How to Save Tax on Salary Above Rs.25 Lakh in India?

For salaried individuals managing their finances, reducing income tax liabilities, and increasing disposable income is essential. Proper tax planning and savings can help you take advantage of legal tax-saving opportunities, such as investing in tax-saving schemes, claiming deductions and exemptions, and minimising income tax liabilities. This, in turn, allows you to better manage your finances, achieve financial goals, and build wealth over time. It is essential to stay informed and updated on the latest changes in income tax laws to ensure that all available tax-saving opportunities are utilised effectively. 

In this article, we discuss tax-saving opportunities for salaried individuals earning above Rs.25 Lakh and other deductions and exemptions available to them. By utilising these options, you can reduce your tax liabilities and increase your disposable income. 

Brief Overview of Taxation for FY 2023-24 (AY 2024-25)

Taxation in India is regulated by the Income Tax Act, 1961, which is a set of rules that determines how much funds individuals and entities have to pay as taxes based on their income. Tax is levied based on various income categories, with rates increasing for higher income brackets. The government collects taxes in different ways, such as income tax, corporate tax, goods and services tax (GST), and customs duties. These funds are used for various purposes like funding social welfare programs, developing infrastructure, and defence.

The government also offers tax exemptions, deductions, and rebates to encourage people to invest in specific sectors or make charitable contributions. To manage finances properly, it is essential to understand the Indian taxation system and follow the rules. 

Understanding Taxation for Salaried Individuals in India 

Understanding taxation is essential for salaried individuals in India to effectively manage their finances. Income tax slab rates in India determine the percentage of tax individuals pay based on their income. Salaried individuals can claim tax deductions and exemptions to reduce their taxable income, such as deductions on investments in tax-saving schemes and exemptions on specific allowances. Types of income considered for taxation include salary, capital gains, and rental income. By understanding the different types of taxes, tax rates, deductions, and exemptions available to them, salaried individuals can ensure compliance with tax laws and maximise their savings. 

Income Tax Slab Rates in India 

Income tax slab rates in India determine the tax percentage individuals pay according to their income. There are currently six tax slab rates, ranging from 0% to 30%, reviewed and revised annually during the Union Budget. Understanding these rates is important for salaried individuals to calculate their income tax liability accurately. 

Tax Deductions and Exemptions Available for Salaried Individuals 

Tax deductions and exemptions play a significant role in the Indian tax system, enabling salaried individuals to decrease their taxable income and consequently, their tax liability. A few examples of such tax deductions and exemptions accessible to salaried individuals are: 

• Salaried individuals can claim deductions under Section 80C for investments in tax-saving schemes such as the Public Provident Fund (PPF), the Equity-Linked Saving Schemes (ELSS), and the National Pension System (NPS), among others, up to Rs.1.5 Lakh. 
• Salaried individuals can claim deductions on health insurance premiums paid for themselves and their dependents under Section 80D. This section allows a maximum deduction of Rs.25,000 for individuals and Rs.50,000 for senior citizens. 
• Salaried individuals who live in rented accommodation can claim a deduction on the House Rent Allowance (HRA) component of their salary. The amount of deduction depends on their salary, HRA received, and city of residence. 
• One of the tax deductions available to salaried individuals is the standard deduction. This deduction allows individuals to claim Rs.50,000 as a deduction from their taxable income. Unlike other deductions, the standard deduction does not require any proof of investment or expense and is available to all salaried individuals. 
• Salaried individuals are eligible to claim a tax exemption on domestic travel expenses for themselves and their family twice in a block of four years under Leave Travel Allowance (LTA). 

Types of Income Considered for Taxation 

To calculate taxable income, the Indian tax system takes into account various types of income, which salaried individuals should know to determine their taxable income. The following are some common types of income considered for taxation: 

• Salary income refers to all earnings received from an employer, which encompasses basic salary, bonuses, commissions, and allowances, among other forms of income. 
• One's income from renting out a property or owning a house property is considered as Income from House Property for taxation purposes. 
• Capital gains are profits generated from the sale of capital assets, such as stocks, mutual funds, or property. 
• Individuals who are self-employed or own a business are considered to have business income. This type of income includes the earnings from running their business or profession. 
• Other sources of income considered for taxation include earnings from interest on bank deposits, dividends, and royalties, among others. 

