Best Tax Saving Guide | Complete tax planning for salaried persons | FY 2021-22 - YouTube

I'm sure all of us want to save taxes, legally.

We also research the same. Everyone is aware of 80C, 80D, Standard Deduction, etc.

But one thing which majority of blogs, videos and we miss out is - Salary Optimization.

If we don't reduce our taxable income by utilizing all exemptions

then no matter how many deductions we claim, we won't be able to take full advantage of tax savings.

Take my case for example.

Before starting LLA, Mandeep was my fitness trainer.

And the main aim was weight loss, obviously.

Even though I exercised, did yoga, walked, and even drank lemon water every morning

still I did not reduce my eating portions.

And unless you don't reduce your calorie intake,

you will not see any benefits of all the physical activities.

So I hope you've understood my point.

Income Tax Act provides two types of relief for salaried employees to reduce their tax liability -

first is Exemption and second is Deduction.

Mostly, people use Exemption and Deduction interchangeably, which is incorrect.

For example, say Ram works in an MNC, owns a farm and is a silent partner is a partnership firm.

He earns a salary of Rs 10 lakh from the MNC, his agricultural income is Rs 5 lakh

and he gets profit share of Rs 2 lakh from partnership firm.

Thus, his net earning is 10+5+2= Rs 17 lakh.

But the 5 lakh agricultural income and 2 lakh profit share is completely exempt from income tax.

Infact, he can also claim many exemptions on the 10 lakh salaried income.

Hence, EARNING - EXEMPTIONS = TAXABLE INCOME.

and, TAXABLE INCOME - DEDUCTIONS = NET TAXABLE INCOME.

So, if you remove all exemptions from your earning then you get taxable income.

On this taxable income you can claim deductions like 80C, 80D, etc.

And after deductions you get the final net taxable income, on which you have to pay tax.

Hence, it is important to reduce your taxable income to gain further benefit of deductions.

So you may ask what exemptions I may get if I'm not a farmer or partner in a partnership firm.

But before explaining that you may also ask,

why take the hassle of exemptions and deductions when we can just opt for the new tax regime.

It has no exemptions and deductions claim and will reduce tax liability too.

To decide which tax regime to follow, take for instance you fall under 30% tax slab rate.

To save tax, you invested Rs 1.5 lakh annually, which is Rs 12,500 per month.

At 8% return rate, in 15 years, you will receive this much amount.

In second case, take you fall under 30% slab rate even in the new tax regime.

In that case, you will not get Rs 1.5 lakh,

but approx Rs 1 lakh only because 30% tax will be deducted from it.

Thus, your monthly SIP will come to Rs 8,600.

If you invest this for 15 years at 13%

then the return will be approximately equivalent to 8% PPF investment.

Because remember that both principal and interest are tax free under PPF.

But if you invest in any other equity mutual fund or debt fund

then you need to pay minimum 10% LTCG.

And say for instance in the new tax regime you fall under 20% slab rate

instead of 30%, then you can make slight adjustments accordingly.

But the point is that 8% return in PPF is

approximately equal to 12%-13% return in equity or debt mutual fund

because you get many tax exemptions in PPF investment.

Now if you are super confident of generating so much return on your Rs 1.5 lakh

then definitely opt for new tax regime and forget about exemptions and deductions.

But for the common man, we will continue with this video and discuss Exemptions.

[Part 1 - Exemption]

So what all can you see on your salary slip? Basic and DA which occurs in all salaries.

Then there might be some allowances such as HRA, Leave Travel Allowance (LTA), Conveyance, Washing, etc.

Lastly, in some companies you might probably also see reimbursements such as Mobile, Food Coupon, Internet, etc.

On the Basic and DA part, you will have to pay full tax.

But on allowances and reimbursements you can get many exemptions.

Then you might think of taking your full salary under HRA or other allowances instead of Basic and DA.

So you can take exemption on full salary.

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So if that's your decision after seeing 2 minutes of this video,

then obviously the Government and Income Tax Department have thought of this long back.

To prevent you from saving alot of money through exemptions, the government has two things in order.

Firstly, the government has introduced the Code on Wages. This limits minimum 50% of gross salary under basic.

Secondly, Income Tax Department has put limitations on the exemptions on various allowances.

However, an aware citizen, will still be able to optimize all allowances and save considerable tax.

First key to tax saving is HRA. HRA majorly helps in saving tax.

The government assumes that an employee will need to relocate for job purposes and will need to rent a new place there.

