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January 24, 2022

How to pay zero Tax for Salary Income of 12 Lakhs ?

by Mahesh Mara in Income Tax

How to pay zero Tax for Salary Income of 12 Lakhs ?

January to March is the period when all salaried class start planning to save tax as they have to submit their investment declaration and expenditure details. Every year the ideal time for tax planning should be beginning of the year in which you can discuss with your employer what all allowances or exempt income you are eligible and how to take maximum benefit from it.

Tax planning can be done through incentives granted as per law, so if one arrange it affairs within ambit of law to attract the least amount of tax is perfectly legal. An individual who is earning income from salary can plan his expenditure and investment in such a way that it can be used an effective tool for tax planning.

Following is the calculation which shows some of the ways which can be adopted so that the income tax outgo is minimum

Pay Zero Tax for Income up to Rs 12 Lakhs from Salary FY 2021-22Amount (Rs)
Total Salary for FY 2021-2212,00,000
Standard Deduction (Section 16)50,000
Profession tax2,500
Gross Total Income11,47,500
PPF, Insurance, ELSS, FD, NSC, etc (Section 80C Deduction)1,50,000
Deduction of Employer Pension (80CCD (2))1,00,000
Investment in NPS – Section (80CCD (1B ))50,000
Home Loan Interest or House Rent Allowance (Section 24 and Section 10)2,00,000
Medical Expenses for Self and Parents (above 60 years of age)75,000
Medical treatment of dependent (above 60 years of age) under section 80DDB 1,00,000
Total Income – TaxFree4,72,500

1) Standard Deduction of Rs. 50,000:

In order to provide relief to salaried taxpayers, standard deduction has been reintroduced w.e.f. financial year 2018-19. While computing the income chargeable under the head “salary” besides other deductions, a deduction of Rs. 40,000 or the amount of the salary, whichever is less will be allowed. The benefit of Transport allowance and medical reimbursement is withdrawn from FY 2018-19 and a flat benefit of Rs. 40,000/- as standard deduction is allowed to all employees. The Finance Act 2020 has increased the said limit to Rs. 50,000.

2) Profession Tax of Rs. 2,500:

Under Section 16(iii), a deduction from salary can be claimed by the taxpayer on account of professional tax paid. The deduction for professional tax will be allowed in the year in which the tax is actually paid by the employee. Professional tax due but not paid cannot be claimed as a deduction from salary. State Governments and Local Authorities are empowered to collect professional taxes on professions, trades, callings and employment. The amount of professional tax collected does not exceed Rs. 2,500 per annum.

3) Investment in 80C for taking full benefit of 1,50,000:

Any individual or HUF can get a tax deduction up to Rs.1,50,000 per financial year under Section 80C of the Income Tax Act. The deduction can be claimed basically for investment or expenditure made on following

  1. Investment Schemes: ELSS Mutual Funds, Unit Linked Insurance Policies (ULIPs)
  2. Insurance Schemes: Term Insurance, Endowment Insurance
  3. Retirement Savings Schemes: Public Provident Fund, (PPF), Employees Provident Fund, National Pension System (NPS)
  4. Fixed Income Schemes: National Savings Certificate (NSC), Senior Citizens Saving Scheme (SCSS), Sukanya Samriddhi Yojana, Investment in 5 Year FD
  5. Miscellaneous: Home loan repayment, tuition fee payment etc.

4) Investment in National Pension Scheme up to Rs. 50,000:

Finance Minister Arun Jaitley in Budget 2015-16 introduced an additional income tax deduction of Rs. 50,000 for contribution to the New Pension Scheme (NPS) under Section 80CCD (1B). NPS is a voluntary pension scheme, which is regulated by the Pension Fund Regulatory and Development Authority. This extra deduction of Rs. 50,000 on NPS will increase the total deduction allowed under Section 80C and 80CCD of Income Tax Act to Rs. 2 lakh.

