As a salaried employee in India, you're likely to be paying a significant amount of your income in taxes. However, by restructuring your salary package in a tax-efficient way, you can keep more of your hard-earned money and pay less in taxes. Here are some tips on how to do it:
1. Take advantage of tax-free allowances
Many allowances and reimbursements are exempt from tax under the Income-tax Act. By including these in your salary package, you can reduce your taxable income and increase your take-home pay. For example:
- Telephone and internet bills: Reimbursements for actual telephone and internet bills are not taxable.
- Conveyance expenses: If an employee uses their own vehicle or doesn't receive any vehicle from the employer, they can claim a tax exemption on any conveyance allowance provided to them by the employer. However, if an employee uses a company-provided car and the employer pays for the driver's wage, insurance, maintenance, and fuel expenses, then the taxable value is Rs 2,700 per month (for cars with cubic capacity within 1.6 Litre) or Rs 3,300 per month (for cars with engines over 1,600 cc or cubic capacity exceeding 1.6 Litre). If an employee owns a car, the employer can reimburse an exemption of Rs 2,700 per month or Rs 3,300 per month for the driver's salary, maintenance, and fuel expenses.
- Meal allowance: A meal allowance of up to Rs 50 per meal can be included in the salary package as a non-taxable benefit.
2. Incorporate standard deduction
Every employee is entitled to claim a standard deduction of Rs 50,000 from their gross salary, and this can be claimed as an exemption.
3. Include Leave Travel Allowance
Leave Travel Allowance (LTA) is an allowance for travel expenses incurred while on leave. LTA can be claimed twice in a block of four years for domestic travel. By including LTA in your salary package, you can reduce your taxable income and increase your take-home pay.
4. House Rent Allowance
House Rent Allowance (HRA) is an allowance provided by the employer to meet rental expenses. HRA exemption can also be claimed as per the act and is allowed least of the below:
- Actual HRA received by the employee
- 40 percent of the salary for a non-metro city or 50 percent of salary if the rented property is in metro cities like Mumbai, New Delhi, Kolkata, and Chennai
- Actual rent paid should be less than 10 percent of salary
By including HRA in your salary package, you can reduce your taxable income and increase your take-home pay.
5. Make contributions to Provident fund and National Pension Scheme
Contributions to Provident Fund and National Pension Scheme can be deducted from taxable income under certain sections of the Income-tax Act. By making contributions to these schemes, you can reduce your taxable income and increase your take-home pay. The maximum limit for Provident Fund contribution is Rs 1,50,000 u/s 80C of the Act and for National Pension Scheme, the limit is Rs 50,000 u/s 80CCD of the Act.
6. Opt for a higher basic salary
Basic salary is taxable, but it's also the basis for calculating other allowances such as House Rent Allowance (HRA), Gratuity, and Provident Fund (PF). By increasing your basic salary, you can reduce the taxable portion of your salary while still receiving the same take-home pay.
7. Opt for a flexible benefits plan
Some employers offer a flexible benefits plan where you can choose from a range of tax-free benefits such as insurance coverage, travel allowances, and NPS contributions etc. By opting for a flexible benefits plan, you can reduce your taxable income while still receiving the same benefits.
In conclusion, restructuring your salary package can help you maximize your take-home pay while minimizing the taxes you pay. By taking advantage of the various exemptions and deductions available under the Income-tax Act, you can reduce your taxable income and increase your take-home pay. Be sure to work with your employer or a tax consultant to structure your salary package in a tax-efficient way that works best for your financial situation.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.
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