Tax Saving for High Salaried People without any investments


(Last Updated On: August 3, 2019)

Earning a 7-figure annual salary is a dream for many. A high salary promises an improved lifestyle, fulfilment of financial goals and, overall, a comfortable life. However, there is another aspect which a high salary brings in its wake – a high tax liability. You know that your tax liability increases as your income increases and so when you earn a high salary, you fall in the 30% tax slab and end up paying a high tax. Though there are tax-saving investments which help in bringing down your tax liability, you often wonder whether there are other ways to save tax without factoring in investments.

Actually, there are. If tax-saving investments are put aside, there are other ways of saving taxes for high salaried individuals. Let’s see what these ways are –

Claim standard deduction

The Union Budget of 2018 abolished tax free medical reimbursements and conveyance allowance and implemented a standard deduction of INR 40,000 from the salary. This deduction would be done from the total salary which would lower the taxable salary in your hands.

With Interim Budget 2019 the limit of standard deduction has further been increased by INR 10,000. Resulting in aggregate benefit of INR 50,000 to salaried employees, for the Financial Year 2019-20 (AY 2020-2021).

Use your EPF contributions

It is mandatory to contribute to Employees Provident Fund (EPF) Scheme if you have a minimum monthly salary of INR 15,000. Since you fall in the high salary bracket, you must be contributing to the EPF scheme. In fact, even your employer contributes an equal amount to your EPF Account. While your employer’s contributions are tax-free, you can claim tax deductions on your contributions under Section 80C up to a maximum of INR 1.5 lakhs.


Claim HRA exemption

HRA stands for House Rent Allowance. HRA features as a salary component for many employees. If you are a salaried employee and live in a rented home, you can claim HRA exemption from your taxable salary. HRA exemption would reduce your taxable salary and bring down your tax liability. Under Section 10 (13A) of the Income Tax Act, the exemption allowed for HRA is calculated as follows –

Lowest of –

  • Actual HRA paid by the employer
  • Actual rent paid – 10% of the salary (basic salary + dearness allowance + commission received)
  • 50% of the basic salary if you live in a metro city else 40% of the basic salary

For instance,

If your salary is INR 10 lakhs annually where the HRA component is INR 2 lakhs and you pay a monthly rent of INR 20, 000, the HRA exemption available to you would be calculated as follows –

Actual HRA paid by employer INR 2 lakhs
Actual rent paid – 10% of salary INR 2.4 lakhs – INR 1 lakh = INR 1.4
50% of basic salary (assuming you live in a metro city) INR 5 lakhs
HRA exemption available Lowest of the three = INR 1.4 lakhs

Even if HRA is not a part of your salary structure, you can still get a tax deduction under Section 80GG if you pay a rent on your house. In such cases, the eligible amount of deduction available is as follows –

Lowest of –

  • Rent paid – 10% of the adjusted total income (income before claiming deduction under Section 80GG)
  • INR 5000 per month
  • 25% of the adjusted total income

For instance, in the same example given above, if HRA is not a part of your salary component, here is how the HRA exemption would be computed –

Rent paid – 10% of total income INR 2.4 lakhs – INR 1 lakh = INR 1.4 lakhs
INR 5000/month INR 60,000
25% of income INR 2.5 lakhs
HRA exemption available Lowest of the three – INR 60,000

Home loans provide a tax advantage

While HRA exemptions are available on a rented home, what if you own a home? Would you lose the tax saving advantage?

No, you wouldn’t. An owned house also allows you tax saving advantages in two ways. Let’s understand what these ways are –

Interest paid on your home loan

If you own a home and have taken a home loan on the same, the interest paid for the home loan is allowed as a tax deduction under Section 24. You can claim a deduction of up to INR 2 lakhs on the interest paid on your home loan in one financial year. Even if you have taken a loan for the repairs or renovations of your home, the interest paid on the loan would also be allowed as a tax-free expense up to INR 30, 000 within the INR 2 lakh limit.

Principal repayments of your home loan

Besides the tax deduction available on interests, the principal component of your home loan also qualifies for tax deduction. The principal repayment of the home loan is allowed as a tax-free expense under Section 80C of the Income Tax Act. The maximum limit up to which you can claim a deduction is limited to INR 1.5 lakhs.

So, owning a home is also rewarding. You can save tax on your home loan.

 


Tuition fee payable for children is also a tax-free expense

Do you have children? If you do then you can claim tax deduction on the fee paid for their education. Section 80C allows the tuition fee paid for up to 2 dependent children as a tax-free expense. You can reduce your salary with that expense to reduce your tax liability.


Go on a leave

Salaried employees also enjoy tax-free Leave Travel Allowances granted by their employers as a part of their salary. Leave Travel Allowance allows you to take two journeys in a block of four financial years. The expenses incurred on the journey can be claimed as tax-free expenses through LTA. Proofs of the expenses would, however, be required to be submitted to claim tax exemption. Moreover, if two journeys are not taken in one block, the balance can be forward to the next 4-year block and used by you. The maximum leave travel allowance available would be the cost of return tickets booked for train or air. In case of train ticket bookings, cost of air-conditioned first class train ticket is allowed. In case of air bookings, return fare of economy seats booked in a national carrier. The travel fare covered is for the shortest possible route.


