Who doesn't want to save tax? So in this article we discuss how a salaried person can save tax through tax planning. Wage earners have relatively limited options available to them when it comes to saving taxes. But if we use what we have effectively, significant tax savings can be achieved.
Fiscal policy savings can be roughly classified into two categories
A. Save taxes by incorporating tax saving components into the salary structure
B. Save taxes through deductions
It is almost time to start filing ITR for FY20-21. Another important decision to take while filing ITR would be to choose between the old and the new scheme of tax slabs. The important thing to understand here is that even if you have already chosen the scheme and notified it to your employer (and they have deductedTDSbased on your choice), you can still change regime choice while filing ITR, any excess TDS due to earlier unfavorable regime choice can be claimed as a refund.
You may be interested in reading about which regimen would be beneficial for you,this article may be of some help here
A. Save taxes by incorporating tax saving components into the salary structure:
This tax saving is greatly underestimated and is therefore used by very few taxpayers. It is also less practical as it involves negotiating with the employers who essentially design our pay structure. So let's see how incorporating tax saving components into our salary structure can reduce tax expenses:
I) Save taxes on the rent
1) Housing rental allowance
If you live in a rented accommodation, it can help you save tax through the HRA deduction.
The maximum HRA deduction one could claim would be the lowest of
actually received HRA
40%/50%* of (Base Salary + DA)
Rent paid (less) 10% of (basic salary + DA)
*For big cities
Note: To claim HRA deduction one must have HRA as part of salary
2) Rent deduction u/s 80GG
If you pay rent but don't have an HRA as part of your salary, you can still save tax on the rent you pay. You can claim a deduction of up to Rs 5000 per month under section 80GG.
Note: To claim the u/s 80GG deduction you need to file Form 10BA
II) Uniform grant
You can make use of this allowance up to the amount of the actual expenses. It is available if a uniform is required at work and the amount of the allowance must be reasonable with the actual cost of the uniform.
III) Child education supplement
Children's education allowance is tax-free up to Rs 100 per child. month per child (up to a maximum of 2 children)
IV) Subsidy for crisis center expenses
Hostel allowance is tax-free up to Rs 300 per month per child (up to 2 children maximum)
V) Free food and drink for the employee
This is exempt up to Rs 50 per meal. This can also be given in the form of food vouchers such as Sodexo. Assuming 2 meals a day and 22 working days, this can make Rs 2,200 per month tax free.
VI) Gift card
Gifts in kind or vouchers or coupons on ceremonial occasions etc. up to Rs. NOK 5,000 per year, which the employer provides, is tax-free
VII) Medical facilities in India
The health insurance premium paid or reimbursed by the employer is not taxable. So factor this into your salary structure to save tax.
VIII) Expenses for operation and maintenance of the car
For the employee-owned car which is partly used for official and personal purposes by the employee, Rs 1,800/Rs 2,400* per month is tax-free for operation and maintenance of the car, plus Rs 900 per month is also tax-free. tax for the driver.
*Rs 1,800 for a car with an engine capacity of up to 1,600 cc and Rs 2,400 for a car with an engine capacity of more than 1,600 cc
Note: This is only available when showing invoices for expenses incurred
X) Repayment of mobile and internet invoices
Reimbursement of internet and mobile bills is tax-free on a real basis.
Note: This is only available when showing invoices for expenses incurred
X) Travel Authorization (LTA)
This is tax free when extended to an employee by an employer because he travels anywhere in India along with his family. The exemption is available for travel expenses and not for hotel and food bills.
This can be done twice in a 4-year block.
There are certain limits on the price of the trip that can be claimed here. Although it is quite reasonable. You can use a price corresponding to a first-class train ticket or an economy-class plane ticket.
Note: This is only available when showing invoices for expenses incurred
XI) Employer contribution to PF & NPS
Employer contributions to NPS and EPF are tax-free up to 12% of basic salary. This thus helps you save tax and induce saving habits.
