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Best Salary Structure to Save Income Tax

 

Most of the salaried people are envious of the self-employed because they receive their salary after deduction of TDS and they can do nothing about it. Today we are going to tell salaried people about legitimate ways to reduce their income tax by fine-tuning their salary structure. First, we shall tell you about various exemptions and deductions to reach your Net taxable salary. After that, we shall take an example of a comparative study of the two salaried persons drawing the same salary, but one utilizing all the available options. An employer when employees a person, specifies his cost to the company (C.T.C). It means that the organization is going to spend that much amount per year to employ that person. It is dependent upon the employee to decide his salary structure in a smart way,  i.e. under which heads he wants to receive his salary to minimize his tax liability.

Related Topic:
Note on Employer-Employee Transactions

Exemptions u/s sec (10)

These amounts are not considered as income for taxation purposes. They are reduced from the very source of income.

Note- In most of the cases salary means (Basic + DA, where DA=Dearness allowance and it is a percentage of Basic)

Related Topic:
Note on Employer-Employee Transactions

House rent allowance

If you are living in rented accommodation, then you should take some amount under this head, as the least of the three is exempt.

  1. Actual HRA received
  2.  40% / 50% of salary (depending upon the city)
  3.  Rent paid- 10% of salary

If you live with your parents, then you can pay them the rent through the bank and obtain a receipt. Also, your parents should show that rental income in their return.

Leave travel allowance

If you go on a vacation with your family, then you can avail leave travel allowance. This exemption is available only on the actual fare of rail, airplane, or bus incurred by the employee. Any other local conveyance, sightseeing, hotel accommodation, food, etc., are not eligible for this exemption. The exemption will be lower of the two; 

1) LTA provided by the employer.

2) Exemption according to the actual expenses incurred or through the applicable amounts explained in the table below according to the mode of transport. 

Related Topic:
Sharing of Data between Income Tax and GST Authorities

Following conditions have to be fulfilled;

  1. A journey must have been performed to claim the exemption.
  2. The exemption is applicable for domestic travel only. International travel does not qualify for exemption under LTA.
  3. The exemption for travel is available for the employee alone or with his family, where  ‘family’ includes the employee’s spouse, children, and wholly or mainly dependent parents, brothers, and sisters of the employee. The exemption is restricted to only two children. 
  4. Amount of exemption and travel modes

 

Scenario Amount of Exemption
When the Journey is performed by air The amount is restricted to the economy class fare of the national carrier( Air India) by the shortest route to the place of destination.
When the Place of journey and destination are connected by rail The amount is restricted to the lower of the two ; 

(i) air-conditioned first-class rail fare by the shortest route to the place of destination or 

(ii)  actual by any mode other than air

When the Place of journey and destination are not connected by rail (partly/fully) but connected by other recognized public transport. The amount restricted to 1st class fare from the place of the journey to the destination by the shortest route of that recognized public mode of transport 
When the destination and place of the journey are not connected by any recognized public transport system The amount equivalent to the air-conditioned first-class rail fare, for the distance of the journey by the shortest route, as if the journey had been performed by rail.

 

Only two journeys performed in a block of 4 calendar years shall be applicable for LTA exemption.

Block Years- The block applicable for the current period is the calendar year 2018-21

If the employee has not availed both the LTA’s in the applicable block of 4 years, then the balance LTA will be carried forward to the next block and it should be availed in the first year of that block. Otherwise, it will lapse.

Mobile/telephone allowance

It is an allowance for the residential landline phone,  broadband connection, and the mobile used by the employee

The amount of exemption will be lower of the two;

  1. Amount actually spent
  2. Amount of allowance received

Books and periodicals allowance

This is an allowance for having any subscriptions of books and periodicals 

The amount of exemption will be lower of the two;

  1. Amount actually spent
  2. Amount of allowance received

Children Education Allowance

This is an allowance for the education of children of the employee.

The amount of exemption will be lower of the two;

  1. Rs 100/- per month per child. Restricted to two children i.e. Rs 1200/- per child per year
  2. Amount of allowance received

Note-If the education of the children of the employee is done in the school run by the employer then the whole fee is exempt. 

This amount will be a part of the CTC of the employee but will not be considered for taxation purposes. 

Medical allowance and medical reimbursement

Medical allowance-It is just like dearness allowance and is a part of the salary. It is fully taxable.

