How to Save Tax for Salary Above 10 Lakhs?

When your salary crosses the ₹10 lakh mark, it’s a milestone worth celebrating. But along with the perks of a higher income comes the unavoidable question: how to save tax on 10 lakh salary?

Suddenly, the amount you take home is not the same as what you expected, and you might find yourself wondering how to keep more of that hard-earned money in your pocket. How to overcome this? With the right strategies, you can greatly reduce your tax burden and make the most of your income.

No matter if you are an expert professional or just stepping into a higher tax bracket, the right strategies can provide you with the knowledge you need to make the right decisions and keep more of what you earn.

Comparing Income Tax Slabs: Old vs. New Tax Regime

The Indian income tax system offers taxpayers a choice between the old and new tax regime. Both regimes have different tax slabs and offer different benefits, which cater to different financial planning needs.

Take a look at the tax rates under the old tax regime:

The new tax regime has amendments in terms of tax slabs, which are as follows:

Effective Ways to Reduce Tax on a 10 Lakh Salary

When earning a salary of ₹10 lakh annually, managing tax liability is essential to maximize your take-home pay. If you are looking for some effective ways to reduce your tax burden, understanding your salary structure is of utmost importance:

Understanding Salary Structure

When applying for tax exemptions and trying to avail of the benefits of income tax sections, it becomes necessary to know your salary structure. Here is a basic structure of an individual’s salary:

• Basic Salary: The core part of your salary, usually 40-50%, is fully taxable.

• House Rent Allowance (HRA): This can be partially exempt if you pay rent and meet specific conditions.

• Special Allowance: A fully taxable component provided for personal expenses.

• Bonuses/Incentives: Performance-based payments that are fully taxable and can affect your taxable income significantly.

• Provident Fund Contributions: Employer contributions are tax-free up to a certain limit, with your contributions qualifying for deductions under Section 80C.

• Perquisites: Non-monetary benefits like a company car or housing are taxable as part of your salary.

Now that you know how your salary is structured, you can easily divide your taxable and non-taxable income. Your taxable income includes your basic salary, dearness allowance (DA), and other allowances that are taxable as per the Income Tax Act. On the other hand, non-taxable income includes house rent allowance (HRA), transport allowance, and medical reimbursement.

Apart from these, various sections under old and new tax regimes offer tax-saving options. Let us take a look at them:

Old Tax Regime Strategies

• Maximize Section 80C Deductions: Invest up to ₹1.5 lakh in tax-saving instruments such as the Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), or life insurance premiums.

• Section 80D (Health Insurance): Claim deductions up to ₹25,000 for health insurance premiums for yourself, spouse, and children, plus an additional ₹50,000 for senior citizen parents.

• House Rent Allowance (HRA): If you are paying rent, claim the HRA exemption. This can be calculated as the least of actual HRA received, rent paid minus 10% of salary, or 50% of salary (metro) or 40% (non-metro).

• Standard Deduction: Avail of the standard deduction of ₹50,000 for salaried individuals.

• National Pension System (NPS): Contributions under Section 80CCD(1B) offer an additional deduction of ₹50,000.

New Tax Regime Strategies

• Evaluate Tax Liability: The new regime has lower tax rates but no deductions/exemptions. Depending on your deductions, calculate whether this results in a lower tax burden than the old regime.

• Simplicity and Flexibility: The new regime simplifies tax calculations, as there is no need to invest in tax-saving instruments to reduce liability.

• Tax Planning Flexibility: Without investments needing to claim deductions, you can allocate your finances more freely while benefiting from reduced tax rates.

Exemptions and Deductions Under New Tax Regime

The new tax regime does not only include changes in the tax slabs but it has introduced lower tax rates in FY 2020-21, limiting most exemptions and deductions.

Section 1: Available Exemptions

Under the new tax regime, the only exemptions available include:

• Employer’s Contribution to NPS: This contribution continues to be tax-exempt, up to 10% of salary (Basic + DA).

• Gratuity and Leave Encashment: Exempt as per existing rules.

• Retrenchment Compensation and VRS: Exempt as per existing rules.

• The amount received on the death of an employee: Exempt from tax.