Read: Important Aspects to Know Before Filing ITR
B. Deduction in salary income
I. Standard deduction
A standard deduction of Rs 50000 is available to all salaried employees
II. Labor/vocational tax
The amount actually paid during the year is deductible. However, if the business tax is paid by the employer on behalf of its employee, it is first recognized in the employee's salary as a claim and then the same amount is allowed as a deduction.
third Deduction linked to the investment
to. Deduction according to section 80C
This is the most popular area that taxpayers use to save taxes. It allows deduction of up to Rs 1.5 lakhs. A taxpayer can invest in PF, ELSS, FD, NSC, NPS, Life Insurance. In addition to that, you can also demand repayment of the mortgage principal, student fees and payment of stamp duty etc. in this episode.
b. Deduction under section 80CCD (1B)
This gives an additional deduction of Rs 50000 on the investment in NPS
C. Deductions in accordance with section 80D
This section provides deductions for health insurance premium paid by yourself, family and parents.
Persons below 60 years of age can claim Rs 25,000 as a deduction for themselves and their family and Rs 25,000 for parents (if below 60).
When the parents are above 60 years, the deduction is increased by another Rs 25,000 (for the parents) to a total of Rs 75,000. (for parents) may be required.
A preventive health check up to Rs 5000 may be required. But this does not increase the total deduction limits under section 80D
d. Section 80E Education loan interest deduction
Interest paid on loans taken out for higher education for yourself, spouse or children can be claimed on an actual basis. There is no upper limit for this deduction.
mine. Deduction for donations 80G
Eligible donations receive a 50-100% discount subject to conditions.
F. Deduction for mortgage interest
§ 24
This provides deduction for interest paid on home loans up to Rs 2 lakhs for independent residences and for houses to be rented, there is no limit for claiming the interest deduction.
Section 80EEA- for first time home owners
This also provides a home loan interest deduction which would be on top of the deduction available under section 24. This section provides a deduction of Rs 1.5 lakhs, which means you can technically increase the upper limit to Rs 3. 5 lakhs for yourself -occupied housing. .
However, there are certain conditions that must be met to be eligible to claim the deduction under section 80EEA: you must not have any house in your name and the stamp duty value of the house must not exceed Rs 45 lakhs.
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Disclaimer:The above post is for academic discussion purposes only and should not be construed as a legal opinion on any subject.
The author is a CA student in Delhi and can be contacted at: E-mail: abhinandansethia90@gmail.com, Mobile: +91-9811741451
FAQs
How can I save federal taxes on my salary? ›
How Can I Reduce My Taxable Income? There are a few methods that you can use to reduce your taxable income. These include contributing to an employee contribution plan, such as a 401(k), contributing to a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.
How much difference between claiming 1 or 0? ›By placing a “0” on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period.
How can I maximize my tax break? ›- Try itemizing your deductions.
- Double check your filing status.
- Make a retirement contribution.
- Claim tax credits.
- Contribute to your health savings account.
- Work with a tax professional.
- Maximizing your retirement contributions. Tax-advantaged retirement accounts, including IRAs and 401(k)s, allow you to reduce your taxable income as you put aside money for your later years.
- Claiming as many tax deductions as you can. ...
- Taking tax credits to the max. ...
- Working with a tax professional.
It's our simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings.
What percentage should I save for federal taxes? ›A general rule of thumb is to set aside 30-35% of your income for your taxes. In this article, we'll talk about all the taxes you'll need to pay and why you should save this percentage amount from the money you make.
Do I get more money if I claim 1 or 2? ›You can claim anywhere between 0 and 3 allowances on the W4 IRS form, depending on what you're eligible for. Generally, the more allowances you claim, the less tax will be withheld from each paycheck. The fewer allowances claimed, the larger withholding amount, which may result in a refund.
Is it better to claim 2 or 0? ›If you are single and are being claimed as a dependant by someone else's W4 then you should claim zero allowances. If you are single and have one job, or married and filing jointly then claiming one allowance makes the most sense.
