When Ashutosh, a fresh engineering graduate checked his bank balance after the first month at work, it warmed the cockles of his heart. Gazing fondly at his pay-slip, he suddenly stopped at a particular number, conspicuous by its large size. This figure ‘Tax deducted at source' took away a good chunk of his salary! Ashutosh figured that if he could somehow manage to reduce this amount, his ‘take-home' salary would increase substantially. So, he headed off to see his friend, Sagar, who knew a thing or two about salary structuring and tax optimization.
After hearing Ashutosh out, Sagar said “As you well know, Ashu, nothing is certain in this world except death and taxes. There's no escape from the taxman's tentacles.” Pausing for effect, Sagar continued “But worry not. There are ways of blunting the edge of the taxman's sword. Tax evasion is illegal but tax avoidance is not.”
Invest to save tax
Noticing Ashutosh's puzzled expression, he explained the semantics. “If you conceal income and don't pay taxes that are due, then you evade taxes and the tax sleuths may come after you. But if your company structures your salary in a tax-friendly way and you make investments which give you tax-breaks in accordance to tax laws, then it is tax avoidance, which is kosher. Tell me, did your company ask you to fill an investment declaration form when you joined?”
Ashutosh replied, “Yes, it did, but I haven't done so yet.” Sagar admonished, “No wonder your TDS amount is so high! You know, there is a Chapter VI A in the tax law which allows various deductions before arriving at taxable income. For instance, an amount of up to Rs 100,000 every year invested in specified avenues is allowed as deduction. For starters, your monthly contribution towards employee provident fund, already reflected in your pay-slip, is covered under this. You can also invest in avenues such as public provident fund (up to Rs 70,000), life insurance premiums, equity-linked saving schemes, principal payment towards home loan, deposits of 5 years or more with banks and the post office, national savings certificates and specified bonds. In fact, even tuition fees paid for the education of two children is allowed as a deduction under this category. And that's not all. In addition, you can invest up to Rs 20,000 annually in specified infrastructure bonds, which will be allowed as a deduction. What this means is, at the highest tax rate of 30.9 per cent, you can save tax of up to Rs 37,080 annually on investments of Rs 120,000. Not bad, no?”
Deductibles
Impressed, Ashutosh replied “Not bad at all! Are there other deductions which will help me reduce the tax outgo?” Now in his element, Sagar replied. “Sure. If you purchase health insurance for yourself and your family, premium payment of up to Rs 15,000 an annum is deductible. What's more, you can also buy health insurance for your parents and avail an additional deduction of up to Rs 15,000 every year (up to Rs 20,000 if either parent is a senior citizen). Besides, the tax authorities encourage you to give, not just to them, but also to charity. So, if you donate to certain approved funds and charitable institutions, either the entire donation or 50 per cent of your contribution is allowed as deduction. Oh, and tell me, did you take any educational loan from the bank to fund your engineering studies?”
“Oh yes! I have started repaying the loan now,” replied Ashutosh. “Good.” said Sagar “You can also claim the interest paid on your loan as deduction. And you know what, the deductions which I mentioned till now are the more common ones. Besides these, the law also allows for deductions based on specific circumstances such as physical disabilities, and for medical expenditure incurred on yourself or dependent relatives for specified illnesses.”
Ashutosh said, “This information is very useful. But I was wondering whether I can get any tax relief on the huge rent I pay for the apartment I stay in?” Sagar replied, “Yes. For this, you will need to submit the monthly rent receipts to your company. Exemption would be available on the house rent allowance (HRA) component of your salary but is restricted to certain limits. Moreover, in case you have availed a loan to buy a house (not in same city as the house you have rented), the interest paid on the loan is also allowed as deduction up to Rs 150,000 an annum.”
Exempt from tax
At this point, Ashutosh interjected “Sagar, I noted that you make a distinction between deduction and exemption. What's the difference?” Sagar replied, “Exemptions do not form part of the gross total income (sum of salary income and any other income reported by the employee including interest cost on home loans). For instance, exemption on conveyance allowance (up to Rs 800 a month) and HRA (as per prescribed limits) is subtracted before arriving at gross total income. From this gross total income, investments such as the Rs 120,000 and health insurance premium mentioned above (Chapter VI A deductions) are allowed to arrive at the taxable income.”
Inquisitive, Ashutosh asked “So, if my salary had components which were exempt from tax, it would do me well, right?” Sagar said, “Yes. In fact, many companies structure employee salaries such that a good portion is in the form of allowances and reimbursement of expenses which are exempt from tax. For instance, medical reimbursement is exempt up to Rs 15,000 every year. Also, reimbursement of telephone and mobile phone expenses is exempt. Besides, leave travel allowance is exempt twice in four years, subject to production of bills. Food coupons provided by companies, up to specified limits, also fall in the exempt category. So, it makes sense to check how your company has structured your salary, and see if this can be optimized.”
Sagar concluded, “Then again, if the Direct Tax Code comes in as scheduled next year, some of the current provisions may alter.”