Paying zero tax for salaried individuals in India – Calculating Taxable Income
I am writing this article on how to avoid paying tax or paying as little tax as possible in three blog posts – calculating taxable income, deductions before tax and tax slabs. I have always found it very confusing to calculate tax and have lost a bundle of cash through past oversights. Here, I have posted all the information I know about saving income tax for salaried people in India, so that it is a ready reference whenever I need to calculate tax.
Calculating Taxable Income in India
First, you need to calculate your gross income from salary. This includes house rent allowance and provident fund contribution which are paid monthly. If you are a new employee, it depends on how many months you have worked with your current employer. Other than basic pay, dearness allowance and commissions that are fully taxable, most Indians have the following major component allowances included as part of their salary. If you have not been provided a few of these benefits in office, just skip to the next step.
1. House Rent Allowance – If a portion of your salary is marked as House Rent Allowance or HRA and you are paying rent, then submit rent receipts. The house should not be in your kids, spouses or your own name. As this is the biggest saving from the tax burden, it helps if you exchange houses with relatives/friends whose house is in the name of a non-earning member.
The total amount of rent paid or the amount earmarked as House Rent Allowance in your payslip, whichever is less, will be deducted from your gross income from salary. However, it should not be more than 50 percent of salary for those living in metro cities or 40 percent of salary for others. If you are paying more than Rs.5000 per month as house rent, you will have to submit a lease document and your rent receipts should have a revenue stamp. Rent receipt books are available at any stationary shop for around Rs.15.
2. Medical Reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills. (Company pays Fringe Benefit Tax on this amount of 6.8 percent of 20 percent of the amount). If you don’t claim it, it is taken as part of your income and is taxable. There are some spurious chemists and doctors who take cash bribes to make fake medical bills. These are the same folks who make excuses to give bills to legitimate customers buying medicine for illnesses. However, it is better to invest an extra Rs.15,000 in deductible investments than to use this method, as you will earn more in the long term.
3. Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if it is mentioned in your salary as conveyance allowance. No bills are required for this amount.
4. Phone Bills: You can claim the amount allocated to you in your Cost to Company (CTC).
(Company pays Fringe Benefit Tax on this amount of 6.8 percent of 20 percent of the amount). If you don’t claim it, it is taken as part of your income and is taxable.
5. Employee Stock Options: The company has to pay Fringe Benefit Tax of 33.99 percent on the difference between market value and purchase price on the vesting date.
6. Leave Travel Allowance – This is tax free for the salaried individuals and family and can be claimed for only two journeys in every four years. The current year block for which LTA is non taxable is 2006-2009. Also, mode of travel should be –
- Airline - economy fare of the national airlines ‘Indian’
- Railway - first class AC fare
- Road - deluxe/first class public transport buses.
After deducting all the allowances that you have claimed and including the unclaimed portions, you also need to include taxable income other sources. This income could consist of any or all of the following such as – salary from previous employer, bonuses, income from house property, sale of paintings, other capital gains and freelancing. This gives you your ‘Gross Total Income’.
Information about deductions from ‘Gross Total Income’ is given in the next post called ‘Deductions’. Did you find this section on how to save income tax for salaried individuals in India helpful? Do you have any other tips or information to add?
Here are my other posts on calculating Income Tax in India -
Deducting Office Allowances and Reimbursements
Deducting Investments and Expenses