Medical reimbursement- It is a reimbursement of the medical expenses incurred by the employee on himself or his family. The amount of exemption will be lower of the two;

  1. Rs 15000/-
  2. Amount actually reimbursed

NoteMedical treatment in a hospital-owned by the employer-If the medical treatment of the employee or his family is done in a hospital or infirmary maintained/owned by the employer then the amount spent is exempt. 

This amount will be a part of the CTC of the employee but will not be considered for taxation purposes. 

Uniform allowance

You can get an allowance for the expenses incurred in purchasing and maintaining the uniform to be worn to the office. The amount of exemption will be lower of the two;

  1. Amount actually spent
  2. Amount of allowance received

Transport Allowance or conveyance allowance

This allowance is available for travelling to and fro to the office. You can get an exemption of up to Rs.1,600 per month. In the case of handicapped employees, the exemption is extended up to Rs.3,200.

Hostel Allowance

An exemption of up to Rs.300 per month per child for two children.

Note- Some allowances like medical allowance, City compensatory allowance, special allowance, and overtime allowance are fully taxable

Food Coupons

 Some employers provide some food coupons like “Sodexo” which can be used as payment at various food joints. Rs 50 per coupon for one meal. Total Rs 2200/- coupons per month are exempt 

Employer’s contribution to a Recognised Provident Fund

It is mandatory for the employer to contribute to a recognized provident fund for the benefit of the employee. The employee can also contribute to the same. Employer’s Contribution up to 12% of the salary (Basic +DA) is exempt. The amount 

employer’s contribution will become a part of C.T.C.

Note-The employee contribution to Recognized P.F. will be eligible for 80 C

Perquisites u/s 17

Cab Service

If the employer provides cab service 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 C.T.C. The value of the perquisite for the taxation purpose will be nil. 

Health club Facility

If the employer provides a Health club facility to every employee, then the value of perquisite will be nil. The amount spent on the employee will be a part of C.T.C. But if the employer reimburses the amount for the health care facility to the employee, then such amount will be fully taxable.

Deductions under the head “salary” u/s 16 (specific to this income head)

Standard deduction

An amount of 50000 is given as standard deduction u/s 16(ia)

Entertainment allowance(only for govt employees) u/s 16(ii)

The least of the three will be deducted

  1. 5000
  2. 20% of salary
  3. Actual amount received

Professional tax

This tax is levied by the state governments. If paid by the employer on the behalf of the employee, then that amount is allowed as a deduction. The maximum amount to be deducted is 2500.

Some Deductions u/s 80 C to 80 U (available to all on the basis of payment)

Employer’s contribution to NPS (National pension scheme) sec 80CCD2

An Employer can contribute to the National Pension Scheme for the benefit of the employee. Employer’s Contribution up to 10% of the salary (Basic +DA) is deducted.

Employee’s contribution to NPS Sec 80CCD1

The Employee can contribute to the NPS. Employee’s  Contribution up to 10% of the salary (Basic +DA) is deducted.

The extra amount contributed by the employee in NPS sec 80CCD(1B)

The extra amount can be contributed by the employee. The maximum amount of deduction available is 50000.

Note– The payment of the contribution of both is done by the employer and will form part of the C.T.C.

Employer’s contribution to approved Superannuation Fund

An Employer can contribute to the approved superannuation fund for the benefit of the employee. Employer’s Contribution up to Rs 150000/- is deductible.

Employee’s contribution to approved Superannuation Fund

An employee can also contribute voluntarily to the superannuation fund. That amount would qualify for deduction u/s 80C.

Note Employee’s contribution to Recognised provident fund, employee’s contribution to superannuation fund can qualify for sec 80 C.

Amount of deduction in sec 80 CCD1 and 80 CCD2 and any other deduction amount  u/s 80C will have a combined maximum limit of 150000.

For Revision

The total amount of deduction u/s 80CCD( 80CCD1 and 80 CCD2) and 80 C can not exceed 150000.

The total amount of deduction  u/s 80CCD(1B) cannot exceed 50000.

Total amount  of deduction  u/s 80 CCD {80 CCD1,80CCD 2, 80 CCD(1B)} and 80 C 

cannot exceed 200000.

Deduction for rent paid Sec 80 GG

If you don’t receive HRA (House Rent Allowance) but pay rent, you can still get a tax deduction on the rent paid under Section 80 GG. The amount of deduction available under this section is 5000 per month( 60000/-per annum). Moreover, the employee, his spouse, or his minor child should not own a house.

