As one’s salary increases, so does the tax obligation. You can explore the option of salary restructuring so that more money comes under the purview of allowances and perquisites. The contribution to PF and ESI is exempted under the Income Tax Act. Similarly, the reimbursement of travel and telephone bills is exempted from tax up to a certain limit. Companies share their profits with employees in the form of variable pay. Employees get variable pay in the form of bonuses or performance incentives. These incentives are offered in recognition of their contribution to the growth of the company.
Variable salary can constitute a significant portion of your total salary. Thus, you should have a fair assessment of the variable part of your salary so that necessary steps can be taken to minimize the tax.
Many investment options are accompanied by a tax exemption provision. You can read the points enlisted below to find out how to save tax as per your convenience:
Health insurance premium can be deducted under Section 80D of the Income Tax Act. For individuals and family members (who are less than 60 years old), you can get an exemption of up to Rs. 25,000 in a financial year. Rs. 5000/- can be claimed for a preventive medical check-up. If the family member is above 60 years of age, you can claim Rs. 30,000 in a financial year.
An additional Rs. 25000 can be claimed towards the premium paid for parents. If the parent’s age is more than 60 years, you can get a deduction of up to Rs. 30,000 in a financial year. Thus, you can get an exemption from Rs. 50,000 to Rs. 60,000 towards a health insurance plan (based on the age).
If you buy a property with a home loan, you can get income tax exemption on the principal and the interest. The principal is deducted from income tax under Section 80C and the interest is exempted under Section 24 of the Income Tax Act. A maximum of Rs. 2 lakh can be claimed in the financial year towards the home loan interest under Section 24.
The interest paid on education loan can be claimed under Section 80E of the Income Tax Act. There is no upper limit on the interest on a loan for higher education. The education loan for self, spouse and children can be claimed under Section 80E. The education loan can be availed for studying in a foreign university as well. The education loan is available to enroll in vocational courses as well. Even though you are not admitted to a full-time course, you will be benefited by an educational loan.
How to Minimize Tax?
You should choose various tax-savings instruments, as per your risk appetite and affordability. If you are young, you can go for ELSS and ULIPs so that market-oriented returns are expected in the long run. By investing in blue chip companies (in the form of equities), you can expect good returns over a long period.
If you are not sure of how the market works, you can choose to invest in mutual funds via Systematic Investment Plans (SIPs). The risk can be reduced drastically with an investment in an SIP. The ups and downs in the market will be absorbed by the SIP efficiently.
NPS and PPF are ideal options to take care of your future pension needs. The corpus built through these products can be used to buy the annuity. The PPF returns are 100% tax-free and it is a safe investment option.
There are several ways to address the tax component on variable pay. You should understand that the variable pay will also be clubbed under your total income. Thus, you should explore the best avenues to know effectively ‘how to save tax’. The selection of various schemes should be done as per the feasibility and convenience. The savings portfolio should comprise of short-term as well as long-term plans. You can also opt for insurance products that will cover the risk and offer attractive tax exemptions.
Helpful Resources: Computation of Taxable Income