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In the post-pandemic world, remote work has become the new normal, with over 70% of the global workforce working remotely at least once a week. For many skilled professionals in India, this has opened up exciting opportunities to work for foreign firms while enjoying the comfort and flexibility of working from home. However, earning a handsome salary from an overseas employer comes with a significant drawback - a large portion of your income is lost to taxes in India.
Did you know that the salary you receive for services rendered in India is taxable, regardless of your residential status or where the payment is received? Moreover, with the new tax regime introduced in 2020, individuals earning above ₹15 lakhs per annum now fall into the 30% tax bracket. This means that for every ₹100 you earn, ₹30 goes to the government as income tax.
But what if there was a way to optimize your taxes and take home a larger portion of your hard-earned money? This is where an Employer of Record (EOR) comes in. An EOR acts as your legal employer in India, handling all the complex tax regulations, statutory contributions, and compliance requirements on your behalf. By partnering with an EOR, you can not only reduce your tax liabilities but also avail of certain tax exemptions and benefits under Indian laws.
In this blog post, we will delve into how an EOR can help you optimize your taxes as a remote worker in India. We will explore the various tax implications, exemptions, and benefits available, and how an EOR can simplify the process for you. So, if you're ready to take control of your taxes and maximize your take-home pay, read on!
Restructuring the salary can lead to a significantly lower tax.
In India, employees can optimize their taxes through various methods. Here is a detailed list of some common tax optimization strategies:
Section 80C of the Income Tax Act, 1961, is one of the most popular and widely used sections for tax-saving investments in India. It allows individuals and Hindu Undivided Families (HUFs) to claim tax deductions from their gross total income, thereby reducing their taxable income. The maximum tax deductions limit under Section 80C is ₹1.5 lakh per financial year. Here are some key investment options and expenses that qualify for deductions under Section 80C:
The National Pension System (NPS) is a government-sponsored pension scheme that allows individuals to make contributions towards their retirement corpus. Contributions made to the NPS are eligible for tax deductions under Section 80CCD of the Income Tax Act, 1961.Under Section 80CCD, there are two main sub-sections:
*The limit of ₹1,50,000 deduction is inclusive of Section 80C, 80CCC and 80CCD(1) deductions. This means that a maximum of ₹ 1,50,000 can be claimed under all three sections combined. Section 80CCD(1B) deduction of up to₹ 50,000 is over and above this limit. Therefore, under Sections 80C, 80CCC, 80CCD(1) and 80CCD(1B), a maximum deduction of ₹ 2,00,000 can be claimed.
It's important to note that the deduction under Section 80CCD(1B) is available only if the individual opts for the old tax regime. If they choose the new tax regime introduced in the Union Budget 2020, they will not be eligible for these additional tax deductions.
The Income Tax Act, 1961, provides for certain allowances and perquisites received by employees from their employers to be exempt from taxation, subject to specific conditions and limits. These tax-free allowances and perquisites can help employees reduce their taxable income and overall tax liability. Here are some common tax-free allowances and perquisites:
These tax-free allowances and perquisites are subject to specific rules and conditions laid down by the Income Tax Act. Employees should carefully review their eligibility and compliance requirements to avail of these benefits. Proper documentation and adherence to the prescribed limits are essential to ensure that these allowances and perquisites remain tax-exempt. By leveraging these exemptions, employees can effectively reduce their taxable income and optimize their tax savings.
Section 80D of the Income Tax Act, 1961, provides deductions for premiums paid towards health insurance policies. This section aims to encourage individuals to secure health insurance for themselves and their families. The deductions available under Section 80D are as follows:
For example, if an individual pays ₹20,000 for their own health insurance and ₹30,000 for their senior citizen parents' health insurance, they can claim a total deduction of ₹50,000 (₹20,000 + ₹30,000) under Section 80D.
House Rent Allowance (HRA) is a component of the salary provided by employers to employees to cover rental expenses. Employees living in rented accommodation can claim HRA exemption under Section 10(13A) of the Income Tax Act, 1961. The exemption is calculated as the least of the following three amounts:
For example, if an employee in a metro city receives an HRA of ₹1,00,000, has a basic salary of ₹3,00,000, and pays an annual rent of ₹1,20,000, the HRA exemption would be calculated as follows:
The least of these amounts is ₹90,000, which would be the exempted House Rent Allowance (HRA). The remaining HRA (₹1,00,000 - ₹90,000 = ₹10,000) would be taxable.
The standard deduction is a flat amount that is deducted from the gross salary of salaried employees, reducing their taxable income directly. Introduced in the Union Budget 2018, the standard deduction replaced the earlier exemptions for transport allowance and medical reimbursement.
As of the current financial year, the standard deduction available to all salaried employees is ₹50,000 per annum. This deduction simplifies the tax calculation process and provides a straightforward way to reduce taxable income without the need for specific documentation or proof of expenses.
For example, if an employee has a gross salary of ₹6,00,000, the taxable income after applying the standard deduction would be ₹5,50,000 (₹6,00,000 - ₹50,000).
Leave Travel Allowance (LTA) is a component of the salary package provided by employers to cover travel expenses incurred by employees while on leave. LTA exemption is available for travel within India and can be claimed for the employee and their family members. The exemption is subject to certain conditions and limits:
For example, if an employee incurs travel expenses of ₹30,000 for a family trip within India, they can claim this amount as LTA exemption, provided it meets the specified conditions.