Maximising Tax Savings through Investments 

Investing in tax-saving schemes like PPF, ELSS, NPS, and tax-saving fixed deposits can help individuals reduce their tax liability by claiming deductions under Section 80C. Besides, investments in health insurance, life insurance, and pension plans can also help individuals claim deductions under different sections of the Income Tax Act, 1961. Maximising tax savings through investments not only helps individuals save tax but also enables them to grow their wealth over the long term. 

Importance of Investments for Tax Savings 

Investing in tax-saving schemes is essential for tax planning and can significantly lower an individual's tax liability. The Public Provident Fund (PPF), Equity-Linked Saving Schemes (ELSS), and National Pension System (NPS) are popular tax-saving investment options that offer deductions under Section 80C of the Income Tax Act, 1961. Additionally, investments in health insurance, life insurance, and pension plans can also help individuals claim deductions under different sections of the Income Tax Act, 1961. Consistent investing enables individuals to build a diversified portfolio that can not only save tax but also generate wealth over time. 

Overview of Investment Options Available in India 

There is a wide range of investment options available in India, with varying levels of risk and potential returns. Some popular investment choices in India include: 

• The Public Provident Fund (PPF) is a government-backed long-term investment option that comes with a lock-in period of 15 years and provides tax-free returns. 
• One investment option for tax savings is Equity-Linked Saving Schemes (ELSS), which is a mutual fund scheme that invests primarily in equities. It offers the potential for high returns and has a lock-in period of three years. 
• The National Pension System (NPS) is an investment option aimed at retirement planning that is governed by the Pension Fund Regulatory and Development Authority (PFRDA). It provides a variety of investment options and tax advantages. 

Tax Benefits of Various Investment Options

Investment options like ELSS, PPF, and NPS, among others, provide tax benefits to individuals in India, enabling them to lower their taxable income and ultimately, their tax liability. 

• ELSS provides individuals a tax benefit of up to Rs.1.5 Lakh under Section 80C of the Income Tax Act, 1961. Moreover, long-term capital gains on ELSS investments are also tax-exempt up to Rs.1 Lakh per annum. 
• The Public Provident Fund (PPF) is a tax-exempt investment alternative that comes with a 15-year lock-in period. The interest received on PPF investments is tax-free, and individuals can claim a tax deduction of up to Rs.1.5 Lakh under Section 80C of the Income Tax Act, 1961, for their investment amount. 
• Investing in the National Pension System (NPS) can provide tax benefits under different sections of the Income Tax Act, 1961. Individuals can claim a tax deduction of up to Rs.1.5 Lakh on the investment amount under Section 80C, and an additional deduction of Rs.50,000 is available under Section 80CCD(1B). 
• Investing in tax-saving fixed deposits that have a lock-in period of five years can help individuals claim a tax deduction of up to Rs.1.5 Lakh under Section 80C of the Income Tax Act, 1961. 

Strategies for Choosing the Right Investment Mix for Tax Savings 

Maximizing tax savings requires careful consideration of the investment mix. Several factors such as the investor's risk appetite, investment goals, and tax bracket come into play when selecting the right investment mix. To choose the right investment mix for tax savings, the following strategies can be helpful: 

• To optimise your tax savings, it's important to have a clear understanding of your tax bracket. If you fall into a higher tax bracket, it is recommended to invest in tax-saving options like ELSS and NPS. 
• One way to minimise risk and maximise returns is by diversifying your investments. Depending on your risk tolerance, it is recommended to have a combination of equity and debt investments in your portfolio. 
• You can consider utilising an income tax calculator to evaluate the influence of a Home Loan on your tax obligation.

Tax Saving through Home Loan 

Individuals can reduce their tax liability through tax-saving schemes such as a Home Loan. Apart from fulfilling the dream of owning a house, availing a Home Loan also provides several tax benefits. The Home Loan tax benefit can be claimed under different sections of the Income Tax Act, but the benefits may vary based on factors such as the loan's purpose, borrowed amount, and interest paid. To better understand the impact of Home Loan interest on tax liability, using an income tax calculator can help individuals plan their finances accordingly. 

Tax Benefits Available on Home Loans 

There are numerous tax benefits available to borrowers in India who have availed of Home Loans. Here are some of the tax benefits that one can avail of when taking a Home Loan: 

• Tax deduction is available on Home Loan interest under Section 24(b) of the Income Tax Act, 1961. The maximum deduction allowed for a self-occupied property is Rs.2 Lakh, and there is no limit for a property that is let out.  
• Tax deduction on principal repayment of Home Loans available under Section 80C with a maximum deduction limit of up to Rs.1.5 Lakh for both self-occupied and let-out properties.
• Tax deduction is available on stamp duty and registration charges paid for purchasing a property under Section 80C of the Income Tax Act, 1961. The maximum deduction available is up to Rs.1.5 Lakh. 
• Joint Home Loan borrowers can claim individual tax benefits on Home Loan interest and principal repayment, based on their ownership share. 

