April is the month when most employers decide the salary structure of the employees. In many cases, employees are allowed to determine different components of their salary within the broad contours of the company policy, in order to determine the tax liability. It is often seen that the amount mentioned in the appointment letter as salary is very different from what is credited to the bank account at the end of the month. This is because the salary mentioned in the appointment letter is the comprehensive ‘Cost to Company’ (CTC) and this is will differ from the net salary on account of various deductions and taxes. Structuring the salary and including tax efficient components can help in maximising the take home pay of the employee. Here are some ways of structuring the salary to save taxes:
Medical Allowance: One can claim up to Rs 15,000 a year as medical allowance that is a part of salary and which is tax exempt. One has to provide medical bills for the amount shown under this head in order to claim the exemption.
Transport Allowance: Transport allowance of Rs 800 per month is allowed as tax free income. This is generally allowed to all employees and there is no need to provide the proof as well. It is paid as a part of salary on a monthly basis.
House Rent Allowance: Employees staying in a rented accommodation can claim House Rent Allowance as a part of their salary and this can help in bringing down the taxability of income. The tax exempt amount of House Rent Allowance will be lower of (1) Actual HRA received by the employee or (2) 50% of basic salary (40% in case the employee is in a non metro) or (3) Rent paid - 10% of basic salary. Any excess will be taxable as salary in the hands of the employee.
Leave Travel Allowance: Leave Travel Allowance is an allowance granted by employers to compensate employees for the amount spent on their personal travel. This is allowed under the Income Tax laws and can be claimed twice in a block of four years. The blocks are determined by the Government. The actual amount spent on cost of travel will be exempt from tax, provided it is within the overall limit specified in the salary structure.
Food Coupons: Food coupons or meal vouchers are coupons that carry a monetary value and which are given by companies to employees as a part of salary. The amount given in the form of food coupons is exempt from tax. Usually a ceiling is specified on the amount which can be issued in the form of food coupons. Food coupons are generally given as an option to employees. SodexHo and Ticket Restaurant are leading coupon providers that issue such coupons, which can be used in select restaurants or grocery stores. One should check the applicability and validity before using such coupons. Therefore these coupons can be restrictive at times. Nevertheless, it is a good way of reducing tax outflow and most employees opt for this.
Other reimbursements and perquisites: This head includes all reimbursements or perquisites which companies grant to their employees and which do not fall under the taxable income category. These benefits vary from one company to another and also depend on the designation of the individual. It is recommended that employees check the applicability with the Human Resources department in the beginning of the financial year. Telephone reimbursement can be included as a tax free component and signifies the amount spent towards mobile and landline telephone connections of the employee. Usually this is based on the actual bill amounts and is required to be within the limit prescribed by the employer. Car Running and Maintenance expenses can be another component, which includes fuel, maintenance and driver’s salary incurred by the employee. Some companies allow a reimbursement of entertainment expenses for professional purposes and the amount spent on purchase of professional attire as tax free components. Club memberships and magazine memberships are other categories of perquisites which can be included as tax exempt salary. It must be remembered that not all of the above may be applicable to all employees and there can be variations.
Tax assessees generally use different provisions under the Income Tax Act to save taxes in various ways. However, not many people are aware that they can structure their salary to reduce the tax outflow. Sometimes, even if there is awareness, employees are either lazy or do not find the time for carrying out this exercise with their Human Resources department. As April is the beginning of the financial year, this is the best time to structure your salary, take the first step towards reducing tax outflow and increase your take home pay.
By Smitha Hari
The author writes regularly on personal finance and financial planning. She is associated with www.gettingyourich.com, a Mumbai based financial planning firm....