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How To Save Tax On Your Variable Pay

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A big fat salary can get reduced manifold after taxation. One way to hold on to the money from slipping away is by getting your salary restructured to pay more in terms of allowances and perquisites. Reimbursements such as travel expense and telephone bill and contributions to PF and ESI are tax free.

However, many companies indulge in making variable payments which are given out as bonuses and performance incentives. These are usually given out in the form of profit sharing, tangible gifts, incentives and financial support for higher education.

How variable salary is taxed?

The variable pay constitutes a significant part of the salary structure and is completely taxable in the hands of the employee, same as the fixed component. It is important for an employee to track the expected variable pay to ascertain the possible tax liability. Once you have got the estimates, here are some tax saving options you could explore to reduce your tax liability.

Clear off debts

First things first, if you have high interest debts in your books, you must use your variable income, especially the annual bonus, to clear off such outstanding amounts. It will not just save you a good deal of interest outgo but also ensure your CIBIL score is in place. You must prioritize on paying off personal loan and credit card debt as the interest rates are relatively high on these loans and there are no associated tax benefits. Student loan and home loan can follow. Also check on pre-payment charges before you get on to it.

Invest in tax-saving schemes under Section 80C

A lump sum amount always comes handy in making last minute investments to save taxes. You could enjoy exemptions up to Rs. 1.5 Lakh through investments eligible under Section 80C.  Such investments include ELSS, PPF, five-year-long fixed deposits with banks and post office, tuition fees paid for up to two children. If you have a daughter who is less than 10 years of age, you can invest in Sukanya Samriddhi Scheme to earn an interest of 8.6% and avail exemption under Section 80C.

Invest in NPS

The national pension scheme (NPS) allows you to save another Rs. 50,000 over and above the Rs. 1.5 Lakh eligible under Section 80C. This scheme is covered under Section 80CCD (1b).

Buy health insurance

If you have not bought health insurance for yourself and family yet, you can use the variable pay to buy it. It can help you save taxes up to Rs. 60,000 if you are a senior citizen and are paying premium for parents who are senior citizens. This scheme is covered under Section 80D of the Income Tax Act.

Boost your corpus to buy a house

The home loans are relatively cheap now and it comes with an additional tax benefit of Rs. 50,000 for the first-time buyers. So, if your loan is less than Rs. 35 Lakh and your property costs less than Rs. 50 Lakh, you could get a deduction of up to Rs 2.5 Lakh on interest payment. So, if you have plans to buy a house, use your variable pay to increase the size of your fund to make down payment.

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