How to get the highest in-hand salary
Well, I was away for a long time recently, apologies for that. We are in the process of building something cool for Indians to understand Personal Finance (more on that later).
Let’s discuss today’s topic. For those of you who are salaried folks, in today’s newsletter I’m going to talk about how to pay the least amount of tax and maximize your income. When you get your offer letter, it shows you your gross salary. This is the salary that the company will pay you. From this gross salary, tax is deducted by your company, known as TDS. This gives you your in-hand salary. In order to maximize your in-hand salary, you need to make sure that you pay as little tax as possible. There are 2 aspects that we need to take care for this - exemptions and deductions.
Let’s look at them one-by-one. (Not more than 5 minutes again. I promise! :))
Exemptions: An Exemption is a part of your salary that is not taxable. Which means that on the exempt amount, you don’t need to pay any tax. Some components of your salary such as HRA, LTA etc are partially or fully exempt from Tax, which means that a part (or whole) of that component will not be taxable.
Therefore, you need to make sure that you utilize your exemptions well. Which means that if you stay in a rented house, you should pay rent and claim HRA. You can also pay rent to your parents and claim it as an exemption. However, in that case, your parents will have to show the rent as an Income in their file, and you’ll need to have a rent agreement in place with them.
LTA is another exemption which most people don’t utilize well. Leave Travel Allowance (or Leave Travel Concession (LTC)) is an allowance paid to you by your employer for personal travel, while on leave. There are two options to take this LTA:
Take it as a part of your salary every month. In this case, it is fully taxable. OR
Let it accumulate with your employer, and then claim this LTA by submitting proof of travel to your employer. In this case, the amount of the bills submitted by you is completely exempt from tax. So if you have spent money equal to your annual LTA, the entire allowance becomes tax free for you. The only downside here is that you don’t get this money in your bank account every month, but it gets accumulated with your employer. If you don’t travel, you can claim this money at the end of the year, irrespective. However, since there is no travel done, this money will then be fully taxable.
Therefore, as long as you don’t have a money crunch every month, it is always recommended to let LTA accumulate with your employer and them claim it. LTA can be claimed only twice in 4 years, so you’ll need to make claims accordingly.
Deductions: These are certain expenses which you make and get tax benefits on them. Which means that the amount you spent on these specified products is reduced from your total taxable income, thereby reducing your income tax.
While there are a lot of such expenses that can be claimed, a lot of salaried folks don’t utilize these well. I had written an article here about how you can save up to Rs. 82,000 in taxes if you utilize all the provisions well! Make sure you utilize these provisions and save tax in the current financial year!
An important piece of information that you guys should know, is that for the last financial year (FY 2020-21), since most of us didn’t travel, we could not claim LTA. However, the government has allowed LTA to be claimed against money spent on Goods & Services as well, in FY 2020-21. The only difference is that the amount exempt from tax would be 1/3rd the value of total bills submitted, and the bills should be for products where GST is >=12%. Therefore, if you have total accumulated LTA of Rs. 50,000 and if you’re submitting Goods and Services bills, you’ll have to submit bills worth Rs. 1,50,000 to get tax deduction on the full amount. If you submit bills worth, say, Rs. 60000, then only Rs. 20,000 will be tax free. The remaining will be taxable. If you submit travel bills worth Rs. 60,000 though, then the entire accumulated LTA of Rs. 50,000 would be tax free.
If you have not done this yet, don’t worry. You can still claim this LTA before you file your returns (provided your expense was done in the last financial year, i.e 2020-21). You can submit this amount in your ITR and claim a refund.
Planning taxes helps in ways we can’t imagine! To illustrate this, let’s take an example of 2 employees - one whose annual taxable income is Rs. 14,00,000 and someone else who utilizes exemptions & deductions well, and brings down their taxable income to Rs. 11,50,000. The difference in the tax paid by both will be Rs. 75,000 - which means that the second person is eventually earning Rs. 75,000 more than the first one.
That’s it. Utilizing exemptions and deductions is all you need to do, to ensure that you pay the least amount of tax, and therefore get the maximum amount of in-hand salary!
I’m building a platform called Jackfruit which simplifies Personal Finance for Indians. We have already launched the first version of the platform which will enable you to calculate your taxable income and save tax. Currently, it is open only for a select group of individuals. If any of you want access to check it out, please write back to me on this email, or send me a mail on ankurAjhaveri[at]gmail[dot]com, and I will send you the details!
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Adios, for now! We’ll talk again next week! :)