KNOWLEDGE CENTRE Tax Planning / How Should You Structure Your Salary To Save More Tax

How Should You Structure Your Salary To Save More Tax

How to save tax on your salary?

Like most people, you may focus on increasing the Cost-To-Company (CTC) when looking for a new job. Moreover, you may not pay much attention to the way your salary is structured. Earning a higher CTC is important; it is equally crucial that you structure the salary accurately to minimize your tax outflow enabling you to maximize your take-home package.

Several employers are flexible to provide you with a favorable salary structure to reduce your taxes. However, you must consider your short-term and long-term investment goals before making your decision. When you modify the salary structure, there is a direct impact on your take-home amount and the retirement corpus. This is because certain components of the salary are not received immediately while others may be tax-free or taxable.

What are the components of CTC?

CTC comprises four components:

1. Basic salary

This component is taxable and deciding how much of your salary comprises of basic is important. If the basic salary is higher, your tax outflow will increase. Additionally, house rent allowance and provident fund benefits are associated with your basic salary.

Therefore, deciding the right mix to maximize net take-home and minimizing taxes is a major trade-off.

If you are at a junior level, consider including food allowance, conveyance, medical reimbursement, and telephone expenses and reduce the basic component. These fixed allowances are paid monthly. Although you may pay tax on these allowances, the rate is lower.

On the other hand, if you work at a senior level, you may probably be in the highest tax slab. You need to minimize your taxes even if your take-home may reduce. Therefore, opting for a higher basic is beneficial in saving tax on salary.

2. Allowances

The Income Tax Act provides certain allowances that are exempt from taxes for all salaried people. Travel allowance, medical reimbursements, and Leave Travel Allowance (LTA) are some of these. Such allowances are tax-free based on certain criteria and on providing bills and receipts. Therefore, an important tax-saving tip is to include these prescribed allowances in your salary structure to reduce your liability.

Here are some allowances and facilities and their taxability.

  • House Tent Allowance (HRA)
    The exempted amount is the lower of the following— actual HRA, 40% – 50% of basic (based on the location), and rent paid less 10% of the basic salary
  • Medical reimbursement
    An amount of up to INR 15000 per annum is exempt
  • Transport allowance
    Up to INR 1600 per month is exempt from tax
  • LTA
    Actual cost may be claimed under section 10(5) twice in a block of four years
  • Uniform allowance
    Exempt under section 10(14) as per law
  • Children’s education and hostel expenses:
    Exemption available for two children based on the regulations
  • Research allowance
    Actual expenditure is exempt
  • Meal vouchers
    An amount of INR 2200 per month is tax-free
  • Health club, sports, and others
    If all employees receive this in a uniform manner, it is tax-free
  • Telephone reimbursement
    Actual expenses are exempt
  • Books and periodicals
    Actual costs are tax-free

3. Perquisites

Perquisites are additional amenities and benefits offered by the employers. Some of these include fuel expenses, driver’s salary, and others. The Income Tax Act allows an exemption on certain perquisites as long as you meet the prescribed conditions. If you want to know how to save tax on your salary, it is recommended you include such perquisites in the CTC to reduce your outflow.

4. Retirement contributions

The final component of the salary structure is your retirement contributions. These are not available immediately but are beneficial to create long-term savings. A higher retirement corpus ensures you from financial independence post-retirement. However, contributing a higher amount to retirement plans reduces your current take-home salary. Therefore, it is important to achieve the right balance between your retirement contributions and take-home package.

The Income Tax Act provides multiple exemptions and deductions to encourage you to increase your retirement contributions. You need to be diligent in structuring your CTC in a way enabling you saving tax on salary. You must consider your financial goals to ensure you make the right choice.

You may reduce your tax liability in several ways. However, choosing the right mix of investments and take-home salary may be difficult. One of the most popular and widely used methods is to invest in eligible tax-saving instruments under section 80C such as ELSS funds. Several tax-saving tips talk about such investments. However, with a large number of products, you may use ARQ, our technology-driven investment engine. It uses scientific methods to provide machine-based recommendations that suit your financial goals and risk profile. Enjoy all these for free on downloading the Angel Bee app.

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