How to Save Tax For Salary Above ₹20 lakhs?

Do you have a package/CTC of ₹20 lakhs or more and pay a large amount of Tax Deducted at Source (TDS)?

If yes, taxes can take up a good chunk of your earnings, especially if you do not take the right steps promptly and plan your taxes well in advance. Ideally, take advice and help from tax experts or Chartered Accountants who are in the tax practice. You may be familiar with the basics of taxation but if you are not thoroughly updated on the latest amendments and eligible benefits, you may miss out on some deductions, allowances, or exemptions that you are eligible for.

Let us assume you do not utilize an eligible exemption and do not make the required investments for claiming the eligible deductions for an amount of 1 lakh. Now, because you are earning a salary of ₹20 lakhs per annum, you would be taxed for a major chunk of your salary at a 30% tax rate. Therefore, a lapse of deduction on the ₹1 lakh would lead to a tax loss of ₹30,000 or more. To earn ₹30,000, at an investment return tax-free rate of around 6% a year, you would need to commit capital of around ₹5 lakhs. Thus, it is evident that you need to be very vigilant and well-prepared with your tax plan from the very beginning of the financial year.

Key Features

Listed below are the key provisions with sections that can help you prepare your tax plan. The given list is not exhaustive and different rules may apply to specific cases.

Perquisites and Allowances:

If you have a CTC of ₹20 lakhs, some components of it may be in the form of perquisites and allowances like House Rent Allowance, Internet Allowance, Conveyance Allowance, Leave Travel Allowance, etc. Note that, the entire amount of allowances that you receive from your employer is not taxable. Some of the sub-sections under Section 10 of the Income Tax Act include provisions for exemptions, such as Section 10(13A) for house rent allowance, Section 10(5) for leave encashment exemption, and Section 10(14) for conveyance, official travel, and internet expenses incurred by the employer.

It is advisable to always negotiate the CTC structure with your employer to include as many allowances as possible as part of your salary structure. Accordingly, you can maximize your non-taxable component and reduce your tax liability.

Deductions:

Schedule VI A deductions are the most important part of any tax plan. It is highly recommended that you consult a tax expert who can examine all of your income sources and guide you through the eligible deductions that you can claim. They will also be able to recommend the required investments or insurance schemes that you may require to utilize the tax benefits you may be eligible for.

Listed below are the key Schedule VI A deductions that one may claim depending upon his/her eligibility:

• 80 C deductions for Employee Provident Funds (EPF), investments in the Public Provident Fund (PPF), LIC premium payment, investments in Equity-Linked Savings Scheme (ELSS), premiums of unit-linked insurance plans etc.
• 80 CCD (1B) deduction of ₹50,000 for contribution to tier I National Pension Scheme Account.
• 80 G for donations made to charitable institutions or political parties.
• 80 D deductions of up to ₹25,000 for mediclaim premiums paid for self, spouse, and children. Additional deductions of up to ₹25,000 for the mediclaim premium/expenses of senior citizen parents, which can include up to ₹5,000 for preventive health checkups.
• If your expenses include disabled/medical treatment of specified diseases, you can claim deductions under Sections 80DD (₹1.25 lakhs) and 80DDB (maximum ₹1 lakh for senior citizens).
• 80 EEA deductions of up to ₹1.15 lakhs on interest paid toward a home loan. This deduction is applicable only if the property value exceeds ₹15 lakhs.
• 80 EEB deductions of up to ₹1.15 lakhs on interest paid toward a loan taken to purchase an electric vehicle. 
• 80 E deductions on interest paid toward loans taken for higher studies.

The aforementioned list is not exhaustive and other sections under Schedule VI A may apply to specific cases.

Tax Regime:

During the presentation of the 2020 Budget, the Hon’ble Finance Minister of India announced that individual assessees can opt t pay taxes as per the guidelines of the ‘New tax Regime’ or the ‘Old tax Regime.’ The most pressing question that most taxpayers have is which regime to select while filing their tax returns to claim maximum benefits. The new tax regime does not allow the assessees to claim all the allowances under Section 10 and Schedule VI A deductions, as listed above. However, the tax rates under the new regime are much lower. Opting for the old tax regime enables usual tax filing, allowing all the erstwhile exemptions under Section 10 and Schedule VI A deductions available to taxpayers earning a salary of ₹15 lakhs. In thsi case, opting for the old tax regime is generally considered more beneficial for most taxpayers. Accordingly, you can maximize your allowances and fully utilize the Schedule VI A deductions to the extent eligible and reduce your tax commitments. Although you can calculate your tax liability under both regimes, you should select the one that is more beneficial to you in terms of tax savings.

Frequently Asked Questions (FAQs)

Is it possible to have a NIL tax payable with a salary of ₹20 lakhs?

If your salary is ₹20 lakhs, it is not possible for you to have a NIL tax payable or no tax liability even if you cliam all the allowances available under Sections 10 and all the Schedule VI A deductions. You may minimize your tax liability based on the eligible allowances and deductions applicable to your specific case but it may not be possible to have a NIL tax liability with an income of ₹20 lakhs per annum.

How much would be the in-hand salary for a gross CTC of ₹20 lakhs?

After claiming most of the eligible allowances and deductions by making an investment declaration with your employer at the beginning of the year, you may have a monthly take-home salary ranging from ₹90,000 to ₹1 lakh.

If I have to pay GST on all products and services I purchase, why should I be charged such a high amount of income tax?

It is important to always understand the difference between indirect tax and direct tax. While GST is an indirect tax, income tax happens to be a direct tax. Indirect tax is charged on products and services purchased by one and all, irrespective of the income they earn. However, income tax is a progressive tax levied on the income earned and varies with the income levels. It is generally higher for high-income individuals (HNI).