The Taxing Tax
Come March and all working individuals have to go through the Tax trauma. While business men and enterprises have a ready army at their disposal to fight their tax battle, working class individuals have to rely on “Heard advice, Read advice, Experienced advice, Friendly advice” and other advice bank that may or may not be reliable. Here, in this article we have tried to look at the ‘Tax’ component from a beginner or say a layman’s perspective. We have tried to make the Taxing Tax issues as simple as possible. So, let’s understand the March month’s Taxing Tax issues. How do we begin understanding our Tax?
Firstly one needs to understand the various components of the Salary Slip. The best way is to approach you HR manager. Most people avoid that thinking it my make them sound ignorant. Let’s assure you, there are many employee who have limited knowledge of their salary component. Many of us approach it as a sum total figure and leave the bifurcation details on the HR manager. So, seek an appointment with your HR manager and understand your salary slip as a first step towards tax management.
What should you look at?
Look at components like Basic Salary, House Rent Allowance, Leave Travel Allowance, Bonus, Employee Contribution to Provident Fund (PF), Standard Deduction, Professional Tax.
What are the most ignored/grey areas of tax savings?
You need to understand DEDUCTIONS- yes, you read it right. Understanding deductions is your Step - 2 towards being a Tax educated employee. Deductions such as Section 80C, 80CCC, 80CCD & 80D, allowed under the income tax should be bracketed under your ‘Friendly Deduction Category’. These deductions help you reduce your taxable income.
To help you further we would like to specify the law that states :
Certain Gray areas of special allowances are exempt under Section 10(14) of the Income Tax Act, 1961. Section 10(14) says that, any special allowance/benefit that is granted to the employees to meet certain expenses wholly while performing the duties of an office. These expenses need to be incurred while on job/ activity that is meant for office.Also at times offices pay allowances to their employee to meet personal expenses at the office/employment for profit performed by him or to compensate him for the high cost of living, these too are exempted from taxes.
The below listed tax categories are exempted from tax in totality:
• House rent allowance are partially exempted as per Section 10(13A)
• Fuel/Transport Allowance
• LTA Allowance
• Children’s Education Allowance
• Uniform Allowance
• Book and Periodicals Allowance
• Academic/Research Allowance
• Conveyance Allowance
• Helper Allowance (include driver too at times).
Many people may think that a special allowance is a part of variable income. However, you must know that a special allowance is considered as part of the gross salary. In addition, the allocation of a special allowance depends on the company’s policies.
Why should you look closely towards 80D?
The problem with employee benefits under 80D is that most employees really don’t opt for them, largely due to a lack of awareness and tedious processes. We give you below an understanding of the savings that you get for various salary slabs.
• Salary barcket – Rs. 2.5 lakh to Rs. 5 lakh, You can save up to 5% which can be up to Rs. 12,500 (available under section 87A)
• An employee in the salary bracket of Rs 7.5 lakh to Rs 10 lakh (15% tax slab) save up to Rs. 11,500 a year
• An employee in the salary bracket of Rs 10 lakh to Rs 12.5 lakh (20% tax slab) can save up to Rs. 30,500 annually.
• An employee in the salary bracket of Rs 12.5 lakh to Rs 15 lakh (25% tax slab) save up to Rs. 46,160 per year.
• An employee in the salary bracket of Rs 15 lakh and above (30% tax slab) save up to Rs. 69,240 a year.
How can an employee benefit from being a tax educated employee?
A Tax Educated employee can easily save up to 80k. The above descriptions gives an understanding of all the tax benefits that an employee can avail.
If you fall under high income bracket, how can you optimize your tax savings?
It can be quite the rally of matching employee expectations of a higher take-home salary; while keeping the tax cuts to a minimum. An employee salary structure consists of several components which can help employees reduce the tax burden. As mentioned above there are various components that are completely tax free and some that are partially sans tax (refer above). An optimum salary structure is that which enables employees to meet your day-to-day expenses while leaving sufficient money in your hands for long-term financial goals.
Every individual’s goals and priorities are different. For employees with a high salary, best option would be to consult Tax consultants who can customize the tax areas as per the salary structure, available options by the company and individual financial goals. The tax consultants are experts to gauge whether the benefits offered by the employer holds value and accordingly they structure the savings and also give inputs to divert funds and benefits under specific categories.
DECODING ALLOWANCES:
Meal Allowance
Food allowance can be given by the employer through the provision of food at working hours or through pre-paid food vouchers/coupons. For instance, vouchers (not transferable) are tax-exempt to the extent of Rs 50 per meal. "On a calculation of 22 working days a month and 2 meals per day, a sum of Rs 26,400 can be availed as a deduction by an employee annually.
Leave Travel Allowance (LTA):
The income tax law also provides for an LTA exemption to salaried employees, restricted to travel expenses incurred during leaves by them. Please note that the exemption doesn’t include costs incurred for the entire trip such as shopping, food expenses, entertainment and leisure among others.
You can claim LTA twice in a block of four years. In case an individual doesn’t use this exemption within a block, he/she could carry the same to the next block.
Below are the restrictions which are applicable to LTA:
LTA only covers domestic travel and not the cost of international travel
The mode of such travel must be either railway, air travel, or public transport
Gift voucher
The value of a gift, or voucher, or token provided by an employer, the aggregate value of which does not exceed Rs 5,000 annually, is tax-free in the hands of an employee.
Uniform allowance
This covers allowance granted by the employer to the employee to meet the cost of purchase and/or maintenance of uniform worn during the performance of the duties of employment.
