Income Tax!! Not only is it a major expense but also an unavoidable one for each person to bear. And if you draw a salary, your tax expense is probably the highest.
Imagine, you have recently joined your new workplace. You work for a whole month and are eagerly waiting to receive your first salary. In your excitement for the paycheck, you have already made plans about how you will spend your hard earned money. Suddenly, your phone rings and there, you read wonderful words ‘Your salary has been credited’. Hooray!! You are about to take your flight to cloud nine; but wait a second, oh god!! You just realized that you have received an amount that is lesser than what you were expecting. Why has some amount been deducted? You enquire and realize that INR. XXX have been deducted as INCOME TAX i.e. TDS from your salary. You probably have no idea about what you can do except accept the amount as gone.
As an employee, would you like to realize your dream of ensuring optimization of tax? Various opportunities have been provided under the Income Tax Act, which if effectively build in one's salary structure, will go a long way in ensuring effective tax savings for the employee.
The first thing that one should understand is what the meaning of the word “Salary” is. As per Income Tax Act, 1961 the Salary includes:
- Wages
- any annuity or pension
- any gratuity
- any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages
- any advance of salary
- any payment received by an employee in respect of any period of leave not availed of by him
- the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule
- the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; and
- the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.
Now that we have recorded what is included in Salary, let's consider some of the most important components that one must have in their salary structure to allow minimization of their tax implications.
1) House Rent Allowance (HRA):
House Rent Allowance commonly known as HRA is a must have component to be included in one's salary structure. Its tax efficiency is the highest. HRA is given to the employee to meet the cost of the rented house that he stays in. Do you know that an employee can claim HRA exemption even if he/she pays rent to his/her parents? HRA is exempt to the extent of the least of the following:
a) Actual amount received
b) 50% of basic salary if the employee stays in Metro Cities (40% in case of Non-Metro cities)
c) Excess of rent paid over 10% of salary
2) Conveyance/ Transport Allowance:
The Conveyance amount is an allowance the employee receives for commuting between his place of residence and office. Conveyance allowance is exempt to the extent of INR.1600/- per month i.e. INR.19200/- per annum
3) Children’s Education Allowance:
Fixed education allowance received by the employee from the employer is exempt up to INR.100/- per month per child subject to a maximum of 2 children.
4) Hostel Allowance:
Any amount granted by the employer to the employee to meet the hostel expenditure of his child will be exempt up to INR.300/- per month per child subject to a maximum of 2 children.
5) Leave Travel Allowance:
Leave Travel Allowance commonly known as LTA is paid by the employer for employee's travel in the country (i.e. only in India) when the employee is on leave, either alone or with family. As the name suggests, only the expenses incurred on travelling is exempt and not other expenses such as lodging, boarding and food. The exemption can be availed subject to certain conditions specified under the Income Tax Act, 1961.
6) Sodexo i.e. Meal Coupons:
Meal coupons provided by the employer to the employee that are not transferable and are usable at eating joints are exempt to the extent of INR.50/- per meal a day.
7) Medical Reimbursement:
Reimbursement of medical expenses incurred by the employee on medical treatment for himself or for some family member is exempt up to INR.15000/- per annum. The said amount is exempt subject to provision of the bills.
8) Reimbursement of Telephone expenses:
Reimbursement by employer, of telephone expenses including payment of mobile phone bills, actually incurred by the employee is not taxable. The said amount will be tax free on submission of telephone bills by the employee provided the telephone connection is registered under the employee’s name.
9) Running and Maintenance of Car:
If you own a car with a cubic capacity of less than 1.6 liters and have been using it for both personal and official purposes, you can claim exemption of up to INR.1800/- per month (you may claim an additional amount of INR.900/- if you hire a chauffeur). If the cubic capacity is more than 1.6 liters, the exemption is INR.2400/- per month (you may claim an additional amount of INR.900/- if you hire a chauffeur). The said exemption is available even if the car is provided by the employer.
Yes, increasing your ‘take-home salary’ is possible! Include the components mentioned above and reduce your tax liabilities. It is well within the parameters of the law.
Disclaimer:
This article should not be constructed as the writer’s opinion on any of the provision of the Income Tax Act, 1961. It is always recommended that the provisions as discussed above be read in conjunction with the recommended rules in regard. The author accepts no liability whatsoever for any direct or consequential loss arising from the use of this article or its contents.
By CA. Ravi H. Dasija
Bibliography:
1) Income Tax Act, 1961
2) Incometaxindia.gov.in
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