Your salary income is, usually, never a "single" consolidated amount. Rather, the total cost to company (CTC) comprises many components.
Each of these components is taxed differently.
Hence, structuring your salary is important; so that for a given total package, your income tax liability is the least (hopefully, nil).
Listed below are the most common components of your salary and the tax implications of the same. This knowledge would help you to design a tax-efficient salary package, for your specific financial profile.
1. Basic Pay
The 'basic' part of your salary is fully taxable. However, many benefits such as Provident Fund, HRA, Gratuity etc., are linked to your basic pay. Therefore, even if it is taxable, don't opt for a low Basic Pay amount.
2. Dearness Allowance
DA or dearness allowance too is fully taxable. However, DA is added to the Basic Pay for calculating many of the aforesaid benefits. So, like basic pay, maintain an appropriate sum of Dearness Allowance in your package.
3. Special Allowance
This allowance is also fully taxable. But, unlike DA or Basic, it offers no benefits. As such, go for as big a cut in your special allowance as possible, and ask for an increase in the other salary constituents that offer some tax breaks.
4. House Rent Allowance
If you are paying rent, part of your HRA is exempt from tax. There is forumla specified in the Income Tax Act for this deduction. For more details on the same, the following posts would be quite useful:
- How To Calculate Your HRA Tax Benefit
- Rules For Claiming Tax Benefit On HRA Tightened
5. Food Coupons
Up to Rs.50 per meal (excluding tea, coffee, non-alcoholic beverages, snacks during working hours) is exempt from tax. So, in general, if you have 25 working days in a month, food coupons worth Rs.1250 (=50*25) given by your company, will not be taxed. [Note: This rule has been open to many interpretations. So check how your company treats this perquisite.]
6. Gift vouchers
Gifts, in kind, are exempt from tax for up to a sum of Rs.5000 in a given financial year. Cash or gift cheques are fully taxable.
7. Furniture & Fixtures
Moveable assets provided by the company, such as furniture, fixtures, etc. are all taxable. Every year, 10% of the cost of the asset is added to your total income. However, laptops and computers, given to you by your employer, are not taxed.
8. Company Car
If your employer provides you the car (which is used for both official and personal purposes) and also reimburses the running / maintenance expenses, following amount would be added to your income and taxed:
a) Upto 1600 cc vehicles: Rs. 1800/- (plus Rs. 900/-, if chauffeur is also provided) per month
b) More than 1600 cc vehicles: Rs. 2400/- (plus Rs. 900/-, if chauffeur is also provided) p.m.
For various other permutations and combinations, read What Is The Perquisite Value For The Car.
9. Club membership
Fees paid by your employer towards your club membership is fully taxable; unless the same serves official purposes.
10. Loan at concessional rates
Concessional or nil rate loans are taxable. The difference between the interest amount as per the market rate (which is equal to the interest rate charged by SBI for a similar loan) and your actual rate, is added to your income and taxed accordingly. [The only exception is when the loan amount is maximum Rs.20,000; or the loan is provided for the treatment of certain specified illnesses.]
11. Transport or Conveyance Allowance
This allowance is towards expenses on commuting between your home and office. It is tax free up to Rs.1600 per month i.e Rs.19,200 per year.
12. Conveyance Reimbursement
This is fully exempt against actual bills, if such travel is for official purposes.
13. Reimbursement of telephone bills
This is fully exempt against actual bills, if such use is for official purposes.
14. Books and Periodicals
Newspapers, books and periodicals relating to your profession are fully exempt against actual bills. Some companies may, however, put a reasonable cap on the same.
15. Leave Travel Allowance
This has been covered, in detail, in my post 10 Key Leave Travel Allowance Tax Exemption Rules.
16. Medical Allowance
This is tax exempt up to Rs.15,000 in a Financial Year; subject to submission of medical bills towards any treatment of self, spouse, children and dependent parents or siblings.
17. Uniform Allowance
Allowance for purchase or maintenance of uniform (or a dress code specified by your employer) to be worn during the working hours, is fully exempt from tax; subject to submission of original bills.
18. Children's Education and Hostel Allowance
Education Allowance is exempt up to Rs.100 per month per child; subject to a maximum of two children. Hostel Allowance is exempt up to Rs.300 per month per child; subject to a maximum of two children.
19. Bonus
Bonus, variable pay or any such other payment(s) made to you by your employer are fully taxable. They do not enjoy any tax exemptions or deductions.
20. Provident Fund
Employer's contribution to your Provident Fund account is not taxable. Further, your contribution to the PF account, is one of the eligible deductions u/s 80C.
21. Superannuation Fund
Employer's contribution is exempt from tax, up to a sum of Rs.1 lakh, during a given Financial Year. Your contribution to Superannuation Fund is one of the eligible deductions u/s 80C.
22. National Pension System
Avoid. Tax benefit on NPS is all bogus and sham.
This, in brief, is how you can optimize your total salary so that the tax outgo is minimal, within the legal framework.
If your employer is open to you deciding your compensation structure, don't miss the opportunity to do so.
