Best Salary Structure to save tax in India

Introduction:

Salaried people in India are most concerned about the income tax implications because they receive their salary after the deduction of TDS and they find themselves helpless on this issue. Every salaried taxpayer has only one question “How could he/she save income tax legitimately?”. The answer to this question is a proper salary structure along with availing maximum deductions available under the Income Tax Act. The salaried person should plan his/her salary structure in such a manner that he/she could reduce the tax burden legitimately. This article elaborates on various components of salary along with income tax implications associated with them. Let’s read…

What are the tax rates for salaried persons under Income Tax?

The salaries taxpayers can pay income tax under the old tax regime and new tax regime as per the Income Tax Act. The taxpayer has to opt for his preferred tax regime while e-filing ITR on the income tax portal. The tax rates under the new tax regime are lower as compared to the old tax regime but it is to be kept in mind that if you are opting for the new tax regime, you will not be eligible to get the benefit of various deductions and exemptions allowed under the Income Tax Act

Learn More on New Tax Regime under section 115BAC

What are the taxable components of the salary?

Salary derived by any employee consists of various components like basic pay, gratuity, bonus, commission, perquisites, leave encashment, PF, HRA, city compensatory allowance, daily allowance, etc. These all components are taxable under the Income Tax Act but these also carry exemptions in certain cases. The important thing for you is to identify those salary components which carry exemptions under the Income Tax Act so as to plan salary structure accordingly.

Now we will have a detailed analysis of various components of salary structure in the table below:

Nature of Salary Component	Taxability
Basic Salary	100% Taxable
Dearness Allowance	100% Taxable
Performance Bonus/ Commission	100% Taxable
House Rent Allowance (HRA)	The exemption towards HRA is available only in case you are living in rented accommodation. You will not get a 100% exemption towards HRA. The exemption towards HRA will be allowed as least of the following: Actual HRA Received 50% of salary (40% in case of non-metro cities) Rent Paid in excess of 10% of salary
Read More about: What is HRA, HRA Exemption & Deduction
Leave Salary during employment	100% Taxable
Salary Arrears	100% Taxable, however, you can avail tax relief under section 89
Learn about: How to claim tax relief on salary arrears
Overtime Pay/ Allowance	100% Taxable
Children Education Allowance	Children's Education Allowance will be exempted as the lower of: Rs. 100 per month per child (maximum 2 children) i.e. Rs. 1200 per child per year Actual Allowance Received Note: If the children of the employee get an education in the school run by the employer, the whole education expenditure is exempt. Therefore, this amount will be a part of the CTC of the employee but will not be considered for taxation purposes.
Food facility or Food vouchers	100% Tax-Free till Rs. 50 per meal Note: Some employers provide food coupons like “Sodexo” which can be used as payment at various food joints. Rs. 50 per coupon per meal shall be exempt.
Transport Allowance for commuting between the place of residence and the place of duty	100% Taxable, however in case of handicapped employees- exempt up to Rs. 3200 per month
Hostel Allowance	Hostel Allowance will be exempted as lower of: Rs. 300 per child (Maximum 2 children) per month Actual amount received
Medical Allowance	100% Taxable
City Compensatory Allowance	100% Taxable
Special Allowance	100% Taxable
Uniform Allowance	Exempt as the lower of: Uniform Allowance Received Actual amount spent
Academic Allowance Granted for encouraging academic, research, and training	Exempt as the lower of: Actual Allowance Received The actual amount spent by the employee
Helper Allowance Granted to meet cost incurred on a helper for the performance of duties	Exempt as the lower of: Actual Allowance Received Actual expenditure incurred
Travelling Allowance/ Daily Allowance Granted to meet the cost of travel/ daily charges on tour or transfer of duty	T.A./D.A. received by the employee shall be exempted to the extent of expenditure incurred by the employee towards travel/ daily charges
Conveyance Allowance Granted to meet expenditure on conveyance in performance of duties of employment	Exempted to the extent of actual expenditure incurred
Cab or Transport Facility for employees	If the employer provides a transport facility through a cab/ bus to the employee for to and fro to the office, the amount spent by the employer in providing the service will be a part of the CTC but the value of the perquisite for the taxation purpose will be nil.
Health Club Facility to employees	If the employer provides a health club/ gym facility to all employees, then the value of the perquisite shall be ‘Nil’ for taxation purposes.
Use of laptops and computers	100% tax-free; the value of perquisite shall be taken as ‘Nil’ for taxation purposes
Moveable assets other than laptops and computers	The value of the perquisite shall be taken as follows for the taxation purposes: If owned by the employer: 10% per annum of the actual cost of the asset If rented by the employer: Amount of rent actually paid less amount recovered from the employee.
Medical facility/ Insurance for employees	The value of medical treatment provided to an employee or to any member of his family in any hospital maintained by the employer shall not be taxable as a perquisite. Insurance premium towards the health of the employees under a scheme approved by the Central Government or IRDA
Phone & Broadband Bills Reimbursement to employees	100% tax-free to the extent of actual expenditure incurred by the employee
Motor Car facility with or without a driver to employees	100% tax-free up to Rs. 1800 per month for the car up to 1600CC (Rs. 2400 per month in case of the car above 1600CC) plus Rs. 900 every month for the driver’s salary
Cash Gift to employees	100% taxable in the hands of the employee
Gifts other than cash gifts or gift vouchers or tokens to employees	Tax-Free up to Rs. 5,000
Life Insurance Premium paid by the employer	The actual amount paid by the employer will be treated as a taxable perquisite.
Gratuity during employment	100% Taxable
Contribution to EPF by the employer	Employer’s contribution to PF up to 12% of the Salary (Basic + DA) is exempted from tax. There is a further capping of Rs. 7,50,000 on employer’s contribution to PF, superannuation fund, and NPS in aggregate. Any contribution exceeding Rs. 7,50,000 by the employer will be a taxable perquisite.