Do you claim 0 or 1 to get more money? ›Claiming more allowances will lower the amount of income tax that's taken out of your check. Conversely, if the total number of allowances you're claiming is zero, that means you'll have the most income tax withheld from your take-home pay.
What is the easiest way to reduce taxable income? ›- An effective way to reduce taxable income is to contribute to a retirement account through an employer-sponsored plan or an individual retirement account.
- Both health spending accounts and flexible spending accounts help reduce taxable income during the years in which contributions are made.
How much can I claim without receipts? ›
Most people are eligible to claim more than $300 and this boosts their tax refund considerably. However, with no receipts you're stuck below that $300 limit.
Which tax would be most difficult to evade? ›Property taxes are generally considered to be more efficient than other (particularly income) taxes, in part because they are not believed to discourage work, saving, and investing, and they are harder to evade than most other taxes, primarily because of the immobility of property.
What are three examples of tax avoidance? ›- Paying for childcare under the table.
- Ignoring overseas income.
- Banking on cryptocurrency.
- Not reporting income from an all-cash business or illegal activities.
Putting pre-tax dollars into an employer-sponsored retirement plan like a 401(k) is one easy way to reduce your taxable income for the year. If you sell an investment that loses its value, you can use that loss to offset other income. Donating to charity can decrease your annual tax bill if you itemize your deductions.
Is 20% of your salary enough to save? ›The 50/30/20 Rule
It says that 50% of your earnings should go to necessities, 30% to discretionary items and 20% to savings. For example, if you earn $8,000 per month, you should save $1,600 of it. There's no guarantee, however, that a general guideline is going to work for you.
Saving $1,500 a month is an excellent goal to have. It can help you build up your savings and put you in a better financial position for the future. Having this amount of money saved each month can give you more flexibility when it comes to making decisions about spending or investing.
What is the ideal amount of salary to save? ›At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
How much should I put away for taxes each month? ›The 30% rule is a general guideline that states that you should set aside 30% of your income for taxes. This includes federal, state, and local taxes. You can use this rule to help you figure out how much money to save each month.
How much of my paycheck should I save for 1099? ›The amount you should consider saving for 1099 taxes depends on your income from self-employment and which tax bracket you expect to be in when you file your annual return. Generally, the amount you may need to set aside could range from 20% to 35% of your 1099 income, less any deductions that you're eligible to claim.
Do 1099 employees pay more taxes? ›Employment taxes (like Social Security taxes and Medicare taxes) amount to 15.3% of a worker's gross wages. Employers pay half of this (7.65%) and withhold the other half from W-2 employee paychecks. 1099 contractors pay the full 15.3% themselves from the money they earn.
Is it good to claim 2 on taxes? ›
Claiming 2 Allowances
This can help with getting closer to a break-even point, but could also result in taxes being due. Claiming 2 allowances could also be for those that have more than one job and are single, as well as if you are married and want to split the allowances per spouse.
Claiming dependents lowers your tax liability and the amount you pay in taxes. Since you are paying less in taxes, you will have a smaller tax refund. Example: If you claim two children on your W-4, you will reduce your total taxable income by $4,000.
Why do I owe taxes if I claim 0 and single? ›If you claimed 0 and still owe taxes, chances are you added “married” to your W4 form. When you claim 0 in allowances, it seems as if you are the only one who earns and that your spouse does not. Then, when both of you earn, and the amount reaches the 25% tax bracket, the amount of tax sent is not enough.
What does claiming 2 do? ›Claiming two allowances will get you close to your tax liability but may result in tax due when filing your taxes. You're single and work more than one job.
How do I fill out a W4 to get more money? ›It's simple -- just enter the extra amount you want withheld from each paycheck on line 4(c) of your W-4 form. The line is marked "Extra withholding." To request more money be withheld from your paycheck, enter the amount into line 4(c) of the W-4 form.
Do I claim myself as a dependent? ›You cannot claim yourself as a dependent on taxes. Dependency exemptions are applicable to your qualifying dependent children and qualifying dependent relatives only. You can, however, claim a personal exemption for yourself on your return. Personal exemptions are for you and your spouse.