Eligibility Criteria for Availing Tax Benefits on Home Loans 

One must fulfil specific eligibility criteria to claim tax benefits on Home Loans in India. These include: 

• Individuals who have availed of a Home Loan to purchase a new property are eligible to claim tax benefits under various sections of the Income Tax Act such as Section 80C, 24(b), 80EEA, and 80EE. Additionally, if the Home Loan is taken jointly by co-owners of the property, both borrowers can claim tax benefits.  
• To claim tax deductions on a Home Loan, the property should be fully constructed. If the house is not built, it must be completed within five years of taking the loan to claim maximum deductions. Borrowers need an interest certificate from the financial institution to avail of the Home Loan interest deduction.  
• In order to avail additional tax benefits of up to Rs.1.5 Lakh under Section 80EEA, it is necessary to be a first-time homebuyer and the stamp value of the property should not exceed Rs.45 Lakh. 
• To claim tax benefits, the borrower needs to furnish appropriate documents such as the loan agreement, possession letter, and completion certificate. 

How to Calculate Tax Savings on Home Loans 

Using an Income Tax Calculator to calculate tax savings on a Home Loan is a simple procedure. Firstly, select your gender. Then, enter your annual income, interest paid on the Home Loan, and principal amount repaid during the financial year into the calculator. After that, the calculator will compute the tax liability before and after claiming deductions on the Home Loan. The variation between these two values signifies the amount of tax savings that can be obtained through the Home Loan.      

HRA and its Tax Benefits 

HRA or House Rent Allowance is a component of an employee's salary that covers their rental expenses and can be eligible for tax benefits if certain conditions are met. The amount of tax deduction available on HRA depends on factors such as the employee's salary, rent paid, and city of residence. HRA tax benefits can be claimed under Section 10(13A) of the Income Tax Act, 1961.

How to Claim Tax Deductions on HRA 

To claim tax deductions on HRA, the employee must furnish the following details to their employer: 

• Rent receipts need to be provided by the employee as evidence of payment made to the landlord. 
• The submission of a valid rent agreement between the employee and landlord is necessary for claiming HRA tax deductions. 
• If the employee pays an annual rent exceeding Rs.1 Lakh, they need to provide the PAN of the landlord. 

The employer calculates tax benefits using the provided documents and adjusts the employee's salary accordingly. If the employer doesn't provide HRA, rent paid can still be claimed for tax deductions under Section 80GG of the Income Tax Act, 1961. 

Eligibility Criteria for Claiming Tax Benefits on HRA 

One can claim tax deductions on HRA under Section 10 (13A) of the Income Tax Act, 1961 by meeting the following requirements: 

• To claim HRA deductions under Section 10(13A) of the Income Tax Act, the individual must either be self-employed or salaried and currently residing in a rented house.  
• They must provide a house rent receipt or any other proof of their rented accommodation to claim the HRA deductions.  
• The calculation for HRA deductions is based on the rent paid for the rented house and not the individual's personal residence. 

Medical and Health Insurance 

Tax Benefits of Medical and Health Insurance 

Under Section 80D of the Income Tax Act 1961, taxpayers in India can avail of tax benefits on medical and health insurance premiums paid. The amount of deduction depends on the policy type, premium amount, and age of the individual. The maximum deduction available is Rs.50,000 for senior citizens and Rs.25,000 for individuals under 60 years. One can also claim an extra deduction of up to Rs.5,000 for preventive health checkups. 

Eligibility Criteria for Claiming Tax Deductions on Medical and Health Insurance 

The following eligibility criteria must be fulfilled to claim tax deductions on medical and health insurance premiums under Section 80D of the Income Tax Act, 1961 in India: 

• The taxpayer, their spouse, or dependent children must be named as the insured on the insurance policy to claim tax deductions under Section 80D of the Income Tax Act in India. 
• The payment for the insurance premium must have been made by the taxpayer. 
• Senior citizens are eligible for a maximum deduction of Rs.50,000, while individuals below 60 years of age can claim up to Rs.25,000 as a deduction on medical and health insurance premiums.  
• A deduction of up to Rs.5,000 can also be claimed for preventive health checkups.  
• The insurance policy should be from an IRDAI-registered insurance company to claim tax deductions on medical and health insurance premiums. 