In addition to structuring the salary package in a proper manner, it is also important to take benefits of various deductions allowed by the Income Tax Act. Some of these deductions are as follows:

Deductions under Income Tax Act

Section	Nature of Deduction
80C	A maximum deduction of an amount up to Rs. 1,50,000 is allowed under section 80C on an actual payment basis in any of the following: Life Insurance Premium Public Provident Fund National Savings Certificate 5 Year’s Tax Saver FD Tuition Fees of children ELSS Funds Tax-saver Mutual Funds NPS ULIP Sukanya Samridhi Yojana PF contribution Housing Loan Principal
80CCD(1B)	Deduction for investment in NPS to the extent of additional Rs. 50,000 over & above Rs. 1,50,000 deduction u/s 80C
80D	Health Insurance Premium paid towards self, family, and parents. For Details Read: Deduction for Medical Insurance Premium under section 80D
80E	Interest paid on education loan is deductible from your salary without any ceiling
80G	Donations paid to eligible trusts or charitable organizations are deductible to the extent of 50% to 100% while calculating taxable income Read More: Deduction under section 80G
80GGC	Donations made to a political party or electoral trust are 100% deductible from your taxable income Read More: Deduction under section 80GGC
80GG	If you are not getting HRA but you are paying rent for residential accommodation, you are eligible to get a deduction under section 80GG up to an amount of Rs. 60,000. Read More: Deduction under section 80GG
24	Interest paid towards housing loan for the self-occupied house is deductible up to Rs. 2 lakhs while income tax return filing

Note: It is important to note that deductions under sections 80C to 80U are allowed only if ITR filing has been done by the taxpayer. In case no ITR has been filed, you will not be eligible to claim any such deductions.

Conclusion: Salaried persons should structure their salary in accordance with the above exemptions available under the law. Further, they should ensure appropriate investments to get the maximum deduction for which he/she is eligible. Also, a comparative analysis of tax under the old regime and new regime is important.

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