Will I get a bigger refund if I claim 0? ›If you claim 0, you should expect a larger refund check. By increasing the amount of money withheld from each paycheck, you'll be paying more than you'll probably owe in taxes and get an excess amount back – almost like saving money with the government every year instead of in a savings account.
Can you claim gas on taxes? ›If you're claiming actual expenses, things like gas, oil, repairs, insurance, registration fees, lease payments, depreciation, bridge and tunnel tolls, and parking can all be deducted." Just make sure to keep a detailed log and all receipts, he advises, and keep track of your yearly mileage and then deduct the ...
Can I claim my dog on my taxes? ›You may claim income your pet earns on your taxes, and you can also receive tax deductions for care of working animals, including: Guard animals. Search animals. Livestock.
Should I keep grocery receipts for taxes? ›In conclusion, saving grocery receipts can be beneficial for taxpayers, particularly business owners and tax advisors. While the process may be time-consuming and require proper organization, the advantages of accurate record-keeping, tax deductions, and audit preparation often outweigh the disadvantages.
What state does not have income tax? ›
As of 2022, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are the only states that do not levy a state income tax. Note that Washington does levy a state capital gains tax on certain high earners.
Why is lowering your taxable income good? ›Taking steps to reduce your income can reduce your overall tax burden. Individual taxpayers may be able to reduce their taxable income through deductions if they meet the qualifications and income limitations.
What happens if you get audited and don't have receipts? ›Technically, if you do not have these records, the IRS can disallow your deduction. Practically, IRS auditors may allow some reconstruction of these expenses if it seems reasonable.
Can I use credit card statements as receipts for taxes? ›As long as the information is visible and legible, your scanned receipts and statements are acceptable as a proof records for the IRS purposes.
Can I claim my laptop as a work expense? ›What Proof Do You Need to Claim a Laptop on Tax? It's crucial that you're able to prove any expenses you incur in relation to a laptop you use for work. So, keep your receipts, tax invoices, contracts, work diaries and communications from your financial institutions.
What is the most harmful tax? ›In a landmark study[4] of the impact of taxes on economic growth, economists at the Organisation for Economic Co-Operation and Development (OECD) concluded that the corporate income tax is the most harmful tax for economic growth, followed by, in order, individual income taxes, consumption taxes, and property taxes.
Who has the biggest tax evasion? ›WASHINGTON — The wealthiest 1 percent of Americans are the nation's most egregious tax evaders, failing to pay as much as $163 billion in owed taxes per year, according to a Treasury Department report released on Wednesday.
How do millionaires evade taxes? ›From work, they may receive deferred compensation, stock or stock options, and other benefits that aren't taxable right away. Outside of work, they have more investments that might generate interest, dividends, capital gains or rent if they own real estate.
What are 2 examples of what you can do to avoid taxes? ›- Taking advantage of a self-employment tax deduction scheme.
- Deducting business expenses from your gross income on your tax return.
- Contributing to a retirement plan and a Health Savings Account (HSA).
- Donating to charity.
- Claiming child tax credits.
Tax avoidance is generally a legal way that taxpayers can avoid paying taxes. They can do so by using tax credits, deductions, exclusions, and loopholes that are part of the tax code to their advantage. Using these strategies can help them either avoid paying taxes altogether or lower their tax liability.
What is the most common form of tax avoidance? ›
Loan schemes
Perhaps the most popular example of tax avoidance is operated by companies where directors receive their income as directors' loans and then either do not repay such loans to the company or write them off at the year-end.
A tax loophole is a tax law provision or a shortcoming of legislation that allows individuals and companies to lower tax liability. Loopholes are legal and allow income or assets to be moved with the purpose of avoiding taxes.
How can I lower my taxable income 2023? ›- Contribute to a 401(k) or Traditional IRA.
- Enroll in Your Employee Stock Purchasing Program.
- Deduct Business Expenses.
- If You Can, Invest in Qualified Opportunity Funds.
- Donate Stocks Through Donor-Advised Funds.
