The Union Budget 2021 has left the income tax rates untouched; this means the announcements made during the last Budget will apply.
Accordingly, in Budget 2020, a new tax regime was announced for FY 2020-21. However, options were given to either pay income tax as per new tax regime at lower rates wherein they forgo some exemptions and deductions or continue to pay income tax under existing rates. In the old regime, rebates and exemptions continue but the taxes are at a higher rate.
As per the new regime, the highest slab is 30 per cent tax rate for a salary of over Rs 15 lakh. The new regime is beneficial for those who have taxable income of up to Rs 15 lakh while high income earners who earn beyond Rs 15 lakh may do better to stick to the old regime. Tax payers have till April 1, 2021, to choose their tax regimes. The new regime does not allow common exemptions or deductions such as LTA, HRA, conveyance, children’s education allowance, standard deduction on the salary, professional tax, interest on housing loan and deductions under 80C, 80D, 80E among others.
Let’s take a situation where your salary is in the Rs 20-lakh range. You are a high earner as per the tax slab considerations because your applicable income tax rate under the new regime will be 30 per cent, which happens to be the highest. Even under the existing regime, this is the tax rate for your income. So, if you were to do some tax planning, you would need to consider the salary break-up first for exemptions and tax credits for high income earners. Here are tax strategies for high income earners 2020 IT payers need to focus on:
House rent allowance (HRA):
The employer may provide HRA if you live in a rented home. The amount of rent exempt is the least of three factors: actual HRA you have received, 40 per cent of your salary or 50 per cent in the case of a mero, rent paid minus 10 per cent of the salary.
Your employer may reimburse Rs 1,800 every month if the car is less than 1600 cc and Rs 2400 monthly for cars bigger than that, apart from providing Rs 900 if the driver is provided by the employer. Companies may provide you with this option of tax savings for high income earners India allows, as you climb the ladder. If it is a company owned car and it is solely used for official reasons, you have no tax liability. However, you may need to provide records such as mileage, bills and maintenance-related expenses. You may also have to declare/certify that you are using it for official reasons.
Food coupons are taxable but are exempt up to Rs 50 for every meal. If the calculation is based on a square meal for 22 days (working), the monthly exemption adds up to Rs 2,200 which converts into over Rs 26,000. This is one more answer to the question of how to reduce taxes for high income earners India is home to.
Reimbursement on mobile, books, periodicals:
You can claim reimbursement which is tax-free on the amount that the salary package provides or the bill, depending on which is lower. Books and periodicals are also tax-free reimbursable along the same lines.
Leave travel allowance:
LTA exemption can be claimed twice in a block of four years typically for employees but the exemption is not inclusive of costs such as food, entertainment, leisure or shopping. Domestic travel is covered under LTA.
Salaried employees can also claim a standard deduction of Rs 50,000 in a year.
Health club facility:
If the employer provides this facility to employees across the board, then it is not taxable as it is considered a perk.
Thanks to these tax credits for high income earners, it becomes important to seek a salary structure that helps you maximise savings.
Tax deductions for high income earners
Apart from these exemptions, you can claim deductions under Section 80C of up to Rs 1.5 lakh. You can opt for tax saving schemes such as equity-linked savings schemes, tax-saving fixed deposits, public provident fund (PPF), post office deposits, home loan principal payment, tuition fees, and National Saving Certificate, among others. Under Sec 80CCD, there are Sec 80CCD (1) and 80CCD (2), you can opt for National Pension Schemes where the money you deposit is invested in many types of securities including equity. If you were to open a Tier 1 account, you can invest up to Rs 2 lakh and claim a deduction for Rs 1.5 lakh. In a Tier 2 account, an extra deduction can be availed of Rs 50,000. Both put together, you can claim a deduction of Rs 2 lakh. To open a Tier 2 account, you would need to have a Tier 1 account. This answers a major question on how to pay less taxes on high income.
As per Budget 2021, a major change is the interest taxation on employees’ provident fund (EPF). If the employee contribution to EPF is over Rs 2.5 lakh for that year, interest is taxable in the same way as fixed deposits are. This provision will be made applicable from April 1, 2021. Also, if the total annual premium paid for unit-linked insurance plans (ULIPs) issued after February 1, 2021, is over Rs 2.5 lakh, the amount at maturity will be taxed at 10 per cent if the gain is over Rs 1 lakh and is long-term. The taxation would be 15 per cent if it is a short term gain. If you already have a ULIP before February 1, these changes won’t be applicable.
The new EPF move is aimed at taxation for high depositors, wherein at least 12 per cent is deducted as PF and the employee contributes an equal 12 per cent. So, if you earn more than Rs 20.8 lakh annually, the interest on the EPF will be taxed.
Under Section 80 D, tax deductions for high income earners include premiums paid towards medical insurance to cover yourself, family and dependent parents. The limit for Section 80D deductions is Rs 25,000 for self and family‘s premium payment. For parents who are senior citizens, deductions of up to Rs 50,000 can be claimed. If you and parents are over 60, then the limit could extend to Rs 75,000.
There are also tax benefits for house property available under Section 24 of the IT Act. Home owners can seek deduction of up to Rs 2 lakh on home loan interest if owner/family resides in the property. If the property is rented out, entire interest on a home loan is allowed for deduction. The tax deduction will be reversed if you sell the property within 5 years. Also, if you have taken a home loan for buying property but live in a different rented house, you can claim HRA.
There is another option for tax deductions for high income earners. This is by way of making donations under Section 80G. You can claim deductions in the range of 50 to 100 per cent, depending on which donation you make. You can choose some organisations or funds that don’t have any qualifying limit such as the Prime Minister’s National Relief Fund, for example, to claim 100 per cent deduction.
If you are a high income earner, you would need to look into all sections carefully and spend some time planning your taxes. You would also need to look at your salary structure carefully as you plan your taxes and claim tax credits for high income earners if you are one of them.