Income Tax Planning for salaried employees

80% of the returns for salaried individuals filed by us end up with a refund.

A refund arises due to excess deduction of taxes by the employer.

No, it is not the employer's fault. It is usually inadequate tax planning by the employee.

Either the investments or deductions are not declared or the wrong tax regime is chosen for TDS, but lack of proper tax planning means withholding of excess TDS.

Which also means a lower in-hand salary every month!

Let's be real - employees are taxed on their gross income i.e. they do not get any significant deductions for their expenses.

So every tax saving becomes precious.

Here a few practical tips and tricks to ensure proper tax planning to avoid needless refunds:

1. Declare all income and investments to the employer

- Nothing invites trouble more than not declaring expected incomes to the employer. This can result in a payable situation as well and you end up shelling taxes at 1% p.m.

- While investments like employees contribution to PF and NPS contributions are considered by the employer upfront, there are other investments like LIC premium, medical premium which should not be considered for the purpose of working.

- It is important to declare everything to the employer such that it gets considered at the time of TDS itself.

2. Choose the new or old tax regime during the financial year itself and intimate the employer

- This has become common recently that employees get their tax deducted under old regime while after coming to us, they realise that the new regime suits their case better.

- This can be easily avoided by doing a draft calculation at the beginning of the FY and asking the employer to deduct tax in the respective tax regime.

- Suppose, you are an employee who does not claim much tax deductions under section 80C or 80D, then it is likely that the new regime will result in significant tax savings.

- It is vital to do a calculation to ensure that there are no surprises at the time of filing refunds!

3. Make full use of available tax deductions for housing (owned/ rented)

- While everyone knows about the HRA deductions, there are various lesser-known deductions like under section 80C, interest on home loan etc. which are not declared to the employer upfront.

It is always advisable to have this factored into the monthly in-hand.

Why?

If there is any deduction which has not been declared to the employer (i.e. appearing in Form 16) and the same is claimed only during the return of income, then it increases the chances of inquiries by the Income Tax Department.

Caution points to remember in tax planning:

- Make sure your immediate and mid-term financial needs are covered as most of these investments have a minimum lock-in period of 3/ 5 years.

- It’s important to consider several investment opportunities before making a final decision. Ensure that your need of tax saving is not getting fulfilled at the cost of poor returns from that investment.

- Be fully aware of the objective of an investment, it’s gestation period and maturity terms and conditions.

Thank you for reading. Should you require any clarification or information, please write to us at contact@vprpca.com