How to Save Tax On Your Variable Pay of This Year

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.

Tax on variable salary

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.

How Can You Save 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:    

Sections 80C

• Life insurance premium – The premium paid towards your life insurance policy can be deducted under the section 80C of the Income Tax Act. You can either buy a term policy or an endowment/money back policy or ULIP, as per your needs. You are eligible to claim a tax deduction up to a maximum of Rs. 1.5 lakh on the insurance premium.
• Tax-saving fixed deposit – A tax-saving fixed deposit will come with a 5-year lock-in period. It can be opened by any resident Indian. Under Section 80C, you are eligible for a tax deduction of up to Rs. 1.5 lakh.
• PPF – A public provident fund is a long-term investment option. The deposits that you make under PPF are eligible for income tax deductions under Section 80C. The minimum investment is Rs. 500 and the maximum investment is Rs. 1.5 lakh per year. You can contribute to the fund in a maximum of 12 installments. The PPF will be helpful in building a corpus for your annuity plan as it enjoys the ‘Exempt, Exempt, Exempt’ benefit. There is no tax on the principal, interest and the maturity amount. The interest will be added to your account at the end of the financial year and will be compounded annually. The money saved in your PPF account is secure.
• ELSS – You can invest in equity-linked savings schemes to earn higher returns. ELSS comes with a lock-in period of 3 years. The returns up to Rs. 1 lakh in financial year are tax-free in the hands of the investor. An ELSS contribution of up to Rs. 1.5 lakh will get an income tax exemption. If you would like to achieve inflation-beating returns, you should go for ELSS.
• NPS – The subscription to NPS tier-I account is tax-free up to Rs. 1. 5 lakh under Section 80C. You will also get an additional Rs. 50,000 deducted under the Income Tax Act’s Section 80CCD (1b).
• Home loan – The principal amount up to Rs. 1.5 lakh is exempted under Section 80C. You will also be eligible for exemption up to Rs. 2 lakh on the interest paid towards the home loan. However, you should have taken the loan from a bank or recognized financial institution. The interest amount can be claimed under Section 24 of the Income Tax Act.
• ULIP – The premium contributed towards the insurance portion of the Unit Linked Insurance Plan is exempt from income tax under section 80C. You can cover the risk and get market-related returns and enjoy income tax benefits with ULIP. You can take up to 1/3 of the corpus without tax under Section 10(10D) of Income Tax Act. The remaining amount should be used for buying an annuity.
• Tuition fee – You can claim a deduction of up to Rs. 1200 per year (for one child) and up to Rs. 2400 per year (for two children) towards the tuition fee exemption. In addition to that, you can claim an additional deduction under Section 80C as well. However, Section 80C will be shared by various tax-saving products like PPF, NPS, NSC and ELSS.
• NSC – The National Savings Certificate can be purchased from a post office or bank. The principal amount is deducted from income tax under Section 80C. However, the interest earned will be taxable under ‘income from other sources’ category. You are advised to declare the income earned on NSC on an annual basis to reduce the tax burden. You can buy NSC for 5 years or 10 years as per your convenience. A 10-year NSC will deliver a higher rate of interest.
• Sukanya Samriddhi Yojana – This scheme is ideal to protect the interests of girl children. The account can be opened by a parent or guardian of a girl child. The girl child’s age should be less than 10 years before opening the account. The account will mature 21 years after opening the account. The account holder can go for partial withdrawal up to 50% of the balance after attaining 18 years. The deposits made under the SSY are exempt up to Rs. 1.5 lakh in a financial year.

Section 80D

Health insurance

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).

Section 24

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.

Section 80E

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.

Conclusion

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