How to Save Tax for Government Employee

How to Save Tax for Government Employee

Save tax for  Govt job employees scheme is beneficial as compared to private jobs. That’s why everybody wants a government job.  However, Government also makes tax-saving investments to take the benefit of tax deductions and reduce the tax burden.

Public Provident Fund

  • This is one of the safest investment options with lesser risk.
  • However, the interest rate in Public Provident Fund (PPF) is higher than the market interest rate.
  • PPF has a lock-in period of a minimum of 15 years but one can take the loan from PPF after the fourth year.

General Provident Fund

  • General Provident Fund was popularly known as GPF is the government employees’ version of the Employees’ Provident Fund (EPF).
  • Hence, a portion of a government employee is deducted every month for GPF which is a compulsion but you can even give the order to deduct a higher amount than the compulsion minimum amount.
  • However, the TheGPF account offers higher saving than the normal saving account and it is completely safe because it is backed by the government itself.

LIC Policies

  • These are very popular among government employees.
  • It is a state-owned insurance and investment company and the most famous LIC policy is the Money-Back Policies
  • Theses policy comes with a tenor of 20 years and 25 years. It provides life coverage over the policy period and pays out survival benefits once after every five years.
  • If in case some unfortunate event takes place in your life then the sum that is assured of the policy is given to the nominee/beneficiary registered to the account.
  • The premium paid towards LIC policies is tax-deductible as per Section 80C provisions of the Income Tax Act, 1961.

Fixed Deposit

  • FD’s always pay more and the minimum lock-in period is of 5 years. The interest rate is higher in FD and with minimum risk factors involved.

ELSS

  • ELSS stands for Equity-Linked Saving Scheme (ELSS). They are quite risky than the other saving tax-saving investments because in ELSS the interest depends on the market conditions.
  • The lock-in period of ELSS is of five years.

Mutual Funds

  • Mutual funds are one of the most popular investment options these days.
  • In addition, Mutual fund investment is on the rise these days because of the increasing awareness among people as well as the ability of mutual funds to offer inflation-by-returns.
  • If you are ready to take some risk, then you can invest in equity funds.
  • However, If you are completely at risk, you can go with a debt fund. If you want to balance risk-reward, you can invest in hybrid funds.

Tuition Fees-

  • Your children’s schools/colleges fees will be liable for deduction. This is one of the best benefits of working as a government employee.

Bank Deposits– 

  • Saving money regularly in your bank accounts will not give you that much benefit. Hence for that, you have to make a fixed deposit or recurring deposit account.
  • Hence, If you have a lump sum of the amount with you that you can invest in FD and if you have to deposit a lesser amount on monthly basis then you can go for RD.

Income Tax Exemptions for Salaried Employees

Income tax deduction provides a range of opportunities for salaried class to save tax and with the help of these tax deductions and exemptions one cloud reduce his/her tax.

Income Tax Calculator

Income tax is calculated based on the tax slab. Your income tax is calculated after making necessary deductions and other taxes that you have already paid. An Income Tax Calculator is an online tool that will provide you an estimate of how much income you have to pay after you provide all the necessary details.

Also, read | What are Investment Strategies and the Next Generation Investors?

 

How to Save Tax for Salary Above 10 Lakhs

Well, there are many ways through which you can save income tax on your salary. However, you just need to choose the technique smartly to save tax on salary income.

However, before going forward let’s check the Income Tax Slabe Rate for FY 20-21 (AY 2021-22)

Income Tax Slab New Income Tax Slab Rates for FY 2020-
Rs 0.0 – Rs 2.5 Lakhs NIL
Rs 2.5 lakhs- Rs 3.00 Lakhs 5% (tax rebate u/s 87a is available)
Rs. 3.00 lakhs – Rs 5.00 Lakhs 5% (tax rebate u/s 87a is  available)
Rs. 5.00 lakhs- Rs 7.5 Lakhs 10%
Rs 7.5 lakhs – Rs 10.00 Lakhs 15%
Rs 10.00 lakhs – Rs. 12.50 Lakhs 20%
Rs. 12.5 lakhs- Rs. 15.00 Lakhs 25%
> Rs. 15 Lakhs 30%

If you invest up to 1.5 lakh

  • If you have invested in Public Provident Fund, Health Insurance, Bank Deposits, Mutual Funds, General Provident Fund, Fixed Deposits, Life Insurance, etc, or any other kind of provisions that provide tas exemption up to 1.5 lakh.
  • But if you follow the old school tax-paying method you will still lose a maximum of Rs 31,200.
  • Follow the new tax-paying regime to get some benefits.
  • The new tax regime will allow one to get benefit on Public Provident Fund, Health Insurance, Bank Deposits, Mutual Funds, General Provident Fund, Fixed Deposits, Life Insurance, Retirement Scheme, Rent Paid, and compensation if the company goes down.