Mobile reimbursement
A taxpayer may incur expenses on mobile and telephone used at residence. The income tax law allows an employee to claim a tax-free reimbursement of expenses incurred. An employee can claim reimbursement of the actual bill amount paid or amount provided in the salary package, whichever is lower.
Books and Periodicals
Employees incur expenses on books, newspapers, periodicals, journals and so on. The income tax law allows an employee to claim a tax-free reimbursement of the expenses incurred. The reimbursement allowed to an employee is the lower of the bill amount or the amount provided in the salary package.
Most common mistakes of Tax Savings
Taxes have always been a sore point for salaried individuals. If an employee feels the taxman’s pinch on the salary, they can always minimize the earning by reducing your taxable salary. We have already spoken about Section 80C in the above segment. The 80C offers a deduction of Rs 1.5 lakh on income.
But, if you didn’t know several other allowances and tax-saving options that can reduce tax outgo, Here are Six lesser-known employee tax-saving options you can save thousands in taxes:
1. Vehicle and fuel expenses for official purposes
2. Books and periodicals
3. Mobile reimbursement
4. Research study for professional growth
5. Leave Travel Allowance (LTA)
5.Charity
Some Tips:
In a nutshell, the best advice that we can leave you with would be:
● Educate your self - Be Tax educated
● Plan from the begning
● Look out for smallest of small tax savings options
● Take note of your deductions
● Be smart and save smart
Therefore, how your salary is structured is of utmost importance; as you would always seek to maximize your take-home salary by minimizing the tax burden.
• An employee in the salary bracket of Rs 12.5 lakh to Rs 15 lakh (25% tax slab) save up to Rs. 46,160 per year.
• An employee in the salary bracket of Rs 15 lakh and above (30% tax slab) save up to Rs. 69,240 a year.
How can an employee benefit from being a tax educated employee?
A Tax Educated employee can easily save up to 80k. The above descriptions gives an understanding of all the tax benefits that an employee can avail.
If you fall under high income bracket, how can you optimize your tax savings?
It can be quite the rally of matching employee expectations of a higher take-home salary; while keeping the tax cuts to a minimum. An employee salary structure consists of several components which can help employees reduce the tax burden. As mentioned above there are various components that are completely tax free and some that are partially sans tax (refer above). An optimum salary structure is that which enables employees to meet your day-to-day expenses while leaving sufficient money in your hands for long-term financial goals.
Every individual’s goals and priorities are different. For employees with a high salary, best option would be to consult Tax consultants who can customize the tax areas as per the salary structure, available options by the company and individual financial goals. The tax consultants are experts to gauge whether the benefits offered by the employer holds value and accordingly they structure the savings and also give inputs to divert funds and benefits under specific categories.
DECODING ALLOWANCES:
Meal Allowance
Food allowance can be given by the employer through the provision of food at working hours or through pre-paid food vouchers/coupons. For instance, vouchers (not transferable) are tax-exempt to the extent of Rs 50 per meal. "On a calculation of 22 working days a month and 2 meals per day, a sum of Rs 26,400 can be availed as a deduction by an employee annually.
Leave Travel Allowance (LTA):
The income tax law also provides for an LTA exemption to salaried employees, restricted to travel expenses incurred during leaves by them. Please note that the exemption doesn’t include costs incurred for the entire trip such as shopping, food expenses, entertainment and leisure among others.
You can claim LTA twice in a block of four years. In case an individual doesn’t use this exemption within a block, he/she could carry the same to the next block.
Below are the restrictions which are applicable to LTA:
LTA only covers domestic travel and not the cost of international travel
The mode of such travel must be either railway, air travel, or public transport
Gift voucher
The value of a gift, or voucher, or token provided by an employer, the aggregate value of which does not exceed Rs 5,000 annually, is tax-free in the hands of an employee.
Uniform allowance
This covers allowance granted by the employer to the employee to meet the cost of purchase and/or maintenance of uniform worn during the performance of the duties of employment.
Mobile reimbursement
A taxpayer may incur expenses on mobile and telephone used at residence. The income tax law allows an employee to claim a tax-free reimbursement of expenses incurred. An employee can claim reimbursement of the actual bill amount paid or amount provided in the salary package, whichever is lower.
Books and Periodicals
Employees incur expenses on books, newspapers, periodicals, journals and so on. The income tax law allows an employee to claim a tax-free reimbursement of the expenses incurred. The reimbursement allowed to an employee is the lower of the bill amount or the amount provided in the salary package.
Most common mistakes of Tax Savings
Taxes have always been a sore point for salaried individuals. If an employee feels the taxman’s pinch on the salary, they can always minimize the earning by reducing your taxable salary. We have already spoken about Section 80C in the above segment. The 80C offers a deduction of Rs 1.5 lakh on income.
But, if you didn’t know several other allowances and tax-saving options that can reduce tax outgo, Here are Six lesser-known employee tax-saving options you can save thousands in taxes:
1. Vehicle and fuel expenses for official purposes
2. Books and periodicals
3. Mobile reimbursement
4. Research study for professional growth
5. Leave Travel Allowance (LTA)
5.Charity
Some Tips:
In a nutshell, the best advice that we can leave you with would be:
● Educate your self - Be Tax educated
● Plan from the begning
● Look out for smallest of small tax savings options
● Take note of your deductions
● Be smart and save smart
Therefore, how your salary is structured is of utmost importance; as you would always seek to maximize your take-home salary by minimizing the tax burden.
