Insurance

How to Devise a Tax-Friendly Salary Structure

Consider this situation;

You get a salary hike of 30 percent, but when the amount hits your bank account, there’s hardly any increase. This happens when your salary structure is flawed, and a lot of possible attempts at maximizing your takeaway amount is not made.

A thorough planning of your salary structure can go a long way in saving tax thus minimizing the tax outflow.

The key components of a salary structure are as follows:

  • Basic Salary
  • Allowances
  • Perquisites
  • Retirement Benefits/Contributions

Perquisites are fringe benefits offered by the employer to an employee and are paid by the employer himself. Therefore, we would avoid any discussion on this component as there is nothing which an employee can do to reduce tax liability with its help.

A lot of people are oblivious with respect to the kind of allowances they can get added to their CTC structures. A little more knowledge about the basic components will make the concept of tax saving clear.

  1. Basic Salary

This part of your income is fully taxable and also accounts for almost 40—50% of your total CTC. It will determine the percentage of other deductibles like HRA, PF, and Gratuity and so on.

An entry level employee must keep his basic pay minimum and divert more of his income towards allowances in order to increase the takeaway salary. On the other hand, a senior level employee must save tax and therefore should keep basic salary high and work on getting tax benefits.

  1.     Allowances

According to the laws laid down by the Income Tax Act, a number of allowances are exempt at the source and therefore their inclusion would mean reduced tax liability. But generally, allowances are taxable and can help in tax deduction if actual bills are placed.

You must be aware of common allowances like HRA, LTA (Can be claimed twice in a block of four years), and Medical Allowance (Exemption up to Rs 15000 per year), but it doesn’t stop there. To know more about allowances, read up Rule 2BB of income tax rules to understand them in totality.

Some of the least known allowances which you can ask for inclusion in your CTC structure are Children Hostel Allowance (Exemption up to Rs 300 per month for two children), Soft Furnishing Allowance, Reimbursement of Conveyance Expenses, Research Allowance (Exemption on actual expenses), tour Allowance (fully exempted), Meal Pass (Rs 50 per meal and 2 meals maximum, is tax free) and so on.

  1.     Retirement Benefits/Contribution

This is where the elements of basic pay and Retirement Contributions intersect. A higher basic pay would mean higher PF contributions by the employer and employee. It is 12 % of the Basic Salary and under Section 80C of the Income Tax Act, can be used as a tax saving option. The exemption limit according to Section 80 C is 1 lakh and therefore, the various retirement contributions can be used to avail tax exemption.

Conclusion

So, this is how one can reduce their tax liabilities by simply making changes in the CTC structure and including some lesser-known allowances and contributions to it. Many people are uncomfortable with contributing to the various retirement benefit plans.

However, by opting for smart retirement plans under both government and private policies, one can save a lot of money for the future while also pay fewer taxes to the government.

Allowances and Reimbursements also help in the long term as one has the option of getting several exemptions under them. If one wants to save money, these aspects of your CTC structure must be given attention.

The government has left many doors open, but it is up to us to avail of these facilities. An expert like a CA or a financial adviser can educate you more on these already existing benefits.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s