Clubbing income of disabled child
If you invest in the name of your spouse or minor child, the income from the investment will be clubbed with your income under Sec 64 and taxed accordingly. However, if the child is disabled, the income from investments made in his name will not be clubbed with the income of parents. Parents can use this provision to invest in taxable instruments like fixed deposits and debt funds.

Deduction for specified illnesses
A deduction of up to Rs 40,000 can be claimed if a taxpayer suffers from any ailment specified under Sec 80DDB or has a dependent who is a patient. For senior citizens, the deduction is higher at Rs 60,000. The diseases include certain neurological ailments, cancers, AIDS, kidney failure and haematological disorders.
However, if the amount spent is reimbursed by the employer or insurance, the taxpayer is not eligible for deduction. If he gets partial reimbursement of the expenses, the balance can be claimed as deduction.



Interest from savings accounts
The interest you earn is fully taxable but there is a small window of exemption. Up to Rs 10,000 interest earned on savings banks account is exempt under Sec 80TTA. Also, up to Rs 3,500 interest from a post office savings account is exempt from tax under Sec 10(15)(i). If you hold a joint account, the exemption is higher at Rs 7,000. "Since both provisions are separate, one can claim the benefits under both sections," says Suresh Surana, Founder, RSM Astute Consulting.

House rent exemption without HRA

Many pay house rent but cannot avail exemption because there is no HRA component in their salary. Under Sec 80GG, you can claim a deduction for the rent even if you don't get HRA. However, the taxpayer should not be drawing any housing benefit.
Nor should he or spouse or child be owning a house in the city where he stays. The exemption is limited to the least of the following: rent paid less 10% of total income; or Rs 2,000 a month; or 25% of total income.

Adjusting losses against gains
If you lost money in stocks or on other investments during the previous financial year, there is a silver lining. You can adjust some losses against capital gains from the sale of stocks, property, gold or debt funds. Short term capital losses can be set off against both short-term capital gains as well as taxable long-term capital gains.
However, long term capital losses can only be set off against taxable long-term capital gains. Long-term losses from stocks and equity funds cannot be adjusted against any gain.

Section 80G donations
Donations under Sec 80G are generally not included in Forms 16. "The CBDT circular on TDS does not clarify as to whether deduction under Sec 80G needs to be considered by employers," says Surana.
You will have to claim this deduction at the time of filing your return. Depending on the organisation or fund you have contributed to, you can claim a deduction of 50-100% of the donated amount. But the deduction cannot be more than 10% of your gross total income.

 

5 things to know about LTA DEDUCTION

1) LTA can be claimed as a deduction from taxable income where the employer provides LTA to employee and leave application has been made for a holiday either individually or with family.

2) The deduction is limited to the extent of actual travel costs incurred by the employee. The total cost of the holidays is not covered, only the travelling cost is covered.

3) Travel has to be undertaken within India only. Overseas destinations are not covered for deduction.

4) The tax rules provide for a deduction only in respect of two journeys performed in a block of four calendar years. The blocks are decided by government. They are 2010-2013, 2014-2017 and so on.

5) If the employee does not use their exemption during any block, the exemption can be carried over to the next block and used in the calendar year immediately following that block.

Income tax slab for FY 15 -16 (AY16 - 17)

Income tax slab/ rates applicable in India for individuals, Hindu Individual family (HUF), Association of persons (AOP) and Body of Individual (BOI).
                                                  
 
 

Ways to Save Capital Gains Tax on Sale of Property in India..

 a) Invest in a Residential House (Buy / Construct)  (Under section 54F)

 The seller of the property can claim for tax exemption if he buy another essential property. However, the amount of investment & exemption depends on the type of Capital asset sold.



 The seller has two options, either he can buy another house within two year from sale of property else he can build a house in three years.   Buyer can also buy a house 1 year prior to selling the house and still can avail the benefit under section 54.

However, following conditions needs to be adhered
1. You can only invest in Residential property. This means you cannot invest in a commercial property or land to save tax.

2. You should not own more than one house prior to the investment.
If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.

3. If any additional house (other than the new residential house referred above), is purchased within a period of two years or constructs within a period of three years after the date of transfer of capital asset, then the original exemption will be taxed as capital gains in the year in which the additional residential house is acquired

Capital Gains Accounts scheme -   If you could not invest the amount in another property before due date if filing the returns, you can deposit the amount into a bank account under the Capital Gains Accounts Scheme, 1988. Such amount would have to be utilized for the purchase or construction of the new asset within the prescribed time period. Unutilized amounts would be taxable as income of the previous year in which the period of 3 years from the date of the transfer of the original asset expires.

b) Invest in Capital Gain Bonds (Section 54EC)

Irrespective of the type of property, here you nee to just Invest profit (capital gains) into Capital Gains Bonds. You can invest in NHAI or REC Bonds upto 50 lakhs in an year.
There is a Lock in of 3 years for such investment.  If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.

Important Note –  If you have Capital gains from Under Construction Property / Commercial / Non Agricultural Land –    then this option is more beneficial as you need to invest only profit amount & not the entire sale amount.

4 simple tax saving ideas

# Setting off capital loss against capital profit

Did you know you can setoff long term capital profit against short term loss? Long term capital gains like profit gained on sale of property can be set against any short term capital loss such as loss incurred from investing in stock market.

For example if you have paid off the home loan and sold the property for a profit of Rs. 30 lakh. At 25% the amount of tax payable is 7.5lakhs. In the same financial year if you have invested in the stock market at incurred short term loss of Rs 3 lakhs, then the net taxable capital gain profit is Rs. 27 lakhs (Rs. 30 lakhs – RS. 3 lakhs). Tax payable at the rate of 25% on taxable amount is Rs .6.75 lakhs. By this tota tax saved is Rs. 0.75 lakhs.

Proof required -Statement of  trading account which includes details of transaction in which you incurred loss.

# Donations to political party and charitable trust

Whenever you contributed to charitable trust, NGO and recognized political party, you are eligible for tax deduction. Under Section 80GGC donations to registered political parties or electoral trusts can be entitled for a deduction. A fascinating point to note is that there is no upper limit on the amount that can be claimed as a deduction.
Under Section 80G, 100% or 50% of your donation to a charitable organization and up to 10% of your income is entitled for deduction.
Proof Required – For claims on contributions to political parties, you need a stamped receipt from the party or trust. For claims on donations made to charitable organizations, a tax exemption certificate or receipt is required.

# Educational Expenses
Increasing cost of education is a major concern for parents. In the case of education, the taxman is relatively favorable. Under Section 80C and 80E, interest on educational loans for children as well as spouses (excluding relatives and  siblings) is deductible from taxable income for the first eight years.
Proof Required – For claims on interest paid on education loans, you need to present your loan account statement as proof.

# Medical expenses on illness of dependents
The taxman understands that in circumstances where a dependent is chronically ill, medical expenses can weigh down taxpayers. Therefore, under Section 80DDB, an annual deduction of Rs 40,000 or Rs 60,000 for senior citizen dependents can be claimed.
Deductions can be claimed on only certain diseases  some of which include, advanced stage of AIDS, hematological disorders such as hemophilia, neurological diseases such as Parkinson’s, dementia, chorea, and chronic kidney failure. To be eligible for a claim, dependents (parents, children, spouses and siblings) should not have claimed for deduction separately.
Proof Required – For claims on medical expenses on illness of dependants, you need a medical certificate and details of the illness from a certified medical professional in a government hospital.