Employee Tax Strategies: Leveraging Housing Rent Allowance (HRA).

At the end of each financial year, all employed individuals must pay their income tax. For salaried employees, filing your income tax on time requires planning salary breakups and calculating your final taxable income.

 

When approaching tax planning for employees, note that deductions and exemptions can reduce your taxable income. This helps you save on your tax payment. Deductions refer to amounts that you can deduct from your total taxable income. 

 

The final tax you pay is then computed on this reduced taxable income after excluding any deductions and exemptions. Read on to know how to go about income tax planning for salaried employees, so you can manage your finances better and save more.

Exemption on the House Rent Allowance (HRA)

If you are a salaried individual, you can claim housing costs under tax exemption when living in rented accommodation. Most companies include the cost of accommodation in CTC. However, if your employer does not pay for your HRA, you can claim a deduction for the rent you pay under section 80GG of the Income Tax Act. 

 

Note that HRA is applicable only for rented accommodations and is taxable when you have a rental agreement on a property. In such instances, you can claim this exemption when filing returns. 

 

You can claim the least one of the following as an HRA exemption:

 

• The HRA amount you receive from your employer

• The rent you pay minus 10% of your basic salary along with ‘Dearness Allowance’

• 50% of your basic salary + DA if residing in metro cities

• 40% of your basic salary + DA if living in non-metro cities

Leave Travel Allowance

Leave travel allowance includes all expenses of a short trip with family, including spouse, children and dependent parents. You can claim this exemption only two times in a block of 4 years. If you do not use it within one block, you are allowed to carry it forward to the next block.

 

However, this exemption only applies to domestic travel and excludes international trips. Note that the travel mode has to be via rail, air or public transport. Furthermore, you cannot include entertainment and shopping expenses under this exemption.

• Standard Deductions

As per the new budget, standard deductions up to ₹50,000 are exempt from taxable income. This includes all medical expenses and travel allowance. It is deducted from your gross salary, which you can claim as an exemption. 

Other Salary-based Allowances

While tax planning for a salaried person, you can include other salary-based allowances that your employer covers. Mobile expenses, costs of books, and periodicals and food coupons are allowed for tax-free reimbursements. Furthermore, you can include relocation and travel allowances related to work as tax exemptions.

• EPF, ELSS and Education Fees for Kids as per Section 80C 

Under section and subsection 80C, you can claim many tax deductions with effective income tax planning for salaried employees. You can claim tax deductions on funds directed toward a mutual fund investment or a government-funded pension scheme. 

 

Further, PPF, Senior Citizen Scheme, Sukanya Samriddhi Yojana and ELSS funds are included under the Section 80C deductions. Another benefit of tax planning for employees is that you can also include children's education costs as a liability for tax deductions.

• Health Insurance Deductions 

You can do tax planning for salaried employees, according to section 80D, and it includes tax deductions for payment of health insurance premiums. This includes an annual deduction of ₹25,000 for salaried individuals along with families, and an additional ₹25,000 for parents below the age of 60 years. 

 

If you have senior citizen parents over the age of 60 years, your tax deduction amount will increase to ₹75,000 per year, as the deductible limit is ₹50,000 on premiums paid for parents above 60 years. 

Loans and Donations

While tax planning for salaried employees, know that you can benefit from sections 80C and 24 by including loan interest amounts as tax deductions. For home loans, the annual interest paid, up to ₹2 Lakhs, qualifies for a tax deduction on the self-owned property. 

 

Further, education loans are also subject to deduction under Section 80E. In case you make donations to charity trusts, you can claim deductions under Section 80G. 

 

With this information on tax planning for salaried individuals, you can manage your expenses and plan better to enjoy tax benefits. Remember, paying taxes on time can save you from penalties and with early planning, you can calculate your deductions and exemption wisely.

 

Moreover, the steps related to tax planning for a salaried person are not complicated. However, they do require you to know various sections and limits. If you are unfamiliar with these, it may be best to get a professional to plan your taxes.