Salaried employees often think that they do not have scope for saving taxes. However, this is not true. You can save tax in many ways. One is by restructuring your salary in a way that reduces your tax outgo. When you are, for instance, offered a hike in your package or a new job, you must carefully study the components and understand the tax implication.
“The reason you need to pay attention to the salary structure being offered is the fact that although you have a high package, it does not mean that your take-home salary will increase in the same margin. If your employer lets you decide your compensation structure, you might want to use the tricks given in this article so that you take maximum salary home,” says Chetan Chandak, Head of Tax Research, H&R Block India.
Different components of Salary Structure:
1. Fixed Salary
This component includes basic salary, HRA, DA, special allowances, conveyance allowances, compensatory city allowance, etc.
2. Variable Salary
This component includes sales based incentive, performance-based incentive and profit-based bonus.
Reimbursement of conveyance, telephone bills, medical expenses, etc. are included in this component.
This component includes the benefits that are offered by the company, such as ESI, Statutory Bonus, Gratuity, PF, etc.
Salary Structure based on the level of employee
1. Junior level employee
Employees at this level of employment need a high take-home salary. “If you are a junior-level employee, you should try to add more fixed allowances to your salary structure like food coupons, telephone bill and conveyance, etc. Since these allowances are fixed, your employer will pay you monthly. You can, however, get tax exemption on these allowances to a certain extent,” informs Chandak.
2. Senior level employee
If you are a senior-level employee, you not only have to maintain a high in-hand salary, but you will also have to look for ways to reduce your tax burden. Therefore, you will need to add more benefits to your salary structure.
However, the real aim of employees, regardless of their employment level, is more allowances, less tax liability and more in-hand salary.
Tax impact of different salary components
1. Fixed salary
It is that part of the salary which is fixed and is based on other components of salary that are included. It includes basic salary, which is around 30% to 50% of Cost to Company (CTC) and it is fully taxable.
(a) Basic salary forms the basis on which bonus, gratuity, PF, HRA and other benefits are calculated. Basic salary is fully taxable.
(b) DA or Dearness allowance is used by a very few private companies and is mostly given to the government employees. DA is also fully taxable.
(c) HRA is paid to the employee to meet expenses of rent of a home. “Companies usually keep it 40% to 50% of basic salary depending on where you live. In case you stay in metro cities, your HRA will be kept at 50% of basic salary and in case you stay in non-metro cities your HRA will be at 40% of basic salary. HRA can be claimed as non-taxable component, and its taxability depends upon the city you live in,” says Chandak.
(d) Conveyance allowance is paid to you against expense to commute between office and home. Conveyance allowance is non-taxable up to Rs 1600 per month.
(e) Special allowance is mainly used to adjust rest of the amount which is to be given to you. It is fully taxable allowance.
2. Variable Salary
Variable salary varies depending upon your performance. Many companies are keeping this as a part of their employee CTC these days. “Earlier, only employees related to sales or profit-making department used to have a variable component in their salary. Companies are not willing to pay more fixed salary, but are open to paying higher variable pay as a variable is related to sales and profitability of the organisation. The company has no problem with paying money to employees if the company is making profits,” says Chandak.
3. Other Allowances / Reimbursement
These allowances/ reimbursements are taxable, but you can get tax exemption upon submitting the actual bills to your employer. This component is available to both level of employees’ salary structures, as it gives tax-free income and helps increase the net salary. Reimbursement is paid to employees against expenses made and bills submitted.
(a) Medical reimbursement is one example of this allowance. It is non-taxable up to 15,000 per annum. The company can pay it monthly, quarterly, half-yearly or annually. To claim this allowance/ reimbursement, you will need to submit medical bills in support of medical expenses. Medical bills for spouse, child and dependent parents are also acceptable.
(b) Leave Travel Allowance or Leave Travel Concession (LTC) is another example which is paid for travel cost incurred by you on leave travel. “Every company has its own rule to decide on the amount of LTA to be given to you. A company may prefer to keep as a percentage of the basic monthly salary of the employee or make it fixed depending on your grade and native place. It is a non-taxable income to the extent that bills of travel are submitted, but there are some rules which should be kept in mind while taking benefit of LTA for tax. Moreover this exemption is available only twice in a block of four calendar years,” says Chandak.
(c) Training reimbursement is provided to you for the expenses incurred on professional training/pursuit related to your job profile. You will need to provide bills for same and it can be excluded from taxable income.
(d) Mobile reimbursement is paid to you for expenses incurred for the use of mobile/telephone for official purpose. You need to submit a bill for same.
(e) Books and periodicals will be paid to you for reimbursing expenses made on the purchase of books and periodicals related to your job profile. It is non-taxable if you submit the bills.
(f) CEA (Children Education Allowance) is exempted from tax up to Rs 100 per month per child for two children.
(g) Uniform allowance is fully exempted from income tax on actuals. To claim this, you will have to produce bills for the same. This allowance is given to meet the expenditure on the purchase and maintenance of office uniform or formal office wear which you wear while performing office duties.
(h) Daily allowance is given to you if your normal place of duty is not fixed and you have to travel to different places. Reimbursement received is fully exempt from income tax on actual bills.
(i) Any allowance granted to meet the cost of travel on tour or being transferred from one place to another is called tour allowance. Reimbursement is fully exempted from income tax against actual expenditure incurred.
(j) Food coupon or meal expenses is given to you for meals during working hours. Rs 50 per meal up to 2 meals per day is tax-free.
Contribution means a contribution made by the employer for your long-term saving schemes or social benefits scheme as per the statutory compliance.
EPF is the contribution made by the employer (12% of Basic salary) and is tax exempt. It is a statutory obligation on the part of the employer. Also, you get the benefit of PF deduction (12% of basic) on your part under Section 80C of the Income Tax Act.
Many times employers provide a flexible package to employees where they get to choose the components of their salary. “Senior-level employees generally may choose to have perquisites like rent-free accommodation, car, cleaner, gardener etc. as a part of their salary package. This will save them taxes as a large portion of these perquisites will be tax-free,” informs Chandak.
You can, thus, save tax by making investments that are tax-deductible, through intelligent tax planning. Depending on your job profile and nature of the job, you can discuss the things with your employer to include the allowances mentioned in this article in their salary structure. Planning your salary structure can help you reduce your tax outflow.