PERSONAL TAX: It may be difficult to claim all tax benefits

A salaried employee earning around Rs 15 lakh has a tax liability of around Rs 2.50 lakh. But you can be completely tax free if you optimise many of the income tax rules. But it is possible only if you restructure your salary structure and avail all applicable tax deductions and exemptions.

Salary is never given as one single amount. It consists of different components. Other than basic salary there are components like HRA (House rent allowance), LTA (leave travel allowance), travel allowance, telephone reimbursement, etc. The reason your salary is structured in this manner is to help you save taxes. But many employees do not optimise or avail all benefits. One reason is because they are not aware of tax laws. The other reason is the inability to exhaust all the possible exemptions and deductions.

Let’s take a case of Rohit, whose salary income is Rs 15 lakh, structured as follows: Rs 8,00,000 basic salary, Rs 20,000 towards uniform and daily allowance of Rs 1,00,000 for travel, Rs 25,000 for telephone allowance then LTA of Rs 75,000 and HRA of (50% of basic salary) Rs 4,00,000 apart from the National Pension System (NPS) contribution from his employer for Rs 80,000 (that is, 10% of his basic salary).

Here is how Rohit can completely avoid paying taxes on his salary. He can get full HRA exemption provided he is paying Rs 40,000 or more towards monthly rent which makes his full HRA of Rs 4,00,000 exempt from tax. Then there is a standard deduction for Rs 50,000 (FY 2019-20) and LTA, NPS for Rs 75,000 and Rs 80,000 respectively which will get deducted as well. Plus, he can submit his travel bills to claim exemption up to Rs 1,00,000 towards travel allowance and Rs 25,000 for telephone bills, Rs 20,000 for uniform allowance. If all items are added and reduced from his total income of Rs 15,00,000, then the net taxable income at this stage would come down to Rs 7,50,000 (that is, Rs 15 lakh minus Rs 7.5 lakh). These are the benefits towards exemptions.

Now assume that Rohit also avails some deductions as available under chapter VI A, that is, investment in Equity Linked Savings Schemes for Rs 1,50,000 u/s 80C, Rs 50,000 in NPS u/s 80CCD(1B), his own contribution u/s 80CCD(2) for Rs 80,000. Let us also assume he has a home loan for which he pays an interest of Rs 2,00,000. All these items are also deductible from his total taxable income, which would ultimately reduce his total net taxable income to Rs 2.70 lakh only (Rs 7.50 lakh minus Rs 4.80 lakh).

The interim Budget made all income up to Rs 5 lakh tax free. So, after utilising all tax deductions and exemptions, Rohit’s income is reduced to less than Rs 5 lakh thereby bringing his tax payable to zero.

But it is impractical for a person who earns Rs 15 lakh to avail each and every tax benefit. While it looks good in theory, it is difficult to achieve practically. One has to account for regular expenses such as household expenses, etc. But if you plan smartly and avail all available exemptions and deductions under I-T rules, you can save a good amount in taxes.