Your salary structure consists of several components which can help you reduce your tax burden. While some of these components are fully or partially taxable, some may be fully exempt from tax. Therefore, how your salary is structured is of utmost importance; as you would always seek to maximise your take-home salary by minimising the tax burden.
Here are 10 components that can be used by an employee to minimise their tax burden and plan their salary structure accordingly.
1. Employees’ Provident Fund (EPF)
As per the EPF Act, 12 percent of an employee’s basic salary and dearness allowance has to be invested in EPF and the employer needs to invest an equal sum. The contribution deducted from the employee’s account is exempted from tax up to Rs 1.5 lakh. This deduction is provided under section 80C of the income tax Act. The interest earned on EPF is also tax-exempt, subject to certain conditions.
2. Leave Travel Allowance (LTA)
An employer provides LTA to employees to help them meet travel expenses incurred for travel with family to any place in India. Archit Gupta, CEO, Cleartax said that exemption from tax is only for an amount equal to the cost of travelling the shortest distance to the destination whether by air, rail or recognised public transport system. This component can be availed by an employee by submitting travel bills/tickets to his employer. “You can avail this benefit in respect of two journeys performed in a block of four calendar years. The ongoing block is the calendar year 2018-2021,” he said.
For the purposes of LTA, the meaning of ‘family’ includes spouse and children and parents, brothers and sisters who are wholly or mainly dependent on the employee. Availing LTA tax exemption is subject to certain terms and conditions.
3. House Rent Allowance (HRA)
This component of salary helps take care of rent paid by an employee for the premises in which he lives. To be able to claim this deduction, it is essential that it forms a part of one’s salary. Amount paid as HRA can be claimed as tax exempt, subject to certain limits, terms and conditions.
The lowest of the following amounts will be tax-exempt:
- Actual HRA received;
- Rent paid in excess of 10 percent of salary plus dearness allowance;
- 50 percent of salary plus dearness allowance in case of a house located in metro cities (Mumbai, Kolkata, Delhi or Chennai); 40 percent of salary plus dearness allowance in case the house is located in non-metro cities.
The tax benefit is available to the person only for the period in which the rented house is occupied.
4. Food coupons
Food allowance can be given by the employer through the provision of food at working hours or through pre-paid food vouchers/coupons. For instance, vouchers (not transferable) are tax-exempt to the extent of Rs 50 per meal. “On a calculation of 22 working days a month and 2 meals per day, a sum of Rs 26,400 can be availed as a deduction by an employee annually,” said Gupta.
5. Car maintenance allowance
Homi Mistry, Partner, Deloitte India said that reimbursement of car expenses (used partly for official and partly for personal purposes) to an employee could be exempt up to specified limits depending on whether the car is owned by the employer or by the employee.
“If the car is owned/leased by the employer, the employee using that car will pay tax on a perquisite of Rs 2,700 per month (car with engine capacity up to 1,600 cc) or Rs 3,300 per month (car with engine capacity more than 1,600cc) in respect of the aggregate of the actual lease rent, driver’s salary, maintenance expenses and fuel expenses borne by the employer. If the employee owns the car, he will be entitled to an exemption of Rs 2,700 per month or Rs 3,300 per month in respect of the driver’s salary, car maintenance expenses and fuel expenses borne and reimbursed by the employer,” Mistry said.
6. Children education allowance
An education allowance of Rs 100 per month or Rs 1,200 per annum child paid to an employee by an employer is allowed as deduction from taxable income to the employee. This deduction is granted up to a maximum of 2 children for the employee. Along with this, you can also claim deductions for tuition fees paid for your children under section 80C of the income tax Act.
7. Hostel expenditure allowance
Hostel expenditure allowance of Rs 300 per month or Rs 3,600 per annum per child paid to an employee is also allowed as a deduction from taxable income towards meeting hostel expenditure for the child. This deduction is granted up to a maximum of 2 children for the employee.
8. Phone bill reimbursement
Phone bill reimbursement includes both telephone and mobile phone bill reimbursements. This also covers expenses of telephone including a broadband Internet connection. Many companies offer this to specific employees.
“Expenses on telephones including mobile phones incurred by the employer on behalf of the employee are not taxable. The law does not prescribe any limit, but the expenses should be reasonable considering the salary/ grade of the employee,” said Mistry.
9. Uniform allowance
This covers allowance granted by the employer to the employee to meet the cost of purchase and/or maintenance of uniform worn during the performance of the duties of employment.
Rajat Mohan, Senior Partner, AMRG & Associates said, “Cost actually spent by the taxpayer in purchase and/or maintenance of official uniform worn is allowed as an exemption, thereby any savings from the amount received would be liable to tax under the provisions of income tax laws.”
10. Gift voucher
The value of a gift, or voucher, or token provided by an employer, the aggregate value of which does not exceed Rs 5,000 annually, is tax-free in the hands of an employee.
Gupta says, “An optimum salary structure is that which enables you to meet your day-to-day expenses while leaving sufficient money in your hands for long-term financial goals. Hence, in each individual case, you have to gauge whether the benefits offered by the employer holds value for you and accordingly, you should structure your salary package.”
The above mentioned components facilitate saving for an employee by providing tax-exempt ways of meeting the cost of accommodation, meals, telephone etc. Make the most of them, and structure your salary in such a way that you reduce your tax outgo as much as possible.