How to save tax for salary above 15 lakhs

Hi I am Radhika Palkar, a practising Chartered Accountant mainly working as an advisor to foreign companies with regards to managing their operation in India. I also take keen interest in associating myself with startups, from the stage of incorporation bookkeeping to income tax filling as well in advising the management in cost price analysis, that we act like a virtual CFO for the entities in their growth phase I am here today as part of the Tax video series for Canara HSBC Life Insurance Company. Here’s an important question that I often get asked- If my salary is above 15 Lakhs, how do I save tax effectively. Well let’s figure out how:

On first look, the new tax structure seems better, but one always needs to dig deeper. The suitability of the tax structure will vary depending on the level of investments one makes.

Taxpayers have to choose the right tax regime based on their income structure, type and investments to derive maximum tax benefits. Based on their profile they should decide whether to opt for lower income tax rates or exemptions/deductions.

Let us check with one example :

Suppose Mr. X earned a salary amounting to Rs. 16,00,000 for the F.Y.20-21
Calculation of total income and tax liabilities in both case

As we can see from the above example, a salaried individual having income of Rs.16 lakhs and claiming a deduction of Rs.2.5 Lakhs (Rs 2 lacs under Chapter VIA and Rs 50000 standard deduction) would be liable to pay same amount of tax under both the tax regimes.

However, if the total deduction claimed by assesse is less than Rs. 2.5 lakhs, it is better for the assesse to opt for new tax regime. On the other hand, if the assesse opts for additional deduction under Chapter VIA like contribution towards NPS under Section 80CCD(1B) ***, then the assesse would be liable for additional deduction of Rs 50000 over and above Rs 2 lakhs under Chapter VIA, thus making the total deduction of Rs 3 lacs. In this case, paying under the old regime is a better option for the assesse

*** The Contribution made towards NPS can be claimed as a deduction under section 80CCD(1B) under the Old Tax Regime which is in addition to the Deduction of Rs 2 lacs as shown above

Amount of deduction: up to Rs 50,000

Applicability: Any individual taxpayer who has deposited any amount in his NPS account. The NPS covers New pension scheme and Atal Pension Yojna.

Thus, if an investment is made as per Section 80CCD(1B), then it is better to opt for old regime as the tax liability would reduce further..

Unfortunately, there is no single answer to this. And the culprit again is the complexity of the Indian tax rules. While figuring out what option to go for might look complicated, if you approach it in a systematic way, it is not that difficult to figure out.

In a simpler way, Here is what the assesse needs to do –

• Calculate all the exemptions that you are availing of: If you are living on rent, you would be claiming HRA which is the biggest salary exemption one enjoys. Apart from that, other tax-free components include LTA, Food Bill, Phone Bills, etc. All these will become taxable if you choose to shift to the new tax regime.
• Look at the deductions that you claim: As a salaried employee, two deductions that you automatically get are standard deduction of Rs 50,000 and your contribution towards your Employee Provident Fund (EPF). In the new regime, you won’t be able to claim these deductions even though you will continue to contribute to EPF. Over and above, you cannot claim deductions against your home loan (if you have one) or insurance policies, which till now has helped to reduce your taxable income.

Now, combine these exemptions and deductions and minus them from your salary to see what is your taxable income and what it would be if you let go of these deductions. This should be the deciding factor for which regime you should go for.

Hope this video gives individuals with an annual salary above rupees 15 lakh a fair idea of which tax regime to opt for