How to Calculate Tax Savings on Medical and Health Insurance 

A Section 80D tax saving calculator is a tool that helps taxpayers calculate their tax savings on medical and health insurance premiums. 

• The calculator takes into account factors such as the age of the taxpayer, the type of insurance policy, and the premium paid to determine the maximum deduction available under Section 80D. 
• To use the calculator, taxpayers need to enter their age, the number of family members covered under the policy, and the premium paid for the policy. 
• The calculator then displays the maximum deduction available under Section 80D, as well as the amount of tax savings that can be claimed. 
• Some tax filing websites and financial institutions offer online Section 80D tax-saving calculators that can be used for free. 

Understanding Tax Deducted at Source (TDS) 

Overview of TDS and Its Implications 

TDS is a method to collect taxes at the source of income generation in India. It is mandatory for various transactions such as salaries, rent, professional fees, and interest. The employer or payer deducts TDS at a prescribed rate and deposits it with the government, treated as an advance tax payment by the taxpayer. 

How to Calculate TDS 

• To calculate the TDS amount, the payer must determine the relevant TDS rate and apply it to the amount paid to the payee. 
• For example, if an employee receives a salary of Rs.50,000 per month and the applicable TDS rate is 10%, the employer must deduct Rs.5,000 as TDS from the salary and deposit it with the government. 

How to Claim a TDS Refund 

Here are the steps to claim a TDS refund in India: 

• Obtain Form 26A and get a consolidated tax credit statement from the income tax department's website or your net banking account. 
• Verify the TDS amount mentioned in Form 26AS with the TDS certificates received from the deductor. 
• File your ITR online or offline. 
• Provide the TDS amount deducted, refund due, and bank account details in the ITR form. 
• Submit the ITR form and verify it using Aadhaar OTP or digital signature if filed online. 
• Check the refund status on the income tax department's website after the ITR is processed, and receive the refund in your bank account if the ITR is processed successfully. 

Tax Planning through Salary Restructuring 

Overview of TDS and Its Implications 

Salary restructuring involves rearranging the various components of an employee's salary to lower their tax burden. This is achieved by adjusting the proportion of salary paid as basic salary, allowances, and perquisites. The purpose of salary restructuring is to reduce tax liability while increasing the take-home salary. The benefits of salary restructuring include: 

• Salary restructuring can increase take-home pay by reducing tax liability. 
• Salary restructuring can reduce tax liability by utilising deductions and exemptions. 
• Restructuring salary can allow employees to increase their Provident Fund contribution, resulting in better retirement benefits. 

Strategies for Salary Restructuring to Save Taxes 

Some of the strategies that can be used for salary restructuring to save taxes are: 

• Employees can choose tax-free allowances such as HRA, LTA, and Medical Allowance to lower their taxable income. 
• Employees can claim deductions for investments made in instruments such as PPF, ELSS, NPS, and Life Insurance to lower their taxable income. 
• Basic salary is fully taxable, while allowances are partially taxable. By restructuring the basic salary, employees can lower its proportion and reduce their tax liability. 

Common Salary Restructuring Techniques 

Here are some common salary restructuring techniques: 

• Increase the proportion of allowances such as HRA and LTA to reduce taxable income. 
• Opt for Employee Stock Options (ESOPs) instead of a bonus or additional salary to reduce tax liability. 
• Reimburse work-related expenses incurred by employees instead of providing taxable allowances. 

Tax Planning through Retirement Planning 

Retirement planning involves investing in financial instruments that can provide a regular income stream after retirement to ensure financial stability during old age. It helps individuals achieve their long-term financial goals and secure a comfortable retirement. 

Tax Benefits of Retirement Planning 

Retirement planning offers various tax benefits that can help in reducing the tax liability of individuals. Some of the tax benefits of retirement planning are as follows: 

• Investments in retirement planning instruments like PPF, EPF, NPS, and ELSS can be claimed for a deduction of up to Rs.1.5 Lakh under Section 80C of the Income Tax Act, 1961.  
• Income from some retirement planning instruments like NPS and PPF are tax-free to a certain limit. 
• An extra deduction of up to Rs.50,000 is available under Section 80CCD for investments made in the National Pension Scheme.  