Note– Loss of any other head of income cannot be set off against income from salary except Loss from HP up to Rs 200000 in the current year. Any brought forward loss from any head cannot be set off from income under salary in the current year.

Deduction for interest on Higher education loan u/s 80E

Only an individual can claim this deduction. Conditions for availing deduction under this section;

  1. The loan should have been taken for the higher education of self, spouse, or children.
  2.  It does not matter whether such an education loan is taken for higher studies in India or outside India.
  3.  The deduction allowed is the total interest part of the installments paid during the financial year. There is no limit on the maximum amount that is allowed as a deduction. 

Deduction u/s 80C

Note- Overall limit including the subsections for claiming the deduction is Rs 1.5 lakh except an additional deduction of Rs 50,000 allowed u/s 80CCD(1B).

Types of investments applicable for 80 C;

  • Elss Funds
  • Life insurance Premium (up to 20% of policy amount)
  • NPS scheme
  • ULIP
  • Tax saving FD
  • PPF
  • National saving Certificates
  • Sukanya Samridhi Yojna
  • Senior Citizen saving account
  • The principal amount paid of home loan

Deduction u/s 80D

This is a deduction for payment of medical insurance premium and preventive health check-up

Conditions  Premium Paid Deduction u/s 80D

(Rs)

Self and family Parents
Individuals and parents below 60 years 25000 25000 50000
Parents above 60 years and individual and his family less than 60 years 25000 50000 75000
Both individual, his family, and parents are more than 60 years 50000 50000 100000
Members of HUF 25000 25000 25000
Non-resident individual 25000 25000 25000

 

Preventive health checkups (Medical checkups) expenses to the extent of Rs 5,000/- can be claimed as tax deductions. It implies that 25000 and 50000 are the maximum limits inclusive of this 5000.

Comparison

1) Now we suppose that a person whose C.T.C is 15 lacs, draws it as follows.

Basic – 100000*12                             = 1200000

D A – 25% 0f Basic                             = 300000

Gross salary                                        15000000               

He does not distribute his salary under various allowances. He has no contribution to any recognized PF, NPS, Superannuation fund from him or his employer. He lives in a rented house and pays 120000/- per annum as rent. 

Calculation of Income

Income from salary

Basic 100000*12   1200000
D A  25% 0f Basic  300000
Gross total income 1500000
Less; Standard deduction 16(ia)  ( 50000)
Gross taxable income   1450000

                                                                                        

Less; Deduction u/s 80GG Rent paid 120000 

Amount deducted 60000                                                                                                                                        

(No HRA received)

 

(60000)
   Net Taxable Incom 1390000

                                                                                                                                                 Tax on the above                                                                                                                                         

Up to 250000 nil
250001 to 500000 @5% 12500
500001 to 1000000 @20%  100000
1000001 to 1390000 @ 30%    117000
229500
Add 4% Surcharge 9180
Total tax liability    238680

 

He can also go for the New Tax Regime. But no benefit of any deductions and exemptions will be available. The tax accordingly on 1500000 will be;

0-250000  Nil
250001-   500000   @5% 12500
500001-   750000                                                                                                                                  @10% 25000
750001-   1000000 @15%  37500
1000001- 1250000   @20% 50000
1250001- 1500000   @25% 62500
187500
Add surcharge @4% 7500
Total tax liability 195000

                                                                                                                           

As you can see, the tax calculation according to the new regime is lower than the existing one. Hence he should opt for the new tax regime. Also, under this type of salary distribution, he has a larger cash flow. So it depends upon the person to choose how he wants to spread his salary sheet.

2) Now we suppose that a person whose C.T.C is 15 lacs, draws it as follows.

Basic 600000, DA 150000( 25%) of Basic. Rent paid to parents by him- 120000 per annum

All amounts are per annum                                                                                                                                                                                                                                                                         HRA- 60000                                                                                                  

LTA-   43000      (amount spent 40000)                                                            

Telephone reimbursement 34000  (amount spent  30000)                              

Medical reimbursement 29600    (amount spent  40000)                               

Child education allowance 5000  1 child in school                                        

Hostel allowance 5000                 1 child in the hostel                                       

Travelling allowance 25000                                                                                 

Food coupons 26400                                                                                                                                                                                                              

Contribution of Employer in recognized PF 100000                                                                              

Contribution of Employer in NPS 110000 (80CCD2)                                                                                

Contribution of the employee in NPS 110000   (80CCD1)                                      

Additional Contribution of the employee in NPS 50000    {80CCD(1B)}           

Contribution of Employer in Superannuation Fund   150000

Professional tax paid by employer  2000

The employee has made no contribution to the recognized P.F. and superannuation fund.