- Sell Poor-Performing Stocks.
- Deduct Student Loan Interest.
A tax write-off is a business expense that can be claimed as a tax deduction on a federal income tax return, lowering the amount the business will be assessed for taxes. Tax write-offs are deducted from total revenue to determine total taxable income for a small business.
Will I owe money if I claim 1? ›Claiming 1 on Your Taxes
Claiming 1 reduces the amount of taxes that are withheld, which means you will get more money each paycheck instead of waiting until your tax refund. You could also still get a small refund while having a larger paycheck if you claim 1. It just depends on your situation.
There are a few reasons why you would still owe money if you have claimed zero on your tax forms. Some reasons are if you have additional income, have a spouse that earns income or if you earn bonuses or commissions.
Why is claiming 0 not enough? ›Claiming 0 allowances means that too much money will be withheld by the IRS. The allowances you can claim vary from situation to situation. If you are married with a kid, you can claim up to three allowances. If you want a higher tax return, you can claim 0 allowances.
Why can't I claim 1 on my w4? ›You can no longer claim allowances like 1 or 0 on your W-4 since the IRS redesigned the form. However, you can claim an exemption from withholding if you owed no income tax last year and don't expect to owe anything in the current year.
What should I put on my W4 to get more money on my paycheck? ›To request more money be withheld from your paycheck, enter the amount into line 4(c) of the W-4 form. Likewise, if you find yourself owing taxes to the IRS each year, adding the right amount of extra withholding via line 4(c) of your W-4 can reduce your tax burden to zero each year.
Do you get a bigger refund if you make less money? ›Specifying more income on your W-4 will mean smaller paychecks, since more tax will be withheld. This increases your chances of over-withholding, which can lead to a bigger tax refund. That's why it's called a “refund:” you are just getting money back that you overpaid to the IRS during the year.
How can I adjust my W4 to make more money? ›
- Complete a new Form W-4, Employee's Withholding Allowance Certificate, and submit it to your employer.
- Complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments, and submit it to your payer.
- Make an additional or estimated tax payment to the IRS before the end of the year.
Hey, getting a raise and making more money is great. But a bump in pay could put you in a higher tax bracket. Tax brackets are income ranges taxed at specific rates. So, for the 2022 tax year, if you're single and your taxable income falls somewhere between $41,776 and $89,075, that means you're in the 22% tax bracket.
Is it better to owe taxes or get a refund? ›“The best strategy is breaking even, owing the IRS an amount you can easily pay, or getting a small refund,” Clare J. Fazackerley, CPA, CFP, told Finance Buzz. “You don't want to owe more than $1,000 because you'll have an underpayment penalty of 5% interest, which is more than you can make investing the money.
What happens if I owe taxes and don't have enough money? ›If you find that you cannot pay the full amount by the filing deadline, you should file your return and pay as much as you can by the due date. To see if you qualify for an installment payment plan, attach a Form 9465, “Installment Agreement Request,” to the front of your tax return.
What do I put on my W4 to avoid owing taxes? ›You can claim an exemption from withholding on a W-4 form. There isn't a special line for this on the form, but you can claim it by writing "Exempt" in the space below Line 4(c) if you qualify. You also have to provide your name, address, Social Security number and signature.
Why is everyone owing taxes this year? ›A: During the pandemic, Congress enacted some enhanced tax credits to help support families and some were sunsetted to cut back to pre-pandemic (2019) levels for 2022. As a result, many taxpayers may end up owing more tax this year (or getting a smaller refund).
How to fill out 2023 W4 for maximum withholding? ›It is impossible to max out federal withholding because the amount of federal taxes withheld from your paycheck is determined by the information you provide on your W-4 form and the IRS tax tables, which are based on your income and filing status.
Do I claim myself as a dependent on my W4? ›You cannot claim yourself as a dependent on taxes. Dependency exemptions are applicable to your qualifying dependent children and qualifying dependent relatives only. You can, however, claim a personal exemption for yourself on your return. Personal exemptions are for you and your spouse.