Do you have the tendency to look at the deductions first on your payslip rather than your earnings? Do you clench your fist and grind your teeth when you see a portion of your hard-earned money being taken away as taxes? Yes?
Have you heard of a common saying that ‘it is easy to escape death but not taxes’? Well, do not despair, there is good news. We, at greytHR, can suggest a couple of ways and means to minimize the tax impact. There are two methods to do it: one is to reduce your taxable income and the other to reduce the tax liability. Mind you, tax planning is a prudent exercise and not an attempt to evade taxes.
The first theme is to lower your taxable income. Income tax rules (Section 10) allow a taxpayer to avail of certain approved allowances and reimbursements as a part of their salary. Typically in most organisations, the Compensation & Benefits (C&B) team would decide on the types of such allowances or reimbursements to be provided to its employees. The most common ones are:
- House Rent Allowance
- Leave travel Allowance
- Meals Allowance
Be aware that supporting documents as prescribed by the tax rules are required to be submitted by employees to claim these allowances. While such a lengthy list of benefits cannot be listed here, a link is provided which enlists the same: Employees: Benefits allowable
Once you select the allowance(s) that you are comfortable with, inform the same to Payroll Department who in turn will reduce the amount from your taxable income and pay it to you as non-taxable salary as and when you submit appropriate documents.
greytHR has a feature to help you with this process easily. You simply need to choose the allowance and enter the annual amount. Once you have the valid bills/receipts, you can submit then online on the same portal and, in turn, Payroll will validate it and pay you. There is more! On a real-time basis, you can simulate a tax run to check your tax liability anytime!
In the above theme, we learnt how to reduce the taxable income. Now, we will find out how to reduce the tax liability. The Income tax rules (Section 80) allow an employee to invest in specific financial instruments which will not only help to lower the tax liability but will help in savings for the future. The return on investment is further compounded by additional earnings due to the interest that it fetches. So, it makes sense to invest in the right instruments.
The specific instruments are listed under Section 80C where you can invest upto Rs 150,000 p.a. under various plans such as NSC, Employee PF contributions, PPF, LIC premium, Home loan principal amount, ULIP, ELSS, 5-year bank fixed deposit, etc.
greytHR will help you to pick and choose the instrument that you would like to invest in. Based on your inputs, Payroll will include the same while computing the tax liability. As suggested earlier, you can simulate a tax run to check your tax liability anytime.
To summarise the above steps in a nutshell:
- Take the total CTC which would be your gross taxable income
- Deduct the value of allowances that you have chosen under Section 10
- Arrive at the net taxable income
- Compute gross tax liability
- Deduct the value of investments that you have planned under Section 80
- Arrive at the net tax liability
We hope that with these few simple steps, we have helped you to plan your taxes well.