Calculation of income

Income from salary

Basic      600000
DA 150000
HRA   60000-45000      15000       
a) Received

b) 50% of salary 

c) Rent paid -10% of salary  

60000

750000*50%=375000

120000-75000=45000

The least of the three is exempt=45000   
LTA  

  1. Received 43000
  2. Actual spent 40000
43000- 40000

Exempt  40000

3000
Telephone reimbursement

  1. Received 34000
  2. Amount spent 30000
34000-30000

Exempt 30000

4000
Medical reimbursement 

  1. Amount Received 29600
  2. 15000
  3. Actual expense 40000

    

 

29600- 15000  

 Least of the three 15000

Exempt 15000

14600
Children education allowance

  1. 100*12=1200 exempt (one child)
5000-1200 

Exempt 1200

3800
  Hostel allowance 

  1. 300*12=3600 exempt (one child)
5000-3600

Exempt 3600

1400
Travelling allowance

  1. 1600*12=19200 exempt
25000-19200      5800
  Food Coupons

a) 2200*12 exempt 

26400-26400 nil
Contribution of the employer to recognized P.F

  1. 12% * 750000
90000 Exempt 100000-90000  10000
Contribution of Employer to Superannuation Fund 150000 Exempt 150000-150000  Nil
Contribution of the employer to NPS(80CCD2) 110000 110000
Contribution of the employee to NPS(80CCD1) 110000 110000
Additional Contribution of the employee to NPS{80CCD(1B)} 50000 50000
Payment of professional tax by the employer  2000 2000
Gross total income    1079600
Less Deductions u/s 16
Less  Standard deduction  u/s 16(ia)  (50000)
Less Deduction for professional tax paid    2000 (2000)
Gross Taxable Income 1027600
Less   – Deductions under chapter (vi )
Contribution of the employer to NPS 

  1. 10%*750000=75000
  1. deduction u/s(80CCD2)
(75000)
Contribution of the employee to NPS 

  1. 10%*750000=75000
  1. deduction u/s(80CCD1)
(75000)
Additional contribution of the employee in NPS    deduction u/s {80CCD(1B)}

50000  

(50000)
Since the limit of Sec ( 80C, 80CCD1, 80CCD2 ) of 150000

Has been reached, no other deduction u/s 80C

Net taxable income    827600

 

Tax thereon

 

0   –  250000                                                                                                                                                                                                                                                                                               nil
250001 – 500000 @ 5% 12500
500001  – 827600  @ 20%  65520
78020
Add surcharge @4%     3121
Total Tax Liability 81141

                                                                                                   

Suppose this Individual had been paying a home loan, then this tax amount would have reduced further. Assume he has taken a home loan and paid 240000 as EMIs in which principal is 190000 and 50000 is interest. Also, the said house is not in the same city in which he works. That house is self-occupied and brought forward loss from HP is 70000 and current year loss (due to interest paid in the current year) from house property is 50000. He has paid a LIC premium of 50000 for himself, his spouse, and his children. He has also paid medical insurance of 18000 of his family and 45000 of his parents 

 

Taxable income from salary  827600
Less 

Deduction u/s 80D                                                                                 (63000)

(18000+45000)

The medical insurance premium paid (63000)
Less 

Loss from HP 

Current year loss (50000)
Net taxable income after adjustment of loss     714600 

                                                                    

Note-1) Hence you can see that taxable income has reduced further.

 

2) Amount of brought forward loss of HP can not be adjusted against income of salary. Only current year loss can be adjusted.

 

3) Amount of LIC premium cannot be deducted u/s 80C since the limit has already been exhausted.

 

4) No deduction u/s 80GG because he is receiving HRA. 

5) Principal amount of home loan paid also qualifies for 80 C. Since its limit has already been reached therefore it is not deducted.

6) If his own house would have been in the same city as his work, his payment of rent to his parents might have been disallowed. Also since his parents are receiving rent then they should disclose that amount in their return.

Related Topic:
Comparison Between Various Business Structures

Conclusion

As you can see that tax on income of 1500000 has been reduced from 238000 to 195000 by adapting to the new regime and has been further reduced to 81000 by making certain smart investments which a person usually does for his future.

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