This guest post is contributed by CA Abhishek Soni.
When talking about salary, there are two components of the salary which are usually calculated. One is the CTC (Cost to Company) which represents your gross salary package which the employer pays you in one year.
The other is the take home salary which is, in effect, the salary that you get in cash at the end of every month.
The CTC is higher than the take home salary because the CTC consists of different components. These components are deducted from your monthly CTC and the resulting figure that you get is the take home salary.
While the salary components reduce your take home pay, they can also help you reduce your tax burden. The Income Tax Act allows various types of tax benefits on the different components of your salary which help in lowering your tax liability.
Let's check out the top ten salary components which help you in reducing your tax burden –
1. EPF contributions
As per the Employees' Provident Fund Act which was passed in the year 1952, you have to invest 12% of your basic salary and Dearness Allowance towards the EPF account. Your employer would also have to contribute the same amount towards your EPF account. These EPF contributions, though mandatory, also earn you tax benefits. The amount contributed towards the EPF scheme is allowed as a deduction under Section 80C up to INR 1.5 lakhs. Moreover, the interest that you earn on your contributions would also be a tax-free income in your hands.
2. House Rent Allowance
Most of you have the component of House Rent Allowance (HRA) in your salary. This allowance is provided by the employer to pay for rented accommodation if you don’t own a home yourself. The HRA that you receive can also be claimed as a tax-free benefit. As per Section 10 (13A), the amount of HRA that can be claimed as an exemption from your taxable income would be calculated as lower of the following –
Leave Travel Allowance (LTA) is another tax-free allowance which you can claim to reduce your salary income. LTA is allowed to cover the cost of travel when you take a leave and go on a holiday. LTA is available twice in a block of four calendar years. The allowance is available for travel within India only. The amount of LTA which you can claim as an exemption would be the cost of travelling to the destination through rail, road or air using the shortest route. Moreover, you would have to submit your original travel tickets to claim exemption.
4. Meal coupons
Meal coupons of up to INR 50 per meal can be claimed as a tax-free benefit. Up to two meals a day are covered for exemption. Thus, you can claim an exemption of up to INR 100 per working day on meal coupons and bring down your tax liability.
5. Car allowance
If you own a car and you use the car for your employment as well as for personal use, you can claim an exemption on the car allowance offered by the employer. The exemption would be limited to the following amounts –
6. Children education allowance
If your employer gives you children education allowance to cover the costs of your children’s education, the same allowance can be claimed as an exemption from your salary income. The exemption is allowed on a maximum allowance of INR 100/month for each child. Besides the education allowance in your salary, Section 80C also allows you deduction on the tuition fee that you pay for your dependent children up to INR 1.5 lakhs.
7. Hostel expenditure allowance
Just like education allowance, hostel expenditure allowance is offered by employers to cover the cost of hostel accommodation for your children. If your child is in a hostel you can claim an exemption on the hostel expenditure allowance offered by the employer. The exemption is allowed for up to INR 300/month per child and you can claim an exemption for a maximum of two dependent children.
8. Gift vouchers
If your employer offers you gift vouchers as a part of your salary, you can claim exemption on the vouchers received. Maximum exemption allowed is up to INR 5000/year.
9. Uniform allowance
In many cases you might be required to wear a specific uniform to work. In such situations, the employer usually provides you with a uniform allowance in your salary. This allowance is a tax-free benefit. You can claim an exemption on the cost of uniform that you incurred. There is no maximum limit of exemption on this allowance. Whatever cost is incurred on buying the uniform would be allowed as a tax exemption.
10. Reimbursement of phone bills
The last component which offers you tax benefits is the reimbursement of your phone bills. Often, employers provide reimbursement of the phone or broadband internet bill incurred by the employee. This reimbursement would be tax-free in your hands. You can claim an exemption on the reimbursement of your phone expenses. There is no maximum limit. The actual reimbursement done by the employer would be eligible for exemption.
These are the ten most popular and relevant salary components which, if a part of your salary, can help you lower your tax liability. Look for these components in your CTC. If any of them are missing, talk to your employer to restructure your salary to include these tax-saving components so that you can save tax.
Moreover, you can also claim a standard deduction of INR 50,000 from your salary income and reduce your tax liability.
So, plan your taxes well and you can reduce your tax liability considerably.
Frequently Asked Questions
Author bio:
Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.
When talking about salary, there are two components of the salary which are usually calculated. One is the CTC (Cost to Company) which represents your gross salary package which the employer pays you in one year.
The other is the take home salary which is, in effect, the salary that you get in cash at the end of every month.
