Salaried employees in India can save more than 4% to 10% in taxes with careful tax planning[Survey]

by · August 1, 2012

[The following survey is done by TaxSpanner.  The study covered employees from over 500 corporates in major cities, including the Delhi NCR, Mumbai, Chennai, Bangalore and Hyderabad. ]

TOP 5 REASONS WHY YOU COULD BE PAYING MORE TAX THAN YOUR PEERS:

REASON 1: IGNORING HRA EXEMPTION – Around 27% of salaried employees do not claim HRA exemption.

Anil and Karan may be getting the same salary, but one of them may outsmart the other. Both Anil and Karan live with their own parents. Anil pays household expenses to his parents on a monthly basis. aran simply makes this payment as rent to his parents who (being older) fall in a low-income-tax-slab. And, Karan claims HRA exemption against this. Now, that’s tax optimization- tax saving, the smart way.

As per the report Salaried individuals having income more than Rs. 10 Lac are less likely to claim HRA exemption than taxpayers in the lower salary brackets. It is possible that many of them are not aware that both HRA and home loan benefits can be claimed simultaneously.

REASON 2: NOT CLAIMING MEDICAL INSURANCE PREMIUM DEDUCTION – About 74% employees do not claim deduction under Section 80D.

Given how Anil keeps falling sick every now and then, he would have saved a lot of money. How? All he needed to do was buy himself a mediclaim policy. Let the insurer bear the medical expenses. The premium paid for the policy can be claimed as deduction.

The report reveals that while 38% of filers in Bangalore have taken medical insurance (the maximum in any city), only 13% of NCR filers have claimed this deduction. This indicates how 80D claim is underutilized in general. Only 19% of those with income upto Rs. 5 Lac take medical insurance, when they are the ones who can benefit the most from it in case of any emergency.

REASON 3: FAILING TO CAPITALIZE ON HOME-LOAN TAX BENEFITS – About 81% of employees do not own a house, despite having an average salary of Rs. 5 lakhs p.a.

Anil tries to save every rupee of his salary that he can, hoping that someday he’ll be able to buy his dream home. But, property prices in the metro kept him from owning one. Karan also has a dream to buy a house. He made it come true. After making a decent sum of money, he took a loan and bought a home in his hometown. That’s not all. He is getting a regular rental income out of it and claiming home-loan tax benefits.

REASON 4: NOT INVESTING IN TAX SAVING INSTRUMENTS – About 65% employees have invested less than the exemption limit under Section 80C.

Anil always wondered why his TDS was more as compared to Karan, when he and Karan earned the same salary. On some probing, Anil found that while he kept his extra earnings lying idle in the savings account, Karan invested them in tax saving Fixed Deposit. This way, Karan not only saved a significant amount of tax but also earned a higher return. Karan was also able to have a long term investment, against which he could raise a loan in case of emergency.

REASON 5: NOT REPORTING INCOME FROM OTHER SOURCES- Almost 94% of employees, who are liable to pay more than 10% of their taxable income as tax, do not report income under the head “Other Sources”.

The Income Tax Department sent Anil a notice. What had happened was that Anil made the mistake of not reporting his income from bank interest. He assumed that he did not need to declare this income as the bank had already deducted TDS on it. The bank had deducted TDS at 10%. However, Anil fell in the 20% income tax slab. Thus, he had to pay tax apart from TDS. The Income Tax Department discovered this on scrutiny and sent Anil a notice, asking for a penalty of 300% of the tax evaded.

Karan made it a point to report income from all sources, including bank interest, dividends, prize winnings, etc. while filing his tax returns. As many as 87% salaried individuals having income more than Rs. 15 Lac do not disclose interest income earned on their savings bank account.

The report also brings out some interesting trends on how India pays its taxes

TREND 1: GENDER

  • Females in Chennai are the best tax planners. Even at an average income of Rs. 4 Lac, their Average Tax Ratio is only 2%, much lesser than their counterparts, as well as males, in other cities.
  • Among males, those in NCR have the best tax ratio of 5%, even at an average income of Rs. 6 Lac. Those in Bangalore have the worst tax ratio of 8%, at an average income of Rs. 7 Lac.

TREND 2: GEOGRAPHY

  • Even though the salaried employees in Mumbai are earning 40% more than their counterparts in Chennai and NCR, they are paying lower portion of their salary as tax.

TREND 3: HOUSE OWNERSHIP

  • The Average Tax Ratio of a house owner is high as his average income (Rs. 11 Lac) is also high, as against that of a non house owner (Rs. 5 Lac).
  • At 40%, Bangalore has the highest number of house owners followed by Hyderabad at 17%.
  • Among those having an income below Rs. 5 Lac, only 6.8% own a house. Also, only 20% house owners are below 30 years of age. This indicates that there are only a few people who recognize owning a house as a smart investment and tax planning option in the beginning of their career.
  • Interestingly, the largest percentage of house owners is in the age bracket of 31-35 years at 42%.
  • Percentage of house owners in the age group 21-30 is 20% with 21-25 contributing only 1%. This percentage can be improved with careful tax optimization.

TREND 4: SALARY

  • While one third of salaried individuals earning up to Rs. 5 Lac pay ZERO tax, the Average Tax Ratio of the remaining two third is 3%.
  • Salaried individuals in NCR and Bangalore pay lower tax as compared to their counterparts in other cities.
  • Average Tax Ratio of salaried individuals earning Rs. 5 to 10 Lac is 9%, however there are only 0.6% people in this category with “0%” Tax Ratio.
  • Only 56% salaried individuals own a house despite earning more than Rs. 10 Lac as income.
  • About 8% of salaried individuals earning more than Rs. 10 Lac disclose interest income earned from savings bank account.
  • As high as 92% salaried individuals earning more than Rs. 10 Lac claim full exemption u/s 80C. However, only 30% of those earning less than Rs. 10 Lac exhaust the full limit of Rs. 1 Lac.

TREND 5: SELF ASSESSMENT TAX

  • About 4% of salaried individuals have paid an average amount of Rs. 15,000 as Self-Assessment Tax.
  • As many as 57% of salaried individuals could have avoided paying Self-Assessment Tax by informing their employers about having another Form 16.

TREND 6: ITR FILING PATTERN

  • Late filing doesn’t reflect complexity in the financials of the late filers. Around 96% of late filers had no other income except salary.
  • Among those who file their returns late, about 56% are below 30 years of age.
  • Bangalore leads in terms of late filers at 39% followed by NCR at 24%. On the other hand, people from Hyderabad and Chennai contribute about 9% each to the late filers.
  • Of the total return filers in Bangalore, about 45% file their returns after 3rd week of July.
  • Only 39% of the return filers in NCR region file their returns post 3rd week of July.
  • Male filers are less likely to file their returns late as compared to the female filers.

 

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