How to structure your salary tax efficiently
The appraisal season is just ahead and many people will be rewarded for the hard work. Several others will be lured to switch with better offers. In either case, before you sign the agreement, pay attention to the compensation structure being offered. Various components of the compensation package may not come to you immediately. Others may be fully taxable. If the compensation package is not structured properly, you might get a rude shock in your next pay cheque.
This blog tells you what you can do to minimise the tax outgo and enhance your take-home income. An employee earning Rs 60,000-70,000 a month can save over Rs 20,000 in tax in a year by realigning the package appropriately,
Opt for lower basic and variable pay
The basic pay, which is the primary component of the compensation package, is fully taxable. If the basic pay is too high, your tax liability will shoot up. However, you can’t keep it too low because the other components of the package, such as the HRA and Provident Fund benefit, are linked to the basic pay. For those in the highest tax bracket, it makes sense to keep the basic pay low, but a higher basic will not have a big impact in the lowest 10% income tax slab.
How much basic pay you should have?
Those who have to fund immediate goals would need a higher take-home pay. This can be done by lowering the basic pay component. Those focusing on building a corpus for retirement can opt for higher basic pay, as it leads to a higher contribution to the Provident Fund. Similarly, the variable pay and special allowance is also fully taxable. Any bonus will get the same tax treatment. Make sure that the employer has not loaded your CTC with these heads.
More allowances less taxes and more take home salary
Instead of a high basic pay, opt for more tax friendly allowances and reimbursements, such as conveyance, medical, telephone, and newspaper/periodicals. Some companies even offer soft furnishing allowances to cover clothing and certain household items.
However, all these allowances become taxfree only if the individual submits bills as evidence of the expenses incurred. If no bills are submitted, these become fully taxable. Selection between various types of allowances is based on individual needs and living style. Here under few allowances are discuss”
- Leave travel allowance (LTA) : LTA can be a big amount but you have to submit evidence of the journey.
- HRA: If you do not pay rent, the HRA becomes fully taxable. Even if you pay rent, the exemption is linked to your basic pay. It is the least of the following three options: the actual HRA received, 50% of basic pay (40% in non-metros), and actual rent paid minus 10% basic. If you pay a high rent and can claim exemption, include it in the package. If you live in your own house or the rent is very low, replace it with some other allowance.
When you sit down to reconfigure your pay package, keep in mind that the allowances are allocated reasonable amounts. There is no upper limit to how much a company can pay under one head. However, someone with a monthly CTC of Rs 80,000 cannot get Rs 40,000 a month for conveyance and Rs 10,000 for books and periodicals. If this component is unreasonably high, the taxman may raise an objection.
We hope this should help you design a more tax friendly compensation package for yourself. For more ways to plan your compensation package go ahead for read our further blogs.