The CTC is higher than the take home salary because the CTC consists of different components. These components are deducted from your monthly CTC and the resulting figure that you get is the take home salary.
While the salary components reduce your take home pay, they can also help you reduce your tax burden. The Income Tax Act allows various types of tax benefits on the different components of your salary which help in lowering your tax liability.
Let's check out the top ten salary components which help you in reducing your tax burden –
1. EPF contributions
As per the Employees' Provident Fund Act which was passed in the year 1952, you have to invest 12% of your basic salary and Dearness Allowance towards the EPF account. Your employer would also have to contribute the same amount towards your EPF account. These EPF contributions, though mandatory, also earn you tax benefits. The amount contributed towards the EPF scheme is allowed as a deduction under Section 80C up to INR 1.5 lakhs. Moreover, the interest that you earn on your contributions would also be a tax-free income in your hands.
2. House Rent Allowance
Most of you have the component of House Rent Allowance (HRA) in your salary. This allowance is provided by the employer to pay for rented accommodation if you don’t own a home yourself. The HRA that you receive can also be claimed as a tax-free benefit. As per Section 10 (13A), the amount of HRA that can be claimed as an exemption from your taxable income would be calculated as lower of the following –
- Actual amount of HRA that you have received
- Rent paid – 10% of the basic salary and Dearness Allowance
- 50% of the basic salary and Dearness Allowance if you live in a metro city or 40% if you live in a non-metro city
Leave Travel Allowance (LTA) is another tax-free allowance which you can claim to reduce your salary income. LTA is allowed to cover the cost of travel when you take a leave and go on a holiday. LTA is available twice in a block of four calendar years. The allowance is available for travel within India only. The amount of LTA which you can claim as an exemption would be the cost of travelling to the destination through rail, road or air using the shortest route. Moreover, you would have to submit your original travel tickets to claim exemption.
4. Meal coupons
Meal coupons of up to INR 50 per meal can be claimed as a tax-free benefit. Up to two meals a day are covered for exemption. Thus, you can claim an exemption of up to INR 100 per working day on meal coupons and bring down your tax liability.
5. Car allowance
If you own a car and you use the car for your employment as well as for personal use, you can claim an exemption on the car allowance offered by the employer. The exemption would be limited to the following amounts –
- INR 2700/month if the car has a capacity of up to 1600 cc
- INR 3300/month if the car has a capacity of more than 1600 cc
6. Children education allowance
If your employer gives you children education allowance to cover the costs of your children’s education, the same allowance can be claimed as an exemption from your salary income. The exemption is allowed on a maximum allowance of INR 100/month for each child. Besides the education allowance in your salary, Section 80C also allows you deduction on the tuition fee that you pay for your dependent children up to INR 1.5 lakhs.
7. Hostel expenditure allowance
Just like education allowance, hostel expenditure allowance is offered by employers to cover the cost of hostel accommodation for your children. If your child is in a hostel you can claim an exemption on the hostel expenditure allowance offered by the employer. The exemption is allowed for up to INR 300/month per child and you can claim an exemption for a maximum of two dependent children.
8. Gift vouchers
If your employer offers you gift vouchers as a part of your salary, you can claim exemption on the vouchers received. Maximum exemption allowed is up to INR 5000/year.
9. Uniform allowance
In many cases you might be required to wear a specific uniform to work. In such situations, the employer usually provides you with a uniform allowance in your salary. This allowance is a tax-free benefit. You can claim an exemption on the cost of uniform that you incurred. There is no maximum limit of exemption on this allowance. Whatever cost is incurred on buying the uniform would be allowed as a tax exemption.
10. Reimbursement of phone bills
The last component which offers you tax benefits is the reimbursement of your phone bills. Often, employers provide reimbursement of the phone or broadband internet bill incurred by the employee. This reimbursement would be tax-free in your hands. You can claim an exemption on the reimbursement of your phone expenses. There is no maximum limit. The actual reimbursement done by the employer would be eligible for exemption.
These are the ten most popular and relevant salary components which, if a part of your salary, can help you lower your tax liability. Look for these components in your CTC. If any of them are missing, talk to your employer to restructure your salary to include these tax-saving components so that you can save tax.
Moreover, you can also claim a standard deduction of INR 50,000 from your salary income and reduce your tax liability.
So, plan your taxes well and you can reduce your tax liability considerably.
Frequently Asked Questions
- Under which Income Tax Section is LTA allowed as a tax-free benefit?
- Can airfares be allowed as an exemption under LTA?
- Can I claim children education allowance and hostel allowance when I don’t have children?
Author bio:
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| CA Abhishek Soni |