Section 2: Applicable Deductions

Deductions are largely not allowed under the new tax regime, except for Section 80C, 80D, 80E, etc.: All deductions under Chapter VI-A are not applicable, except for:

• Employer’s NPS Contribution: Under Section 80CCD(2), contributions are deductible within limits. If the employer is a PSU or other group, then:

• deduction limit of 10% of salary, or a Central or State Government group
• deduction limit of 14% of salary.

Exemptions and Deductions Under Old Tax Regime

The old tax regime allows for various exemptions and deductions, which can significantly reduce your taxable income.

Section 1: Available Exemptions

• House Rent Allowance (HRA): Partially exempt, based on rent paid, salary, and city of residence.

• Leave Travel Allowance (LTA): Exempt for travel within India, subject to certain conditions.

• Standard Deduction: ₹50,000 for salaried individuals.

• Transport Allowance: Exempt up to ₹1,600 per month (₹3,200 for disabled individuals).

• Meal Coupons: Tax-exempt up to ₹50 per meal.

Section 2: Applicable Deductions

Apart from exemptions, certain specified deductions are under the old tax regime.

• Section 80C: Deductions up to ₹1.5 lakh for investments in PPF, ELSS, NSC, life insurance premiums, etc.

• Section 80D: Deductions up to ₹25,000 for health insurance premiums for self and family, plus ₹50,000 for senior citizen parents.

• Section 80E: Deduction for interest on education loans.

• Section 80G: Deduction for donations to specified funds and charitable institutions.

• Section 80TTA: Deduction up to ₹10,000 on interest earned on a savings account.

• Section 24(b): Deduction up to ₹2 lakh for interest on a home loan.

How to Pay Zero Tax on a 10 Lakh Salary?

Under the old tax regime, achieving zero tax liability on a 10 lakh salary is possible by strategically utilizing available deductions and exemptions. Want to know some key strategies? Read ahead!

Claim Maximum Deductions

• Section 80C: Invest in tax-saving instruments like ELSS, PPF, NPS, or life insurance policies to claim deductions up to ₹1.5 lakh.
• Section 80D: Deduct medical insurance premiums for yourself, your spouse, and dependent children.
• Section 80E: Claim a deduction for interest paid on a student loan.
• Section 80GG: Deduct rent paid if you live in a rented house.
• Section 80TTA: Deduct interest earned on savings bank accounts up to ₹10,000.

HRA Deduction

• If you live in a rented house, claim an HRA deduction based on your actual rent paid, 10% of your basic salary + DA, or 25% of your basic salary + DA (if you live in a metro city).

Home Loan Interest

• Deduct interest paid on a home loan up to ₹2 lakh under Section 24.
• Deduct principal repayment under Section 80EE or Section 80EEA for first-time home buyers.

Other Deductions

• Claim deductions for donations to charitable organizations under Section 80G.
• Deduct contributions to a retirement fund under Section 80CCD(1).
• Deduct expenses related to disability or dependent parents under Section 80DD or 80D.

Tax Calculation Examples for Both New and Old Regimes

Let’s consider a scenario where Mr. Akshat has a salary income of ₹10 lakhs. Below is a comparison of his tax liability under both the Old and New Tax Regimes:

• Income Details and Deductions:
• Gross Salary: ₹10,00,000
• HRA Exemption: ₹1,50,000
• Leave Travel Allowance (LTA): ₹40,000
• Children’s Education Allowance: ₹9,600
• Profession Tax: ₹2,400
• Investments in PPF (eligible for Section 80C deduction): ₹1,50,000
• Medical Insurance Premium (eligible for Section 80D deduction): ₹50,000
• Interest on Education Loan (eligible for Section 80E deduction): ₹55,000

Under the old tax regime, Mr. Akshat’s net taxable income is ₹4,93,000 after considering all exemptions and deductions. The tax payable on this amount is ₹12,150. However, under Section 87A, he is eligible for a rebate of ₹12,150 (since his total income is less than ₹5,00,000), bringing his final tax liability to ₹0.

While under the new tax regime, Mr. Akshat’s taxable income after the standard deduction is ₹9,50,000. The tax payable on this amount is ₹54,600. No rebate is available under Section 87A, making the total tax payable ₹54,600.

So, if you earn more than ₹10 lakhs, you can save on taxes through various sections of the Income Tax Act of 1961.

FAQs on How to Save Tax for Salary Above 10 Lakhs?