Restructure Your Salary to Save Tax
a picture of glasses on a table, featured image for an article on how salary restructuring can help you save on taxes.

You do all the right things to save on your taxes – use up the Section 80C limit, buy health insurance, and the like. But you could also take a closer look at your pay slip. Your salary structure affects your taxes. Understanding how can make a world of difference to your tax outgo.

By salary structure, we mean the various heads that together make up your total pay. This break-up of your salary under different heads will be mentioned clearly in your monthly pay slip. Let us start by taking a look at what a salary slip from a private organisation might look like:

Basic salary10,000Professional tax200
Dearness allowance10,000Provident fund1,800
House rent allowance10,000TDS1,200
Medical reimbursment1,250
Leave travel allowance1,500
Telephone reimbursement 1,500
Conveyance allowance1,600
Special allowance3,000
Food coupons2,000
Gross Salary40,850Total Deductions 3,200
Net Earnings for the month (Gross Salary - Total Deductions): Rs 37,650

Now, your salary may or may not have all these heads. If it does, you are already making use of all avenues to cut back on taxes. If it doesn’t, read on.

The Income Tax Act allows exemptions and deductions for certain perks and allowances. Negotiating with your employer to put them into your pay structure will therefore help your tax outgo. Here are some of the common ones.

  • House rent allowance(HRA) – Exemption for HRA is available under Section 10(13A) of the Income Tax Act. So if you live in a rented apartment, you can deduct the rent paid from your income, subject to a limit. You need to have a rental agreement and rent receipts as proof that you are paying the rent you claim. Additionally, if you have paid more than Rs. 1,00,000 as rent in a single financial year, you will need to furnish the landlord’s PAN as well.
  • Medical reimbursement– Medical reimbursement from your employer is exempt to the extent of Rs. 15,000 in a year. This translates to Rs. 1,250 per month. Keep in mind, though, that this is subject to actual expenses incurred and you should have bills for these.
  • Conveyance/Transport allowance– If you are receiving conveyance allowance, an exemption of up to Rs. 1,600 per month can be claimed.
  • Meal Vouchers/Food coupons– There is an exemption with regards to food coupons of Rs. 50 per meal. Exemption is available for 2 meals per day and the total exemption depends on the number of working days.
  • Telephone/Internet reimbursement– Reimbursement received on payments to maintain a telephone and/or internet connection is exempt up to the actual amount incurred. As always, make sure you have the bills for these. There is no upper limit to the amount that can be reimbursed.
  • Leave travel concession– If your employer is providing you with leave travel allowance monthly, check if there is an option to take this amount as leave travel concession once in a year. In that case, you will be able to get an exemption for this once every two years. Check section 10(5) of the Income Tax Act for more details.

By restructuring your salary to include these components, you will be able to reduce your tax payments. Try to wrangle the maximum amount under these heads so that you don’t miss out.

Remember that these are just changes in nomenclature and will not affect the actual finances of you or your employer. Hence, if you can get your employer to agree to restructure your salary, you can save a significant amount of tax without any additional effort.

Gourav Kumar

About the author:

Gourav Kumar is a Business Analyst at A Chartered Accountant by training, he is passionate about all things personal finance, and financial planning.
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