How to structure your salary to save tax

When negotiating terms of employment with a propsective employer, we focus on increasing CTC, without paying much attention to the salary structure. Though a higher CTC is an important aspect of salary negotiation, it is equally important to structure it well to maximize take-home pay and minimize tax outgo.

While you may not have complete control over the way your salary is structured, employers today areflexible enough to design it your way. However, before taking a final call on a particular pay structure, consider your long-term and short-term financial goals. Modifying the tax structure can simultaneously impact your net take home and your retirement corpus as some components of the package may not come to you immediately and others may be either full taxable or tax-free.

Generally the CTC can be broadly divided in four components— basic, allowances, perquisites and retirement benefits/contributions. Each component is treated in a different way for tax purposes and can impact your tax liability.

1. BASIC SALARY
It is vital to decide how much of your CTC should make up the basic salary, because it is fully taxable. If the basic is too high, your tax liability will shoot up. Other components of salary exemptions, such as the HRA and Provident Fund benefits, are linked to basic pay. Designing a tax efficient pay structure is always a trade-off between higher take home and maximum tax benefits.

Junior employees need a higher monthly payout. They can get that by opting for a lower basic salary and adding other fixed allowances in the salary structure such as food allowance, medical reimbursement, conveyance allowance, telephone, etc. These allowances are fixed and payable monthly. Employees may get taxed on these to a certain extent, but at a lower rate. Senior employees fall in a higher tax bracket. For them, tax savings gets priority over a higher take-home salary. Hence, a higher basic salary would fetch additional tax benefits for such individuals.

2. ALLOWANCE
The Income Tax Act has prescribed certain allowances for all salaried individuals which are exempt at source. So if these allowances are a part of the pay structure, the overall tax liability may come down to a great extent.

3. PERQUISITES
The additional benefits or amenities provided by the employer to an employee are termed as perquisites. The Income Tax Act allows exemption for certain perquisites which if included as component of salary can result in tax savings.

4. RETIREMENT BENEFITS/CONTRIBUTIONS
The fourth and the most important component of any salary structure is the retirement benefit contribution which is not payable to the employee immediately and is in the nature of long-term savings for them. While these savings help them lead a dignified life post-retirement, they also result in a lower take home package. It is important to decide the right ratio for these contributions. To motivate individuals to save more towards building a good retirement corpus, tax laws allow certain exemptions and deductions for these contributions. Be diligent while designing your pay structure. Use the table alongside to plan the perfect salary structure.

Goals should help decide structure
Modifying the tax structure can impact your net pay and retirement corpus.

Allowance : HRA
Taxability : Amount exempt is the lower of the following three
* Actual HRA received
* 40-50% of basic (depending on whether you stay in a metro city or
other cities)
* Rent paid less 10% of basic salary

Allowance : Medical (allowance) reimbursement
Taxability : Exempt up to Rs 15,000 per annum

Allowance : Transport (conveyance) allowance
Taxability : Exempt up to Rs 1,600 per month

Allowance : LTA/LTC
Taxability : Actual travel cost can be claimed exempt under Section 10(5)
twice in a block of four years

Allowance : Uniform allowance /corporate attire
Taxability : Exempt to the extent of expenditure incurred u/s. 10(14)

Allowance : Children's education allowance
Taxability : Exempt up to Rs 100 per month for 2 children

Allowance : Children hostel allowance
Taxability : Exempt up to Rs 300 per month for 2 children

Allowance : Professional pursuit/research allowance
Taxability : Actual expenses can be claimed as exempt

Allowance : Other allowance (balancing figure)
Taxability : Fully taxable

FACILITY

Meal voucher
Taxability : Can be claimed exempt @ Rs 50/meal up to Rs 2,200 per month

Health club, sports and similar facility
Taxability : If provided uniformly to all employees shall be exempt from tax

Gift voucher
Taxability : Can be claimed exempt up to Rs 5,000 per annum

Mobile/telephone reimbursement
Taxability : Exempt to the extent of actual expenditure towards the mobile and telephone expenses

Books and periodicals
Taxability : Exempt to the extent of actual expenditure towards purchase of
books and periodicals

Company leased car
Taxability : Out of the total expenses incurred by the employer, only a very small portion gets taxed and can result in huge tax savings for the employee who is planning to buy a car.

PF Contributions
Employer's contribution taxability: Exempt up to 12% of salary
Employee's contribution taxability: Qualifies for tax deduction up to Rs 1.5 lakh u/s. 80C

Contributions to NPS
Employer's contribution taxability: Exempt up to 10% of salary
Employee's contribution taxability: Employee's own contribution of up to Rs 50,000 is eligible for deduction over and above the limit of Rs 1,50,000 To take this a step further, the existing withdrawal provisions of Exempt Exempt Taxable (EET) have been tweaked and 40% of the corpus is proposed to be tax-free at withdrawal.

(By Vaibhav Sankla, Director, H&R Block India)

Source: Economic TImes

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