Section 24 of the Income Tax Act, 1961, allows individuals to claim deductions on the interest paid on home loans. The tax deductions are categorized based on the type of property:
For example, if an individual pays ₹2.5 lakh as interest on a home loan for a self-occupied property, they can claim a deduction of ₹2 lakh under Section 24. If the property is let out, the entire ₹2.5 lakh can be claimed as a deduction, subject to the overall loss set-off limit.
Section 80G allows tax deductions for donations made to specified charitable institutions and funds. Deductions range from 50-100% of the donated amount, with or without qualifying limits based on the recipient organization. Key categories include 100% deduction without limit for PM Relief Funds, 50% without limit for institutions like PM's Drought Relief Fund, 100% deduction up to 10% of income for local authorities/Olympic Association, and 50% up to 10% for other approved charities. Donors must obtain receipts with details like amount, organization registration number to claim the deduction in their tax returns.
Section 80TTA provides a deduction up to ₹10,000 per financial year for interest earned on savings accounts with banks, cooperative societies, and post offices. It is available to individuals and HUFs, excluding senior citizens who qualify under 80TTB. Interest from fixed/recurring deposits and corporate bonds is ineligible. Taxpayers must report the interest under "Income from Other Sources" and claim the deduction while filing returns.
Section 80E allows an unlimited deduction for interest paid on education loans taken from approved institutions for the higher education of self, spouse, children, or legal wards. The deduction can be claimed for 8 years starting from repayment commencement or until interest is fully paid, whichever is earlier. Proof of interest payment like bank certificates must be provided with tax returns.
Section 80DDB provides deductions for medical expenses incurred for treatment of specified diseases like cancer, AIDS, and neurological disorders for self or dependents. The maximum deduction is ₹40,000 for non-senior citizens and ₹1,00,000 for senior citizens, subject to actual expenses. Prescriptions from specialist doctors with details like the patient's name, age, and disease are required along with tax returns to claim the deduction.
A1. Life insurance premiums are eligible for tax deductions under Section 80C up to ₹1.5 lakh per annum. Additionally, the maturity proceeds are tax-exempt under Section 10(10D), subject to certain conditions.
A2. Yes, you can claim tax deductions on your home loan interest under Section 24(b) up to ₹2 lakh per annum for a self-occupied property. The principal repayment qualifies for deduction under Section 80C up to ₹1.5 lakh per annum.
A3. Section 80C allows you to claim deductions up to ₹1.5 lakh per annum on investments like Public Provident Fund (PPF), Employee Provident Fund (EPF), life insurance premiums, principal repayment of home loans, and more.
A4. Yes, you can claim deductions under Section 80D for health insurance premiums paid for self, spouse, children, and parents. The maximum deduction limit varies based on the age of the insured individuals.
A5. Some major income tax deductions for salaried individuals include standard deduction, deductions under Section 80C, Section 80D (health insurance premiums), Section 80E (education loan interest), House Rent Allowance (HRA), and Leave Travel Allowance (LTA).
A6. Yes, you can claim deductions under Section 80G for donations made to eligible charitable organizations, subject to certain limits and conditions.
A7. You can save tax on your income by investing in tax-saving instruments like PPF, EPF, life insurance plans, and ELSS mutual funds, which are eligible for deductions under Section 80C. Additionally, you can claim deductions for expenses like home loan interest, health insurance premiums, and education loan interest.
A8. Some popular tax-saving investment options under Section 80C include PPF, EPF, life insurance premiums, ELSS mutual funds, National Savings Certificate (NSC), and principal repayment of home loans.
A9. For the financial year 2023-24, the basic tax exemption limit for income from salaries is ₹2.5 lakh for individuals below 60 years of age and ₹3 lakh for individuals aged 60 years and above but below 80 years.
A10. Yes, senior citizens aged 60 years and above are eligible for higher tax exemption limits and deductions. For instance, they can claim a deduction of up to ₹50,000 on interest income from savings accounts under Section 80TTB.
A11. For individuals whose accounts are not required to be audited, the due date for filing income tax returns is July 31 of the assessment year. For individuals whose accounts need to be audited, the due date is September 30 of the assessment year.
A12. If you file your income tax return after the due date but before December 31 of the assessment year, you may have to pay a late filing fee of ₹5,000. If you file your return after December 31, the late filing fee is ₹10,000.
A13. Salaried individuals receiving HRA as part of their salary can claim exemption on the least of the following: actual HRA received, rent paid minus 10% of salary, or 50% of salary (for metro cities) or 40% of salary (for non-metro cities).
A14. Yes, you can claim an additional deduction of up to ₹50,000 under Section 80CCD(1B) for investments in the NPS, over and above the deduction of ₹1.5 lakh under Section 80C.
A15. You can save tax on your long-term capital gains by investing the proceeds in specified bonds or purchasing a new residential property within the prescribed time limits. Additionally, you can claim indexation benefits to reduce your taxable long-term capital gains.
A16. Yes, you can claim deductions under Section 80CCC for contributions made to certain pension funds, subject to a maximum limit of ₹1.5 lakh per annum.
