Hot tips that will lead to cool savings on tax

An individual taxable at 30% can save Rs 45,000 if he claims Rs 1.5 lakh as deduction under section 80C.

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Home loan interest: If you have purchased a new apartment jointly, say, with your spouse, and are also paying the home loan jointly, then both of you are entitled to deduction of Rs 2 lakh each for the interest. An additional deduction of Rs 1,50,000 is available to first time buyers subject to certain conditions.

Interest on loan taken from an employer, friend or private lender is also eligible for Rs 2 lakh deduction. Here, you need to obtain a certificate from the lender. The principal repayment will not be eligible for a deduction under section 80C.

HRA and loans

Both HRA exemption and interest deduction on a home loan can be claimed simultaneously if you’re living in a rented house in the city where you work. The house financed with the loan should be in another city.

House rent
Deduction of up to Rs 5,000 per month under Section 80GG for rent paid can be claimed even if the employer doesn’t give HRA. However, neither the employee, nor his/her spouse and minor child must own a house.

House sale
Hold on to your house for over two years before selling. This holding period, makes it a long-term capital asset, entitling you to a lower capital gains tax of 20% plus indexation. Short-term capital gains are taxable at the slab rate, the highest rate being 30%.

Medical insurance
Deduction of up to Rs 25,000 (or Rs 50,000 if insurance is for you or your spouse above 60 years) can be claimed. If you insure your parents, you get an additional deduction of Rs 25,000 (or Rs 50,000 if they are above 60). No such deduction is available for parents-in-law. A deduction of up to Rs 5,000 for preventive health check-up is available but this amount is included in the overall cap for medical insurance.

80C: The Rs 1.5 lakh tax-saving window...
An individual taxable at 30% can save Rs 45,000 if he or she claims Rs 1.5 lakh as deduction under section 80C. Some investments you can make...
1) Your Provident Fund (PF) contribution
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2) Principal component of your housing loan from prescribed institutions
3) You can invest Rs 500 to Rs 1.5 lakh every year in a Public Provident Fund (PPF) account
4) Tuition fees of two children
5) Life insurance premiums for self, spouse and kids
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6) Contribution to Unit-linked Insurance Plan for self, spouse and children
7) Invest in National Savings Certificates (NSC) schemes (through post offices)
8) A 5-year term deposit with a bank under a notified scheme or a post office
9) Investment of up to Rs 1.5 lakh a year in Sukanya Samriddhi Account in the name of your daughter (limited to two children)

...And savings beyond 80C
An average taxpayer can save up to Rs 85,500 a year in taxes over and above the 1.5 lakh allowed under 80C if he/she invests Rs 50,000 in NPS, pays Rs 25,000 for medical insurance, has savings account interest of Rs 10,000 and also repays interest of Rs 2 lakh on housing loan for a self-occupied property.

Key components of salary

House rent allowance (HRA)
This is the most common CTC component. Those staying in rented accommodation can avail of an exemption against the HRA received and only the balance will be taxable.

The exemption is limited to the lowest among
1) Rent paid less 10% of salary*
2) 50% of salary* if the house is situated in Delhi, Mumbai, Kolkata or Chennai OR 40% of salary in other cities
3) Actual HRA received

*Salary means basic salary and dearness allowance

If your CTC doesn’t contain HRA, deduction for rent paid is available from gross taxable income, subject to various limits (maximum deduction 5,000 per month).
If you live in a house you own, the HRA component is fully taxable.

What if accommodation is provided by the employer?
Tax implications depend on:
  • Type of accommodation – hotel, serviced apartment, leased accommodation
  • Whether the property is owned by the employer or leased by the employer for you
  • Whether the accommodation is furnished or not
  • Your salary level The city/town where you have been provided accommodation

Depending on a combination of factors, you may check with a tax adviser which is more beneficial to you – claiming HRA or living in your employer’s flat.

Leave travel concession (LTC)
LTC exemption is allowed on two domestic journeys taken in a block of four years. The new block commenced on January 1, 2018.

Restrictions apply. For example, if you are travelling by air, it is limited to economy class airfare for the shortest route to your destination. No exemption is available for hotel and local conveyance expenses.
LEAVE ENCASHMENT: If you haven’t availed of your entitled leave, you may have an option to get it encashed – your employer may permit this only on retirement or resignation. The maximum aggregate exemption available in a lifetime is Rs 3 lakh.

Reimbursements
Reimbursements of your telephone expenses, including data charges, are exempt. There is no cap on the maximum amount that can be claimed for phone expenses. However, your employer may impose an internal cap. In addition, if you get meal vouchers, such as Sodexo coupons, these are exempt from tax to the extent of 50 per meal. You could also claim children’s education allowance (restricted to two children) – albeit a small tax break of 100 and an additional 300 per child per month for hostel expenses, if any.

Car perquisites: The perquisite value of a car benefit provided by an employer to you depends on who owns the car, the capacity of the engine, whether you or the employer pays for its maintenance, running cost (including fuel), driver, and if the use is official or personal. Some employers also offer car on lease, which could bring down your income tax significantly.

Employee Provident Fund (EPF)
PF withdrawal after five or more years in continuous service is tax free. However, interest earned on accumulated balance in PF account post end of employment or retirement is taxable.

Gratuity
Gratuity received under the Payment of Gratuity Act after completion of 5 years of continuous service is eligible for exemption of up to Rs 20 lakh. But remember the exemption is the cumulative of all gratuity payments received by an individual in his lifetime.
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