November 29 , 2012
Having looked at the concept of Income Tax, and the various income heads, we now turn attention to how to make the income scale lighter and hence end up with a lower tax due. The central idea here is to make certain income exempt from tax, or to get certain deductions. All steps apply to Financial Year 2013-14.
We go through this process step-by-step, from the largest and most commonly applicable items to the smaller ones. We also tell you how to verify if you have indeed got the benefit. An hour at spent at the beginning of the Year to plan this, and an hour at the end of the Year for calculations, is all it takes to derive the full tax benefit!
1. House Rent Allowance (HRA)
a. Check your salary slip for split of Basic and HRA
b. Compare your monthly rent, basic pay and HRA
i. If you live in your own house, request your employer to restructure your salary, so that most of it is Basic and very less is treated as HRA. This will give you other benefits associated with a higher Basic Pay.
ii. If you pay more rent than your monthly HRA, check whether HRA is 50% of Basic. If it is not, request your employer to increase your HRA and decrease your Basic, so that HRA is 50% of Basic. If HRA is already 50% of Basic, you are already getting the best possible benefit of HRA exemption
iii. If you pay less rent than your monthly HRA, again request your employer to reduce HRA and make it equal to rent; increasing your Basic Pay instead
c. Make sure you obtain rent receipts from your landlord. Preferably, pay rent by cheque
d. Provide the rent receipts to your employer well before the last day specified by them
2. Tax saving investments
a. Check your salary slip for monthly PF deduction. Multiply by 12 to get the annual value
b. See how much this falls short of Rs1 lakh
c. Start a Systematic Investment in a tax-saving mutual fund (e.g. DSP Black Rock Tax Saver). Make sure the entire shortfall above is covered before 31 March through the systematic investments
d. If you are over 50 years of age, you may bridge this shortfall by putting the amount in PPF, instead of the Tax Saver above
e. Provide the details of the above investments to your employer
f. When you receive Form 16, make sure the deductions are given under Chapter VI
g. 80C Deductions = Sum of PF and your tax saving investments, upto Rs1 lakh
3. Tax saving insurance
a. If you do not have a medical cover for yourself and your family, take one immediately. Cover dependent parents, if applicable
b. Provide the details of the above investments to your employer
c. When you receive Form 16, make sure the deductions are given under Chapter VI
d. 80D Deduction= your medical insurance premium
a. Make sure your salary slip has Rs 800 per month as conveyance allowance
b. If you have incurred medical bills in the year, make sure there is an annual Rs15,000 as medical reimbursement in your salary slip.
c. If the above two items are not present, request your employer to provide them by reducing your Basic. Remember, these are tax-free
a. If you have a home loan going, make sure you declare this to your employer
b. When you get Form 16, make sure the interest paid in the year is shown as a loss in House Property. This will reduce your tax liability
a. If you have made donations to an approved institution, you can provide the original receipt to your employer
b. When you get Form 16, make sure the amount is shown under Chapter VI Section 80G
Avoid these common mistakes
- Investing in other products because the ad or agent talks of its 'tax benefit' - Remember, all the tax benefits you are eligible for are covered above and you will get nothing more. This harping on tax benefit is usually a ploy by agents to sell you bad products
- Not disclosing loans, investments or insurance to your employer - This could result in excess TDS being deducted by them from your salary. Getting this money back from Income Tax Department is usually a very difficult exercise.
- Not independently checking your tax liability - Sometimes employers may miss out deductions while computing TDS and preparing Form 16. Make sure you do an independent check of your tax liability and not blindly go by what is given in Form 16.