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?
- How are these Allowances Calculated in a Salary?
- Which ITR Form to file?
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:
- Actual HRA received;
- Actual rent paid less 10% of basic salary
- 50 % of basic salary plus dearness allowance if staying in metro cities (Mumbai, Kolkata, Delhi or Chennai) or 40 % of basic salary plus dearness allowance if staying in non-metro cities.
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/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.
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.
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.
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|
|+ 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|
|(-) Exempted HRA||2,50,000||2,00,000|
|(-) Standard Allowance||40,000||40,000|
|(-) Leave Travel Allowance||30,000||30,000|
(-) Other allowances
|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?
- If an individual earns income from salary has to file ITR 1 if the total salary is below INR 50 lakhs, inclusive of both salary income and income from other sources.
- ITR 2 must be filed if the individual has other income apart from salary like income from more than one house property, income from capital gains and IFOS.