Look for tax-free perquisites provided as a part of the salary

There are various salary allowances, reimbursements and perquisites which are tax-free. Try and make them a part of your salary to reduce the taxable salary. Some common examples include the following –

  • Food coupons up to INR 50 per meal
  • Reimbursement of telephone expenses
  • Children education allowance of INR 100 per month per child for a maximum of 2 children
  • Hostel expense allowance of INR 300 per month per child for a maximum of 2 children

Health insurance saves taxes

Premium paid for a health insurance plan for yourself and your family qualifies as a tax-free expense under Section 80D. If you pay premiums for a health plan for yourself and your family, you get a tax deduction of up to INR 25, 000. If you are a senior citizen, the limit stands increased to INR 50,000. Moreover, if you pay premium for a separate health insurance plan for your senior citizen parents you get an additional tax deduction of up to INR 50, 000. Here is the maximum deduction you can claim under Section 80D under different instances –  

Instances Tax deduction available
Health plan for self and family when you are under 60 years of age INR 25,000
1 health plan for self and family when you are under 60 years of age + 1 health plan for dependent parents who are also under 60 years of age INR 25,000 + INR 25,000 = INR 50,000
One health plan for self and family when you are under 60 years of age + One health plan for dependent parents who are over 60 years of age INR 25,000+ INR 50,000 = INR 75,000
One health plan for self and family when you are over 60 years of age + One health plan for dependent parents who are also over 60 years of age INR 50,000 + INR 50,000 = INR 1 lakh

So, you can claim a maximum deduction of INR 1 lakh by paying health insurance premiums.


Interest on your savings account is tax-free

If you hold a bank or post office savings account and earn interest on the same, such interest earned is tax free up to INR 10, 000 in a financial year under Section 80TTA.

Further, if you are a senior citizen you can claim benefit under Section 80TTB for all kind of interests whether earned on FD or saving account etc.

But, an important point to be noted here is that, A senior citizen can only take benefit under Section 80TTB and individual (not being senior citizen) and HUF can only claim benefit under section 80TTA.


Use Sections 80DD, 80DDB and 80U

These sections are useful if you have incurred expenses in treating dependent family members with disabilities or for specified ailments. Under Section 80DD, maintenance costs and treatment expenses of a disabled dependent are allowed as a deduction. The deduction limit is INR 75, 000 in case of disabled dependents and INR 1.25 lakhs in case of severely disabled dependents. This is a flat amount allowed as deduction irrespective of the actual expenses incurred.

Section 80DDB, on the other hand, lists down special ailments. If you have spent money on treating the listed ailments, you can claim a tax deduction. Common examples of specified ailments include neurological diseases, cancer, AIDS, etc. The deduction allowed is the expenses incurred on treatments up to a maximum of INR 40, 000 if age is below 60 years else INR 1 lakh.

If you are yourself disabled and employed, you can claim a deduction of INR 75, 000 under Section 80U. Moreover, the limit increases to INR 1.25 lakhs if you have a severe disability.

 


Education loan for self or children has tax benefits

Education loans also give you tax saving benefits besides allowing you or your children to pursue higher education. If you have availed an education loan for your higher education or for your children’s higher education you become eligible to claim a tax relief on it. Under Section 80E of the Income Tax Act, the interest paid on education loan is allowed as tax deduction.


Donations are tax-free

If you have a high salary, charity should feature in your to-do lists. Besides giving you happiness, charitable donations also let you save tax. Under Section 80G, donations made to recognized charitable institutions allow you tax deductions. 50% or 100% of the donated amount qualifies for tax deduction depending on the donation you select. Moreover, the donations should be made in cash to be eligible for deductions.


Set off your capital loss against capital gains

If you have invested, your investments might give you returns which would attract short term or long term capital gains tax. While you have to pay this tax, there is a way to lower it. In some cases, you might incur negative returns on your investments. Negative returns are called capital loss. This loss can be set off against the capital gains which you make in a financial year. Moreover, if you don’t have enough capital gains in a financial year, you can even carry forward your capital loss to up to 8 financial years and use it to set off your capital gains. As your capital gains are set off, your tax liability would reduce.


So, let’s see how you can reduce your taxable income when your salary is INR 25 lakhs annually and you don’t invest –

Annual salary INR 25,00,000
Less: Standard Deduction INR 40,000
EPF contributions Up to INR 1.5 lakhs under Section 80C
HRA exemption Calculated depending on rent paid and salary
Interest paid on home loan Up to INR 2 lakhs
Principal repayment of home loan Up to INR 1.5 lakhs under Section 80C
Tuition fee for two children Up to INR 1.5 lakhs under Section 80C
Leave Travel Allowance The actual expense incurred subject to certain limits
Tax-free perquisites in the salary Up to specified limits
Health insurance premium Up to INR 1 lakh
Savings account interest Up to INR 10,000
Treatment of disabled family member Up to INR 1.25 lakhs
Treatment of specified illnesses Up to INR 1 lakh
Disability benefit for self Up to INR 1.25 lakhs
Interest paid on education loan Actual interest paid
Donations qualifying under Section 80G 50% or 100% of the donation paid
Setting off capital loss against capital gain Actual loss incurred against actual gain

So, even if you earn a high salary, there are ways to reduce your tax liability without resorting to investments. So, if you have maximised the full potential of tax-free investments, use the above-mentioned ways of saving maximum possible tax. Contact our expert CA’s to Plan your Taxes and File ITR.


 

CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.