Each of these components is taxed differently.
Hence, structuring your salary is important; so that for a given total package, your income tax liability is the least (hopefully, nil).
Listed below are the most common components of your salary and the tax implications of the same. This knowledge would help you to design a tax-efficient salary package, for your specific financial profile.
1. Basic Pay
The 'basic' part of your salary is fully taxable. However, many benefits such as Provident Fund, HRA, Gratuity etc., are linked to your basic pay. Therefore, even if it is taxable, don't opt for a low Basic Pay amount.
2. Dearness Allowance
DA or dearness allowance too is fully taxable. However, DA is added to the Basic Pay for calculating many of the aforesaid benefits. So, like basic pay, maintain an appropriate sum of Dearness Allowance in your package.
3. Special Allowance
This allowance is also fully taxable. But, unlike DA or Basic, it offers no benefits. As such, go for as big a cut in your special allowance as possible, and ask for an increase in the other salary constituents that offer some tax breaks.
4. House Rent Allowance
If you are paying rent, part of your HRA is exempt from tax. There is forumla specified in the Income Tax Act for this deduction. For more details on the same, the following posts would be quite useful:
- How To Calculate Your HRA Tax Benefit
- Rules For Claiming Tax Benefit On HRA Tightened
 |
| How to structure your salary for a maximum Take-Home amount. |
5. Food Coupons
Up to Rs.50 per meal (excluding tea, coffee, non-alcoholic beverages, snacks during working hours) is exempt from tax. So, in general, if you have 25 working days in a month, food coupons worth Rs.1250 (=50*25) given by your company, will not be taxed. [Note: This rule has been open to many interpretations. So check how your company treats this perquisite.]
6. Gift vouchers
Gifts, in kind, are exempt from tax for up to a sum of Rs.5000 in a given financial year. Cash or gift cheques are fully taxable.
7. Furniture & Fixtures
Moveable assets provided by the company, such as furniture, fixtures, etc. are all taxable. Every year, 10% of the cost of the asset is added to your total income. However, laptops and computers, given to you by your employer, are not taxed.
8. Company Car
If your employer provides you the car (which is used for both official and personal purposes) and also reimburses the running / maintenance expenses, following amount would be added to your income and taxed:
a) Upto 1600 cc vehicles: Rs. 1800/- (plus Rs. 900/-, if chauffeur is also provided) per month
b) More than 1600 cc vehicles: Rs. 2400/- (plus Rs. 900/-, if chauffeur is also provided) p.m.
For various other permutations and combinations, read What Is The Perquisite Value For The Car.
9. Club membership
Fees paid by your employer towards your club membership is fully taxable; unless the same serves official purposes.
10. Loan at concessional rates
Concessional or nil rate loans are taxable. The difference between the interest amount as per the market rate (which is equal to the interest rate charged by SBI for a similar loan) and your actual rate, is added to your income and taxed accordingly. [The only exception is when the loan amount is maximum Rs.20,000; or the loan is provided for the treatment of certain specified illnesses.]
11. Transport or Conveyance Allowance
This allowance is towards expenses on commuting between your home and office. It is tax free up to Rs.1600 per month i.e Rs.19,200 per year.
12. Conveyance Reimbursement
This is fully exempt against actual bills, if such travel is for official purposes.
13. Reimbursement of telephone bills
This is fully exempt against actual bills, if such use is for official purposes.
14. Books and Periodicals
Newspapers, books and periodicals relating to your profession are fully exempt against actual bills. Some companies may, however, put a reasonable cap on the same.
15. Leave Travel Allowance
This has been covered, in detail, in my post 10 Key Leave Travel Allowance Tax Exemption Rules.
16. Medical Allowance
This is tax exempt up to Rs.15,000 in a Financial Year; subject to submission of medical bills towards any treatment of self, spouse, children and dependent parents or siblings.
17. Uniform Allowance
Allowance for purchase or maintenance of uniform (or a dress code specified by your employer) to be worn during the working hours, is fully exempt from tax; subject to submission of original bills.
18. Children's Education and Hostel Allowance
Education Allowance is exempt up to Rs.100 per month per child; subject to a maximum of two children. Hostel Allowance is exempt up to Rs.300 per month per child; subject to a maximum of two children.
19. Bonus
Bonus, variable pay or any such other payment(s) made to you by your employer are fully taxable. They do not enjoy any tax exemptions or deductions.
20. Provident Fund
Employer's contribution to your Provident Fund account is not taxable. Further, your contribution to the PF account, is one of the eligible deductions u/s 80C.
21. Superannuation Fund
Employer's contribution is exempt from tax, up to a sum of Rs.1 lakh, during a given Financial Year. Your contribution to Superannuation Fund is one of the eligible deductions u/s 80C.
22. National Pension System
Avoid. Tax benefit on NPS is all bogus and sham.
This, in brief, is how you can optimize your total salary so that the tax outgo is minimal, within the legal framework.
If your employer is open to you deciding your compensation structure, don't miss the opportunity to do so.
