Your salary structure has various components. The taxation of each component varies as per prevailing tax rules and regulations. Most employers provide some flexibility to employees to structure some part of their total salary packet. It is here that your knowledge comes into play. If you can structure your salary wisely, you can create a delicate balance between your take-home pay and your overall tax liability. This article contains some simple tips to help you structure your salary and reap the maximum advantage.
#1: Opt for House Rent Allowance:
Suppose you are living on rent and receiving HRA as part of your salary. In that case, you must provide rent receipts to your employer to claim a tax deduction on this salary component. As per the Income Tax Rules. the least of the following is exempt from tax:
- 50% of (Basic salary + Dearness allowance) – applicable if you live in a metro city or 40% of (Basic salary + Dearness allowance) – applicable if you live in a non-metro city
- Actual rent paid minus 10% of (Basic salary + Dearness allowance)
- Actual HRA received from the employer
Please note that if you live on rent and not receiving HRA as part of your salary, then you can claim a tax deduction for the rent paid under Section 80GG subject to conditions.
#2: Opt for Leave Travel Concession:
Suppose you love travelling and do significant domestic travel every year. In that case, you can allocate a specific chunk of your salary towards this component. You will need to provide the bills for travel and stay to your employer to claim this amount as tax-free. An important point is that the LTA concession applies only to domestic travel and for the employee and his family members only. Any two journeys in a block of 4 years will be exempt. You should also read up on your employer’s policy on LTA for any additional guidelines/conditions. Also, make sure that you declare this amount in the investment declaration at the start of the year. This will help reduce the TDS amount deducted from your monthly salary and result in a higher take-home salary.
#3: Claim reimbursements:
Reimbursements are a perfect way to reduce tax liability on your salary income. Basically, when you make certain official expenses like telephone, hotel, conveyance, etc., you can furnish bills to the employer. This will make the amount tax-free in your hands. The only side effect of this approach is that your take monthly home salary will be lower to the extent that you opt for these reimbursements. Employers generally allow specific time windows at various times of the year to allow employees to submit their bills. For the amount not supported by a bill by the end of the year, the employer shall deduct the applicable tax and pay out the amount as part of your salary.
#4: Investment in National Pension Scheme (NPS):
Suppose you opt for the old tax regime. In that case, investment in NPS also qualifies for an additional tax deduction of INR 50,000 under Section 80CCD (1B) of the Income Tax Act. This is over and above the INR 1.5 lacs tax deduction limit under Section 80C. For a person falling in the 30% tax bracket, this means an extra tax saving of around INR 15,000 per year. The main benefit of investing in NPS is that it is a super low cost and efficient investment. You get a variety of asset allocation and fund options to choose from. It is also a true-blue retirement product that systematically helps you plan your most important financial goal, i.e., retirement.
#5: Don’t miss the perquisites:
As you go up in the hierarchy, perquisites in salary structuring become more and more critical. The company can offer certain employee benefits like a leased car, mobile phone, educational loan, medical facilities, etc. There are specific tax rules for the taxability of each perquisite. For example, you can choose to opt for meal vouchers as part of your salary. As an employee, you are entitled to INR 50 per meal tax-free. However, note that this benefit is not available if you choose to be governed by the new tax regime. An intelligent restructuring of perquisites can be a win/win situation for both employer and employee. For the employee, structuring can mean a big difference in terms of the net taxability of salary income. This initiative can act as a differentiator for the employer to attract and retain top-quality talent in the organisation.
Beyond a point, an employee cannot control the amount of CTC that she earns at a given point in time. However, she has every right to take advantage of salary structuring opportunities given by the employer to reduce the tax liability. The employee can use this saving to invest in the right avenues and create a significant corpus of wealth over time. At the same time, she also needs to upgrade her knowledge of ever-changing tax laws. This will help her stay one step ahead of the game and grab any new tax-saving opportunities as they arise.
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