Congratulations on your new job! Does that hefty pay-package make you feel like Richie Rich? Have the sounds of the birds and bees been replaced by a ka-ching?! Have you picked out your new car yet?
Yeah, getting paid is pretty great, and it’s all sunshine and rainbows until this happens:
But why does this happen? How come the amount that was credited to your bank account is lesser than what you expected? What did you miscalculate?
We have one word for you: Tax.
Chances are you forgot about the taxes that you need to pay, which can be quite a large chunk of money.
You see, every month, you (unwittingly?) pay tax in the form of TDS or Tax Deducted at Source. which is the amount that is deducted by your employer from your monthly salary and paid to the Income Tax department.
Oh my god, what?!?! Is there any way I can get it back?!
All of it? No.
Some of it? Yes.
Much to the delight of tax payers the world over, there are various different ways to save tax under different sections of the Income Tax Act, 1961. For instance, under Section 80 C of the Income Tax Act, 1961, you can save up to Rs. 1,50,000 on income tax each year just by investing in tax saving financial products such as PPF, Mutual Funds, ULIPS, etc. Under section 80 D, you can claim deductions for health insurance premiums. Another great way to save on tax is by restructuring your salary.
But my employers have already deducted tax! How can I save tax now?
Enter: Tax Return.
At the start of a new year, your employer gives you a tax declaration from that allows you to specify which tax-saving measures you have undertaken. You are also asked to submit tax-exemption documents such as rent receipts, investment proofs, loan payment certificates, etc. If you share all required information, you can reduce or completely avoid TDS deductions. However, if you are unable to share all the documents in time, your TDS will get deducted.
Not to worry! All you have to do is file for tax returns on or before 31st July of the relevant Assessment Year showing proof that you have taken these tax-saving measures. If they are approved by the Income Tax department, you can get a certain amount of TDS returned to your bank account! Isn’t that awesome!?
So how do I go about filing for tax returns?
As the months of June and July come around, you will be given something called Form-16 by your employers. This is a TDS certificate and gives you all the information you need about exactly how much tax has been deducted by your employer.
The form comes in two parts:
- Form 16 A contains details about employer and employee name, address, PAN details and TDS deductions
- Form 16 B includes details of salary paid, other incomes, deductions allowed, and tax payable
Additionally, you may receive Form 26AS which is a summary of the taxes paid by your company (on your behalf) and any tax deductions you were allowed.
Why is it important to know what my salary / income/ CTC before I file for tax returns?
To understand that, you need to first know the difference between those 3 terms.
- Your income or gross income is not the same as your salary. You can earn income from multiple other sources. Your salary is just the money your employer- gives you. But an individual tax payer could also earn “income” from renting out their home, selling their mutual funds, interest on savings account, fee for freelancing, etc. All these numbers added up give you your gross income.
- Your CTC is the total cost that a company incurs on an employee. This includes basic salary, various allowances, free meals, EPF contributions, etc.
- Your take home salary is the amount that remains when all tax is deducted from your Cost to Company (CTC) by your employer. Your salary is thus the amount that gets credited to your bank account every month.
As you may have guessed by now, NOT ALL parts of your CTC are taxable. You can save tax simply restructuring your salary to increase the non-taxable parts of it and reducing the taxable parts of it. That’s why they say that a higher salary doesn’t necessarily mean a higher tax liability!
To help you understand what parts of your CTC are taxable and which are not, we’ve listed them out for you.
Normally, your CTC includes these taxable and non-taxable elements:
- Basic Salary is usually 40-50% of the total CTC and is entirely taxable
- Employer Provident fund (EPF) is a corpus of funds built through regular monthly contributions made by an employee and his/her employer. Each contribution is usually 12% of your basic salary. Interest earned on EPF and withdrawals made after 5 years are tax-free.
- Medical reimbursement is the amount you get if you can present medical bills. You can get a tax exemption of up to Rs. 15,000 per year for medical reimbursements. Unfortunately, you cannot file for exemption for this while filing tax returns, so make sure you present your bills in time
- Conveyance or transport allowance reimburses you for the cost of commuting between your home and office. You can get a tax exemption of up to Rs. 1,600 per month on this.
- House Rent Allowance (HRA) is offered to salaried individuals to cover their rented-accommodation expenses. If you get HRA but don’t live on rent, it’s completely taxable. If you do live on rent, HRA exemption can be calculated as being the lowest of:
- Actual HRA Received or
- 40% (50% for metros) of (Basic + Dearness Allowance) or
- Rent paid (-) 10% of (Basic + Dearness Allowance)
- Children's education allowance provides a tax break of Rs. 100 per month per child towards educational expenses and Rs. 300 per month per child towards children’s hostel expenses (for maximum 2 children).
- Professional Tax is a tax levied by the state government. The amount varies by income with a maximum deductible limit of Rs. 2,500 per year.
- Additionally, any special allowances mentioned in the CTC are taxable.
- Fully tax-exempt:
- Telephone/mobile expenses are fully exempted from income tax, based on actual bills submitted to the employer.
- Leave Travel Concession (LTC) is a tax exemption provided on the actual travel costs of the employee as well as their dependents. LTC is applicable only on travel within India.
Thus, it is only if you understand exactly how your CTC works that you can successfully plan your investments and file for tax returns and get the excess money you paid as tax, back in your bank account!
Ah…. You can almost smell the new car seat, can’t you?
Mutual fund investments are subject to market risks, read all scheme related documents carefully.