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How to save Income tax on Salary in India

save salary tax

How to save Income tax on Salary in India

As tax season approaches, Kartik was looking at his tax burden and figuring out ways to save tax. He had exhausted the limit under Section 80C (investment in tax saving instruments), Section 80D (investment in health insurance), and taken the benefit of sections like 80G (donations) and 80TTA (deduction for savings account interest). However, his total tax payable was still quite high. He compared his tax burden with a colleague with a similar salary and was surprised to find his burden significantly lower. His colleague assured him it was only a bit of restructuring that had resulted in a lower tax burden.

While Kartik knew how to save tax on salary in India mainly by using tax saving instruments, he was not aware of another way. There are different allowances that are exempt up to a particular limit and by adjusting and structuring your salary to reflect that, you can ensure you reduce the total tax payout.

Some of the common allowances exempt are:

This allowance is meant to meet the cost of staying in rented accommodation.

The minimum of these three is exempted:

Any amount in excess of this is fully taxable.

Child hostel allowance is given to meet the costs of hostel stay for a child. This is given at the rate of Rs. 300 per child per month. This translates to a yearly exemption of Rs. 3,600 per child.

Let us consider Ravi, an employee who has a CTC of Rs. 10,00,000. In the illustration below, we can understand how to save income tax on salary. Let us examine his salary under two different structures:

  Salary Structure 1 Salary Structure 2
Basic Salary 5,00,000 4,00,000
(+) HRA 3,00,000 2,00,000
(+) Provident Fund @12% 60,000 48,000
(+) Standard Allowance (Conveyance allowance + medical reimbursement) 40,000 40,000
(+) Leave Travel Allowance 30,000 30,000
(+) Other Allowances 70,000 2,82,000
Total 10,00,000 10,00,000
(-) Exempted HRA 2,50,000 2,00,000
(-) Standard Allowance 40,000 40,000
(-) Leave Travel Allowance 30,000 30,000
(-) Other allowances

• Meal allowance
• Mobile bill reimbursement
• Gift voucher
• Child’s education allowance
• Child’s hostel allowance
• Newspaper/Journal allowance
• Internet Bill reimbursement
 
26,400
10,000
5,000
2,400
7,200
16,000
12,000
Total taxable Salary 6,80,000 6,51,000
Less: Profession Tax Paid 2,500 2,500
Less: Profession Tax Paid 2,500 2,500
Income under the head Salary 6,77,500 6,48,500
(-) Deductions under Section 80C 1,50,000 1,50,000
Total Taxable Income 5,27,500 4,98,500
Tax on income 18,720 12,920
Saving in tax   5,800

If you were wondering how to save tax on salary, then restructuring it to reflect different exempt allowances is the best way of going about it.