Little can be done to save tax for salaried employees! This seems to be the predicament of most salaried individuals. While it might be true to some extent, things could be better if you at least try and structure your salary in a tax efficient way.
Higher the better
Often employees desire to have maximum amount of salary in hand and accordingly structure their salary so as to have less of basic component, which leads to lower contribution on account of retirals such as provident fund (PF) etc.
On the contrary, we are of the opinion that by increasing the component of retirals you are possibly benefiting in two ways. The first being that the employer contributions to PF is tax free up to the extent of 12 per cent of your salary (basic + DA) and the second being enabling you to defer the tax payable from current timeframe to a future timeframe.
It might also be possible for you to achieve zero tax status on withdrawal of such amounts in future if you have completed five years of continuous employment (not specifically with the same employer).
In case you reside in a rented property, you could incorporate the component of HRA into your salary. This would enable you to cut your tax bill phenomenally.
Generally salaried individuals have a doubt in their mind as to whether they could avail of HRA benefit if they have a house property.
Here it has to be noted that HRA benefit is available even if you have an owned house property subject to the condition that you should not be staying in that house property and are actually staying in a rented property due to reasons of employment.
Tax free allowances
You could factor in all the possible tax free allowance into your salary structure to reduce the tax burden. Few of the tax free allowances are as follows:
- Education allowance: Exempt up to Rs 100 per child per month for a maximum of two children.
- Transport allowance: Exempt up to Rs 800 per month.Though the amounts might seem small but even a rupee of tax saved is a rupee earned.
Tax free reimbursements
Salaried individuals often spend on aspects that might be indirectly linked to their employment such as you might be needed to be attired in a particular way to conduct your employment or you may be needed to read up on subject specific reference books.
Such expenses might not be specifically reimbursed by your employer but is part of your salary.
Here it would be advisable to identify all such heads of expenses incurred by you for reasons directly/indirectly associated with your employment.
Try to talk to your Company HR to restructure the salary in such a way that these reimbursements are given separately against bills submitted by you. This would enable you to get some tax free components included in your overall structure.
Fringe benefits (FB) means any consideration for employment provided by way of any privilege, service, facility or amenity, directly or indirectly by the employer, whether by way of reimbursement or otherwise. In such case the value of fringe benefit is considered for taxation in the hands of the employer and not the employee.
Accordingly, if your salary structure constitutes such fringe benefits then you could take so much portion of your salary out of the tax range. Some examples of such fringe benefits are contributions to superannuation fund (if it is in excess of Rs one lakh per annum), fuel and maintenance expense on cars, gifts including gift coupons, tour/travel/ foreign travel expenses, food coupons (which is not taxable) etc.
However, there is a catch here; generally employers do not want to take the hit for the FB tax and incorporate the amount of tax into the salary structure of the employee based on cost to company (CTC) concept. Accordingly, you might end up paying the tax on such structured components. Here it is our opinion that you might still benefit by taking the hit for the FBT as the effective rate of tax on such FB is substantially lower than the highest slab rate of tax.
By using these measures you could cut your tax bill substantially. Also, you would find a list of possible heads of salary/compensation that could act as a ready reckoner to enable structure your salary better.