Retirement Planning Options Available in India 

There are several retirement planning options that individuals can consider, and some of the commonly used ones are: 

• The National Pension Scheme (NPS) is a retirement-focused plan that provides a lump sum payout along with monthly pension payments when the investor reaches retirement age.  
• The Public Provident Fund (PPF) is a long-term investment plan with a lock-in period of 15 years. The invested funds cannot be withdrawn before 15 years, and after the expiry of the lock-in period, funds can be withdrawn only in a lump sum. 
• EPF is a scheme for salaried employees where both employer and employee contribute equally to a common fund. Upon retirement, the employee gets the principal amount and the accrued interest. 

Understanding Capital Gains Tax 

Capital gains tax is a levy on the gains made from selling an asset, including stocks, bonds, and real estate. The tax is based on the difference between the asset's purchase price and the sale price. As it can have a substantial impact on investors, it is crucial to grasp how the tax operates. 

Calculation of Capital Gains Tax 

Capital Gain = Selling Price of the Asset – (Cost of Acquisition + Cost of Improvement + Cost of Transfer) 

Wherein,  

• The selling price of an asset refers to the amount at which the asset is sold. 
• Cost of Acquisition refers to the initial expenses incurred by the taxpayer to acquire the asset, which may include the purchase price, stamp duty, registration fee, and legal fees. 
• Cost of Improvement refers to the expenses borne by the taxpayer to enhance the value of an asset through modifications, renovations, or extensions. 
• The cost of transfer refers to the expenses borne by the taxpayer during the process of transferring the asset, including fees for brokerage, commission, and legal services. 

Strategies for Reducing Capital Gains Tax 

Here are two important strategies for reducing capital gains tax: 

• When an individual sells a property and invests the sale proceeds in the purchase or construction of a residential property, they may be eligible for exemptions under Section 54F of the Income Tax Act, 1961. This section provides exemptions from capital gains tax if certain conditions are met. 
• Under Section 54EC, an individual can claim an exemption from capital gains tax by investing in specified capital gains bonds. The maximum investment allowed in these bonds is Rs.50 Lakh, and the lock-in period is five years. 

Tax Planning for Senior Citizens 

Senior citizens in India, defined as individuals who are 60 years old or above, can benefit from several tax benefits to minimise their tax liability. Tax planning is important for senior citizens who rely on a fixed income. The tax benefits available to them include a higher income tax exemption limit, tax deductions, and exemptions on income from specific sources. Taking advantage of these benefits can help senior citizens save funds on taxes. 

Tax Benefits Available to Senior Citizens in India 

Here are some of the tax benefits available to senior citizens in India: 

• Senior citizens in India enjoy a differential income tax slab rate as compared to non-senior citizens, resulting in significant tax savings. This tax benefit translates into a tax saving of Rs.5000 for senior citizens and Rs.30,000 for super senior citizens.  
• Starting from the financial year 2018-19, a new section 80TTB has been introduced that allows senior citizens to claim a deduction for interest up to Rs.50,000. Any interest earned beyond this amount would be subject to taxation based on the applicable slab rates for senior citizens.  
• For non-senior citizens, the deduction allowed under section 80D for payment of medical insurance premiums is limited to Rs.25,000. However, senior citizens can avail of a higher deduction of Rs.50,000 for the same purpose. This increase from Rs.30,000 to Rs.50,000 was introduced in the 2018 Budget.  
• If a senior citizen's total income is exempt from income tax and no tax is payable by them for the financial year, they can submit Form 15H to avoid tax deduction at source (TDS) on interest earned from fixed deposits. 

Strategies for Maximising Tax Savings for Senior Citizens 

Below are some strategies that senior citizens may employ to optimise their tax savings: 

• Senior citizens can invest in tax-saving options to reduce tax liability, such as Health Insurance, SCSS, fixed deposits, NPS, and other instruments. 
• To minimize their tax liability, senior citizens can utilize tax-free income sources such as tax-free bonds, post office savings schemes, and PPF. 
• To reduce their tax liability, senior citizens can consider sharing ownership of their assets with their children or spouse, allowing them to split their income. 
• Senior citizens can reduce their tax liability by claiming deductions under Section 80D for medical insurance premiums and Section 80DD for expenses incurred for dependent family members with disabilities. 

Conclusion 

In conclusion, salaried individuals earning between Rs.20 Lakh and Rs.25 Lakh in India can significantly reduce their tax liability by effectively planning and utilizing various tax-saving instruments such as deductions, exemptions, and investments. It is essential to stay updated with the latest tax laws and regulations and by adopting a proactive approach towards tax planning, individuals can achieve their financial goals and secure their future.