Paying pre-tax on the new house' rent will unburden employee's pockets a little

hence government gives exemption on HRA

For finding HRA, you need to calculate 3 numbers the lowest among these 3 will be your actual HRA exemption value.

1. Actual HRA received - if no HRA component is given in your salary slip then you will not get HRA exemption.

2. 50% of basic for metros and 40% of basic for non-metros -

suppose your basic is Rs 5 lakh then you can get maximum Rs 2.5 lakh as HRA exemption annually.

3. Rent - 10% of basic - suppose your basic is Rs 5 lakh and your annual rent is Rs 3 lakh

then benefit = 3 lakh - (10% of 5 lakh=) 50,000 = Rs 2.5 lakh is your maximum HRA exemption.

Calculate all these 3 values and the least value among them will be your HRA exemption amount.

Also note that the second and third components work in reverse order.

If you reduce Basic value, then third component will reduce.

Then, overall third component will be bigger value and your exemption will be larger.

But in the same case, second component of 50% basic will also reduce

So for every rent there is an optimized number you can keep for HRA to save maximum tax.

So now I will show you an excel calculation. Suppose an employee has total salary Rs 10 lakh

He only received HRA and basic salary His total annual rent is Rs 4 lakh

In this case if we put 4 lakh as HRA & 6 lakh as Basic without any thinking then the employee's net

tax saving will be Rs 3 lakh. But, if basic is increased to Rs 6.6 lakh & HRA is decreased to Rs 3.3 lakh

then the employee's tax saving will be Rs 3.3 lakh that is, 30,000 more extra savings!

This excel is provided in the description box below. Download it after watching this video and play

around with it to find your optimized HRA structure. In the same sheet below, I've added optimized basic values

for metros and non-metros. If you use these numbers, you can easily get to your optimized value.

Next component is Leave Travel Allowance (LTA) and very few companies and employees take its advantage.

If you and your family takes 2 trips within 4 years which is very common for taking vacations

then your travel expenses for train, flight, etc., can be exempted under Leave Travel Allowance (LTA)

subject to the fact that you get LTA from your company. Suppose your family of 4 travels from Delhi to Andamans.

Take one way ticket flight as Rs 10,000 then total travel expense for flights would be Rs 80,000

for 4 people, which can be completely exempted under LTA. Think of it as not paying 30% tax,

hence your ticket is 30% cheaper. So do travel all over India and ask

your employer to pay you LTA. Although third and fourth allowances may not give

big exemptions but leaving them out is stupid. They are Children Education Allowance & Hostel Allowance.

They are only applicable for employees with kids. Maximum Rs 9,600 exemption for up to 2 kids

is possible annually. But if you have kids who study in school

then definitely take Education Allowance, and if they stay in boarding, day-boarding, college hostel,

then also claim Hostel Allowance. In future, these limits may increase

so your benefits may increase as well. Next up is Reimbursements.

If you make any expenses on behalf of the business and the business pays you back for it as reimbursement

then generally you don't have to pay any tax on it. Say, your cellphone is predominantly for office use

and you take reimbursement for the cellphone bill then that is tax exempted.

Say, you are working from home and have taken high speed internet connection to work efficiently.

Then that internet bill can also be reimbursed by the company and be tax exempted.

Hence, try to claim such small expenses made on behalf of the company as reimbursements rather

than as allowances. Submit the billing as proof to the company and get them all tax exempted.

One more reimbursement you can get is food coupon such as Sodexo. Companies can pay you maximum Rs 50 per meal

twice a day, which is essentially equal to 50X2X26 = Rs 2600 for 26 working days

and, 2600X12 = Rs 31,200 per annum which you can take as food coupons to redeem.

Now, many of you employees might say that this is under the HR & employer's discretion to give.

So I suggest that you talk it out with your employer and they will surely understand the same.

And to all the employers, if you can then please move your employees' salary structure

around to help them save more money and get more in-hand, especially during this difficult pandemic time.

Whenever you plan the next increment, please take these points into consideration to increase the

employees' in-hand salary and overall satisfaction. So employees, do download the salary excel sheet

given in description box after watching this video and optimize your salary to the best solution.

There is one downside to this from employer's POV. By increasing the Basic, the PF or Gratuity components

may also increase a bit consecutively. But here, we are discussing salaries in terms of CTC

so it is possible to readjust components which will overall not affect employees' in-hand salary or

company's expenses, since anyway there is an upper limit on amount payable as PF and other components.

Once you've optimized your salary and reduced your taxable income, you can now take advantage of deductions.

