What is the right salary structure to save income tax? Five flexi benefits can help in big income tax savings A new salary hike or revision is an opportunity for you to ensure that it is structured in a way that helps you in minimising your income tax outgo. We tell you how you can ensure that your salary is tax efficient
Everyone looks forward to an increase in salary but not many may realise that a good amount of the hike goes away in the form of income tax. If you are in the 30% income tax bracket, remember that of every Rs 1 lakh increase in salary, you get only Rs 68,800 or lower after tax. However, you can save big if you are aware of the tax saving options that you can work into your salary structure.“Keeping one's salary structure tax-efficient is significant as it impacts the amount of income that is taxable and, consequently, the tax liability of an employee. The salary structure determines how various components of the salary are categorised, and optimising it can result in tax savings for employees,” says Suresh Surana, Founder, RSM India
We tell you what all you need to consider when you get an opportunity to revise your salary structure for tax saving purposes.
Things to focus on for a tax-efficient salary structure .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:10px;font-weight:500;line-height:18px;} #sr_widget .sr_desc{margin:0 auto 0;} #sr_widget .sr_desc{color: #024d99;}
Investors looking for twin engines of quality and growth.
While your gross salary may appear higher, you will end up with a much lower net salary or take-home salary, comparatively, if you have not done enough to save taxes. “A tax-efficient salary structure would allow the employees to maximise their take-home pay by minimising the taxable income. By leveraging various exemptions, allowances and deductions available under the income tax act, individuals can reduce their overall tax liability,” says Surana.
When analysing a revised salary, focus on the tax saving aspects instead of the total gains on paper. “Structuring the salary is very important, as it determines the in-hand pay, gross salary, net salary, allowances, etc. The structure needs to have the right salary or reimbursement components so that the employees can avail the maximum tax benefits,” says Krishnendu Chatterjee, VP and Business Head, TeamLease Services.
Utilizing Tax-Free Allowances & Exemptions: Common exemptions and allowances are often limited and linked to the basic salary so this becomes very critical in deciding the extent of allowances you can get. “Certain components of the salary, such as house rent allowance (HRA), conveyance allowance, leave travel allowances, are eligible for tax exemptions up to specific limits. Structuring the salary to include these allowances can lead to significant tax savings,” says Surana.
Flexible Benefits: Many employers offer the flexibility to employees to design their salary in such a way that they can use the tax saving options that match their utility. “Employers often offer flexible benefit plans that allow employees to choose from a menu of taxable and tax-free components (for instance, lunch allowance or lunch coupons). This flexibility enables individuals to tailor their salary structures to align with their financial goals and tax preferences,” says Surana.
Similarly, many employers offer car lease finance options to all or a select number employees. Rather than taking a car on loan, having a company leased car helps in saving a good amount of tax.
Prominent reimbursements and their limits for salaried employee
Pay Head
Limit (Rs)
Petrol Reimbursement
2,400 per month
Driver Reimbursement
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)
Telephone Reimbursement
As per company policy based on the level/grade of employee
Books And Periodicals
Reimbursement as per company policy based on the level/grade of employee
Vehicle Maintenance and Run Exp Reimbursement
As per company policy based on the level/grade of employee
Source: TeamLease Services
Prominent allowances which a salaried employee can get for tax saving
If you have legitimate expenses that can be reimbursed by the employer, it may not be a part of your income; so your net taxable income will come down. “There are several reimbursements that can be included in a salary structure to optimise tax savings for salaried employees. These reimbursements can be part of the flexible benefit plans or salary restructuring that companies may offer. For instance, telephone or mobile reimbursements, food coupons, etc,” says Surana.
Making many allowances a part of your salary can help you save taxes. “Allowances are the monetary benefits offered to an employee by their employer over and above basic salary and DA (dearness allowance). Allowances are taxable. However, only some allowances are fully or partially exempted from taxation,” says Chatterjee.
He iterates that following allowances can be used for tax benefits:
Housing Rent Allowance: Partially exempted if the employee is living in a rented houseChild Education Allowance: Up to Rs 100 per month per child for a maximum of 2 children Hostel Expenditure Allowance: This allowance is granted to employees for expenses incurred on the hostel fees of their child. This is exempted up to Rs 300 per month per child up to 2 children Leave Travel Allowance: You are eligible to claim exemption for LTA if you are going on a vacation subject to exemption limit and conditions as specified under the Income Tax Act, 1961 Meal Coupon Allowance: A calculation based on 22 or 26 working days at 2 meals a day results in a monthly benefit of Rs 2,200 or Rs 2,600. Consequently, the annual exemption works up to Rs 26,400 or Rs 31,200Precautions you must take while going for tax efficient salary structure
For efficient tax saving, the foremost requirement is for you to understand the tax saving opportunities in your salary well. “Maintaining a tax-efficient salary structure is vital for employees as it has a significant impact on their financial well-being and tax liability. It's advisable for employees to be aware of the various tax-saving opportunities, allowances and exemptions available to them, and to work with their employers to structure their salary in a manner that aligns with their financial goals and objectives,” says Surana.
The availability of the option to restructure your salary will depend on your employer’s policy. “It is pertinent to note that tax laws and exemption limits are subject to change, the employees should stay updated with the latest regulations. Additionally, the inclusion of these reimbursements in the salary structure depends on the policies of the employer. As such, the employees should consult with their HR department to discuss the possibility of optimising their salary structure in a tax-efficient manner,” says Surana.
While going for a tax efficient salary, one should not go overboard and neglect the rules and norms. “Statutory compliance is another aspect which needs to be remembered while structuring the salary. The structure should not violate labour laws on minimum wages, provident fund, gratuity and others,” adds Chatterjee.
This story originally appeared on: India Times - Author:Faqs of Insurances
