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:
- House Rent Allowance:
This allowance is meant to meet the cost of staying in rented accommodation.
The minimum of these three is exempted:
- Actual HRA received
- 50% of basic salary (40% if staying in non metro cities)
- Rent paid less 10% of the salary
Any amount in excess of this is fully taxable.
- Child Education/Child Hostel Allowance:
Child education allowance is given to meet the cost of educating your child. It is exempt up to Rs. 100 per child per month. This means that Rs. 1,200 per annum per child is tax free income.
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.
- Mobile/Internet bill reimbursement:
These bills if paid by the employer or reimbursed by the employer on actuals are exempt from tax.
- Meals coupons:
Employers can pay their employees an allowance for meeting food expenses in the form of coupons. These coupons are tax free subject to Rs. 50 per meal. Considering 22 working days, this amounts to Rs. 26,400 per annum which is tax free.
- Gift vouchers:
Any gift voucher given by an employer up to Rs. 5,000 is exempt from tax. This can become one component of salary.
- Newspaper/Journal allowance:
In case employers require the employee to have special knowledge about any subject, they can give a journal or newspaper allowance to ensure the employee takes different subscriptions. These subscriptions are exempt on showing actual bills.
- Leave Travel Allowance / Leave Travel Concession:
This exemption is given for economy air travel or AC rail travel for the family. The exemption is only for mode of travel to the destination and back. Hotel stays, meals and other expenses are not considered. This exemption is based on actuals. Two such exemptions can be availed in a block of four years.
- Basic Exemption:
The government scrapped the conveyance allowance and medical reimbursement in Budget 2018 and replaced it with a basic allowance or a basic deduction of Rs. 40,000 from the salary of the employee.
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|
|(+) 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|
|(-) Exempted HRA||2,50,000||2,00,000|
|(-) Standard Allowance||40,000||40,000|
|(-) Leave Travel Allowance||30,000||30,000|
(-) Other allowances
|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.