5) Deduction of NPS contribution by employer under section 80CCD(2) up to Rs. 1,00,000:

NPS offers additional tax deduction on employer contribution up to 10% of basic and DA. This is over and above other limits as discussed under section 80C and 80CCD(1B). All you have to do is to ask your employer to make minor adjustments in your salary structure. The government gives special tax exemption for contribution towards the National Pension System (NPS) by employers on behalf of employees under the corporate model. In that way you can convince your employer and get benefit from additional deduction of 10% of Basic which can be as high as 2,00,000 a Year.

6) Home Loan Interest and House Rent Allowance Rs. 2 Lakhs:

A home loan must be taken for the purchase/construction of a house and the construction of the house must be completed within 5 years from the end of financial year in which loan was taken. If you are paying EMI for the housing loan, it has two components – interest payment and principal repayment. The interest portion of the EMI paid for the year can be claimed as a deduction from your total income up to a maximum of Rs.2 lakh under Section 24.

You can structure your salary in such a manner that you get an HRA component.

The maximum HRA exempt is as below:

  1. Actual HRA received
  2. 40%/ 50% of the basic salary
  3. (Rent paid – 10% of Basic Salary)

The HRA you have earned so that you can claim maximum HRA benefit as per above formula. You can pay rent amount to your family members like father or mother (who might be not earning or less than 30% bracket) and Claim HRA benefit. In the case of Bajrang Prasad Ramdharani v. ACIT assesee was allowed HRA benefit when he paid rent to Wife. Details of case are “AO disallowed assessee’s claim for HRA exemption on the ground that assessee and his wife was living together and claim of payment of rent by assessee to his wife was made to reduce his tax liability and the CIT(A) confirmed the addition on the ground the tenant (i.e. assessee) and the landlord (i.e. his wife) were staying together which indicated that the whole arrangement was a colorable device, it was held that the assessee had submitted the rent receipts and the payments had been duly verified. Therefore, the assessee had fulfilled the twin requirement of the provision i.e. occupation of the house and the payment of rent. Thus, he was entitled to exemption under section 10(13A).

Thus it can be seen that only two things are required, possession of the property – Means person claiming HRA should be staying in the rented property and secondly rent payment must be made. In this way you can claim additional benefits and save tax on your income. You can claim both home loan interest and HRA also if you satisfy all the condition as mention above.

7) Medical insurance for Self up to Rs. 25,000:

Payment of premium on life insurance policy and health insurance policy not only gives insurance cover to a taxpayer but also offers certain tax benefits. Medical insurance premium paid by assessee, being individual/HUF by any mode other than cash. Sum paid by assessee, being individual on account of preventive health check-up. Medical expenditure incurred by assessee, being individual/HUF on the health of self, spouse and dependent children is deductible under section 80D and a maximum Rs. 25,000 is deductible under section 80D.

8) Medical insurance for Senior Citizen Parents and Dependents up to Rs. 50,000 under 80D:

Payment of premium on life insurance policy and health insurance policy not only gives insurance cover to a taxpayer but also offers certain tax benefits. Medical insurance premium paid by assessee, being individual/HUF by any mode other than cash. Sum paid by assessee, being individual on account of preventive health check-up. Medical expenditure incurred by assessee, being individual/HUF on the health of a very senior citizen person provided that no amount has been paid to effect or to keep in force an insurance on the health of such person a deduction of a maximum of Rs. 50,000 will be deductible under section 80D.

9) Medical treatment of dependent relative under section 80DDB:

Deduction under section 80DDB is allowed for medical treatment of a dependant who is suffering from a specified disease (listed in the table above).

  • Can be claimed by an Individual or HUF
  • Allowed to Resident Indians
  • When taxpayer has spent money on treatment of the dependant
  • Dependant shall mean spouse, children, parents and siblings
  • In case the dependant is insured and some payment is also received from an insurer or reimbursed from an employer, such insurance or reimbursement received shall be subtracted from the deduction.

Amount allowed as a deduction

  • 40,000/- or the amount actually paid, whichever is less.
  • In the case of a senior citizen and super-senior citizen, Rs.1,00,000 or amount actually paid, whichever is less.

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