Tax planning is an honest and rightful approach to reduce tax liability. It implies compliance with the taxation provisions in such a manner that full advantage is taken of all tax deductions and exemptions. Since, every tax payer wishes to retain the maximum part of his earnings, rather than parting with it and facing resource crunch, it would be his benefit to invest in such a way that he avails the maximum deduction from his income.
An individual is eligible to take deduction from his income maximum up to Rs. 1 Lac, if he invests under Sec 80 C of IT act. Moreover the benefits u/s 80C+80CCC+80CCD exceed tax saving benefits over and above Rs 1 Lac.
There are many other provisions for deduction in respect of medical insurance premium, medical treatment, repayment of loan taken for higher studies, donations, rent paid, royalty income, investment in long-term infrastructure bonds, etc.
Apart from deduction, there are many sources of income which are exempt from tax wholly or to some extent; like HRA (house rent allowance), gratuity, commuted pension, etc.
So, if an employee has an opportunity to plan his salary package then he should keep the following aspects in view:-
The employee should opt for division of salary into basic pay and allowance and should not opt for the consolidated salary because some of the allowances are exempt from tax up to a certain extent.
Dearness allowance (DA) should form part of the retirement benefits. This will not only increase the employee's retirement benefits but also reduce his tax incidence in respect of HRA, gratuity, commuted pension, etc.
Any commission payable should be based on turnover so as to form part of salary. This will also reduce the tax incidence.
The employee's contribution to RPF (recognized provident fund) should be 12% of salary as it is exempt up to this limit.