[Part 2 - Deductions]

Salaried employees can firstly opt for Rs 50,000 standard deduction, which is a no-brainer.

Suppose, your taxable income comes to Rs 10 lakh then it automatically becomes Rs 9.5 lakh.

The next deduction which everyone is aware of is 80C. Under 80C, you can get deductions for investments in

PPF, Sukanya Samriddhi Yojana (SSY), kid's tuition fees. If you want to take more risk then you can

also invest in Equity Linked Saving Scheme (ELSS). However, 8% investment in PPF is probably better

than 13% investment in mutual funds. And, PPF interest rate also fluctuates a little

like right now it is supposed to go below 7% which I cannot give a surity about but in the

past few years it has consistently been giving around 8% returns.

Second deduction which people often talk about that can give you Rs 50,000 deduction is

80CCD (NPS) deduction. But I don't suggest it a lot since the lock-in period is high.

Upon retirement, you have to buy minimum 40% annuity which also does not give high returns

and at that time due to inflation the amount may be equal to peanuts for you.

So if I'm doing tax planning for myself I'll only opt for NPS if absolutely necessary.

For example, my income is at Rs 5.5 lakh and tax payment is Rs 12,750 then I'll invest

5000-6000 in NPS and reduce my tax liability to under Rs 5 lakh so my full 12,750 tax gets saved.

Otherwise, I'd rather opt for another investment which provides better liquidity rather than NPS.

Now, after deductions we discuss some expenses on which you can claim tax deduction too.

This expense is Health Insurance (80D). Under health insurance, you can claim maximum upto

Rs 25,000 personally and Rs 50,000 for parents. But do note that common salaried employees never

claim such high health insurance, it usually ranges between 7000-10,0000. And while taking it

understand that you are essentially saving 30% tax on this if you fall under the 30% tax slab rate.

Next, if you've taken a home loan or electric vehicle loan, for 8.5%-9% then as per some

conditions you can claim deduction on the interest. Now, do not forcefully take such loans to save tax.

See it as getting 30% discount on interest rate if you fall in 30% slab and fulfil all the T&C.

Effectively, your 10% interest rate will become 7%-7.5% interest rate with this deduction.

So only take loans if necessary. And when you go to banks to take loans, the associates there

will inform you of all the deductions you will get. Lastly, some small deductions like Rs 5000 for

preventive health check-up, which we suggest anyone above 25-30 years to go for once a year atleast

and take the 5000 deduction for it. For interest on savings account and FD account

you can get Rs 10,000 deduction and Rs 50,000 deduction for senior citizens.

Apart from these, you will find many more deductions in Chapter 4 of Income Tax Act which

are usually not helpful for the common man. If you take these mentioned deductions and the

earlier exemptions then you can save on taxes majorly.

[Part 3 - Summary]

To end this, lets do a quick summary, step by step. If you get a salary then firstly subtract exemptions

from it like HRA, LTA, Children Education Allowance, Hostel Allowance, Reimbursement, Food Coupons, etc.

So that your taxable income gets reduced. If after applying all exemptions, your taxable

income is under Rs 5 lakh then no need for anything else to worry about! But if it is

still above 5 lakh then claim deductions in the following order - Standard Deduction of Rs 50,000,

then 80C investments, then Medical Insurance under 80DD, then Loan Interest under 80EE, and lastly 50,000 for NPS

or Atal Pension Yojana (APS) investments under 80CCD. For example, an employee has gross salary of 12 lakh.

From this he claims 3 lakh HRA exemption, 9,600 of Children Education Allowance & Hostel Allowance,

40,000 of LTA and 20,000 for Reimbursement/Food Coupons. After subtracting all these exemptions form the

earning, we are left with taxable income of 8,30,400. On this we will claim deductions. Firstly, say

1.5 lakh under 80C, then 20,400 under Mediclaim for self and parents and lastly 2 lakh under

EMI interest on house loan. Hence, after subtracting all deductions from taxable income

employee is left with net taxable income of 4,60,000.

Thus, after claiming rebate for income under 5 lakh this employee's tax liability comes to zero!

And if you've watched this video until the end then you must be interested in learning more.

So I suggest that you check out our academy, LLA Professional Training Institute.

You will find multiple courses related to PF, ESI, Payroll, Labour Laws, etc., there.

Moreover, other courses on Excel, Startup Funding, and likewise special courses have been made for you!

So, if you wish to learn and move forward in life then LLA Professional Training Institute is always by your side!

You can also access this on our app, the link is given in description box below.

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