If you avail a deduction of Rs 2.5 Lakh or more

  • Suppose if your annual income is between 15 to 20 lakhs and you claim a tax deduction of Rs 2.5 lakh then you have the option of choosing between the two regimes. As the tax payable will be more or less the same.
  • However, if you are focusing on tax saving for income above 15 lakhs and the amount of tax exemption you have asked for is more than 2.5 lakhs, then it makes sense to stick to the old method of tax calculation.
  • Let us understand this by looking at the tax calculation both ways for a person with an annual salary of Rs 20 lakh
Details Tax Calculation (Old) Tax Calculation (New)
Salary 20 Lakh 20 Lakh
Standard Deduction 50 Thousand NIL
Income Under Salary 19,50000 20 Lakh
Chapter 6 A Exemptions 1,50,000 NIL
Taxable Income 17,50000 20 Lakh
Income Tax 3,37,500 3,37,500
4 % cess 13,500 13,500
Tax  Payable 3,51,000 3,51,000

Source- CANARA HSBC OBC LIFE INSURANCE

 

How to Calculate Income Tax on Salary Example

Male/Female
Income Tax Rate
Upto Rs 2,50,000 NIL
Rs. 2,50,001 to Rs. 5,00,000 5 %
Rs. 5,00,001 to Rs. 10,00,000 Rs. 12,500 + 20% of Income exceeding Rs. 500,000
Above Rs. 10,00,000 Rs. 1,12,500 + 30% of Income exceeding of Rs 10,00,000
Senior Citizen
Income Tax Rate
Upto Rs.3,00,000 NIL
Rs. 3,00,001 to Rs. 5,00,000 5 %
Rs. 5,00,001 to Rs. 10,00,000 Rs.10,000 + 20% of Income exceeding Rs. 500,000
Above Rs. 10,00,000 Rs. 1,10,000 + 30% of Income exceeding of Rs 10,00,000
Very Senior Citizen
Income Tax Rate
Upto Rs. 5,00,000 NIL
Rs. 5,00,001 to Rs. 10,00,000 20 %
Above Rs. 10,00,000 Rs. 1,00,000 + 30% of Income exceeding of Rs 10,00,000

Source – ICICI PRUDENTIAL LIFE INSURANCE

 

How to Save Tax for Central Government Employees

Pension-

  • While the pension paid in installments is taxable to all employees of organizations after retirement, government employees benefit by taking a lump sum.
  • However, under the Income Tax Act, 1961, a special provision allows them to make lump sum pension tax-free at the time of their retirement.

Leave Encashment-

  • While retiring, a government employee may receive monetary compensation for any unused leave earned while working with the company.
  • The amount will be completely exempt from tax as no tax can be levied on leave for retirement by a government employee.
  • In the case of private-sector employees, only a limited amount is exempt from tax. Furthermore, it depends from firm to firm.

National Pension Scheme (NPS)-

  • It is a good option for those who are looking to build a retirement fund utilizing market-linked returns.
  • This scheme offers tax benefits to all the members but the central government employee enjoys more benefits.
  • The government has recently announced that the contribution of employers in NPS for the central government will increment from 10% to 14%.
  • The government amended Section 80 CCD (2) of the Income Tax Act, 1961, to allow government employees to claim an exemption on the total 14% of the amount contributed by their employers to the NPS. (But this provision is not applicable for private-sector employees)

Gratuity-

  • It is an amount paid by the employer to the employee as a note of thanks at the time of their retirement.
  • Gratuity is applicable only for those employees who have worked more than five years in a particular company.
  • Government employees had a benefit in gratuity too they don’t have to pay tax in gratuity.
  • However, the Gratuity that is paid in retirement or death of an individual is exempted from taxes.

Entertainment Allowances

  • Private sector people don’t get entertainment allowances but the central government employees enjoy the entertainment allowances.
  • The government employees get the special provision of taxes in entertainment allowances.
  • Government employees are allowed to debit the allowance from their gross salary by utilizing the minimum of actual allowance/one-fifth of the salary (excluding any allowance, benefits, or other perquisites) / ₹ 5,000.
  • This helps in reducing their overall tax burden.

 

Nikita Dhyani

Nikita Dhyani is a Content Writer at Ionic Digitech. A passionate content writer and has been using her content writing skills to develop various content related to financial and business-related topics. She has done BAJMC (Bachelors in media and mass communication and journalism) from Graphic Era University. Her specialties include - Content creation, Content development, Media managing, Communications skills.

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