When employees demand a salary hike, they forget that the amount goes away into paying the income tax. Very few decide on their salary structure to minimise their tax liability. It is always advisable that one should choose the tax-saving options as per their salary bracket.
Let at look at the basics you should consider when you get an opportunity to revise your salary structure for tax saving purposes.
Choose the Right Tax Regime
The new tax regime has more slabs with lower tax rates, and all the major exemptions and deductions available to taxpayers in the old regime are not allowed if the new one is chosen. Those who don’t have any savings, can opt for the new tax regime.
“If the advantage of lower rates in the new tax regime outruns the benefit of the exemptions and deductions available under the old tax regime, the taxpayer can then choose the new tax regime. To know which tax regime is better, the taxpayer should calculate the income tax liability at the applicable normal tax rates, i.e. at old tax slab rates, after availing all the eligible exemptions and deductions from their income,” said Archit Gupta, CEO and founder of Clear, as quoted by Business Standard.
Individuals are allowed to claim deduction under Section 80C up to Rs 1.5 lakh, house loan interest, NPS contribution among others.
Certain components of the salary such as House Rent Allowance (HRA), conveyance allowance, leave travel allowance are exempted up to a certain limit.
According to a tax filing website, Clear, most taxpayers benefit from the old tax regime when they maximise section 80C and avail tax benefits available in the salary structure.
Salary Components You Should Consider
Basic Salary: It is utilised to calculate the tax of an individual. It is advisable that the basic salary should not be more than 40% of the CTC. Keeping the basic salary low will reduce other constituents of the salary, an expert quoted as saying by the Business Standard.
Tax-Exempt Investments: One can look for options such as Employees’ Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity-Linked Savings Scheme (ELSS) offer substantial tax reductions.
Flexible Benefits: Allowances such as medical insurance, meal vouchers, car allowance can be reimbursed from the company to avail tax benefits.
Bonuses: Negotiate on performance-based bonuses and non-monetary prerequisites like company’s accommodation, vehicle, club memberships. These may have specific tax implications.
Home Loan: If an individual has applied for a home loan, the interest can be claimed as a deduction under Section 24 of the Income Tax Act.
Salary Splitting: If an individual’s family member is falling in lower tax bracket, he/she can explore opportunities to split his/her income by investing in the name of such family member, as long as it’s done within legal limits.
Allowances to Look For
Reimbursements can be added to the salary structure to reduce net taxable income. For instance, food coupons, fuel, telephone or mobile reimbursements are some of the components.
Let’s look at the tax benefits of these allowances.
HRA: Partially exempted if an employee is living in a rented house
Child Education Allowance: Up to Rs 100 per month per child for a maximum of two children
House Expenditure Allowance: This is granted to employees for expenses incurred on hostel fees of their child. Up to Rs 300 per month per child up to two children is exempted
Leave Travel Allowance: You can claim LTA if you go on a vacation subject to exemption limit and conditions as specified under the Income Tax Act, 1961
Food Coupon: Around two meals a day, which is a monthly benefit of Rs 2,200 or Rs 2,600, and an annual exemption of Rs 26,000 to Rs 31,000.