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How to Optimize Salary Structure to Reduce Tax Burden?

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Maharshi Shah

Income from salary
Salary Components
Salary Income

An individual’s salary structure includes various components that can help in reducing his/her tax liability. If one can optimally utilize all the allowances that they receive as a part of their salary and claim all the applicable deductions while filing their ITR, they can reduce their tax burden significantly. This article will throw some light on how to better plan your salary structure to minimize tax liability.

What are the Allowances and Deductions that can Reduce the Tax Liability?

Following are the salary components that will help in reducing the tax burden:

House Rent Allowance

House Rent Allowance is a component that is provided to employees who are staying in rented accommodation. In order to claim this exemption, it is necessary that it forms a part of one’s salary structure. The lowest amount from the following is exempt from taxes:

Children Education Allowance

Children Education Allowance is given in order to support an employee’s child’s education. A monthly allowance of INR 100 per month i.e. INR 1200 per annum per child is exempt from taxation. This exemption can be claimed for a maximum of 2 children. Individuals can also claim deduction under section 80C for the tuition fees that are paid for the child’s education.

Hostel Expenditure Allowance

Hostel Expenditure Allowance of INR 300 per month i.e. INR 3600 per annum per child is provided to meet the hostel expenditure of the employee’s children. This exemption can be claimed for a maximum of 2 children.

Phone Bill Reimbursement

Phone Bill Reimbursement covers the cost of broadband Internet connection as well as a mobile phone bill. It is to be noted that this benefit may be given only to specific employees and not all.

Food Coupons

Food/Meal Allowance is provided by the employees to meet the food expense an employee may incur. This allowance is in the form of coupons. Coupons up to INR 50 per meal are exempt from taxation. This means that annually if there are 22 working days in a month and 2 meals a day then an employee can claim INR 26,400 as an exemption from his salary.

Leave Travel Allowance

Leave Travel Allowance is given by the employees to help meet the travel expenses incurred while travelling with family in India. The exemption is provided on the mode of travel to the destination and back i.e., economy air travel or AC railway travel. An employee can claim this allowance for two journeys taken in the block on four calendar years.

Gift Vouchers

The gift or voucher that given by the employer whose value is not more than INR 5000 annually can be claimed as an exemption if it becomes part of the salary.

Newspaper/Journal Allowance

If the employee has to gain extra knowledge for the job by subscribing to newspapers and journals, then he/she can claim a Newspaper/Journal allowance by showing the bills of the subscriptions taken.

Uniform Allowance

An employer provides Uniform Allowance to meet the expenses of purchase/maintenance for wearing a uniform while working.

Car Maintenance Allowance

An employee can claim an exemption of the car expenses partially or fully depending on the ownership of the car. If the ownership of the car is with the employer, the employee using that car will pay tax on a prerequisite of INR 2,700 per month (car with engine capacity up to 1,600 cc) or INR 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 can claim an exemption of INR 2,700 per month or INR 3,300 per month.

How are these Allowances Calculated in a Salary?

Let us take an example to understand how to maximize tax savings by structuring your salary efficiently.

Ms Mehra is an employee at a reputed bank and earns INR 10,00,000 per annum. Let us examine her salary structure in two different manners:

Particulars Salary Structure 1 Salary Structure 2
Basic Salary 5,00,000 4,00,000
+ HRA 3,00,000 2,00,000
+ Provident Fund (12%) 60,000 48,000
(+) Standard Allowance (Conveyance allowance + medical reimbursement) 40,000 40,000
(+) Leave Travel Allowance 30,000 30,000
(+) Other Allowances 70,000 2,82,000
Total 10,00,000 10,00,000
(-) Exempted HRA 2,50,000 2,00,000
(-) Standard Allowance 40,000 40,000
(-) Leave Travel Allowance 30,000 30,000

(-) Other allowances

Meal allowance
Mobile bill reimbursement
Gift voucher
Child’s education allowance
Child’s hostel allowance
Newspaper/Journal allowance
Internet Bill reimbursement
26,400
10,000
5,000
2,400
7,200
16,000
 12,000
Total taxable Salary 6,80,000 6,51,000
Less: Profession Tax Paid 2,500 2,500
Income under the head Salary 6,77,500 6,48,500
(-) Deductions under Section 80C 1,50,000 1,50,000
Total Taxable Income 5,27,500 4,98,500
Tax on income 18,720 12,920
Saving in tax   5,800

Which ITR Form to file?

Got Questions? Ask Away!

  1. Hi, CTC or the Cost To Company is the cost company bears for an employee - it includes basic salary and other allowances like HRA, Dearness Allowance, Conveyance Allowance, etc.

    Whereas, take-home salary is computed after deducting taxes & contributions from CTC.

    You can refer the guide on the difference between CTC and Take Home Salary on our learn center.