Restructure your compensation with perquisites and other long terms benefits
In our earlier blogs we have already discuss in detail about structuring your compensation plan. Here we are providing you few more tips which will help you in restructuring your salary so as to minimize your tax bill:-
Make use of perquisites
One smart way to avoid tax is to opt for a company leased car instead of buying one yourself. Instead of you paying the EMI out of your post-tax income, your employer pays the EMI and includes it in your CTC. This cuts the tax significantly because you are taxed only for the perk value of the car, which is between Rs 1,800 a month (for cars of up to 1600 cc) and Rs 2,400 a month (for cars bigger than 1600 cc).
If your employer is willing to fund a professional course, the taxable value of such a perk will only be at 10% of the course fee. This means, for a benefit of, say Rs 70,000, you will be taxed for only Rs 7,000.
Check if your employer can provide you a laptop or tablet for professional as well as personal use. You will have to pay tax on the perk value of the gadget, which is only 10% of the price of the gadget.
Other tax-efficient perks include food coupons, which can be used at various outlets and departmental stores to buy food items. Most of big grocery chains, fast food outlets and departmental stores accept these coupons. One can take nearly Rs 30,000 worth of meal coupons and gift coupons of up to Rs 5,000 in a year. This has the potential to reduce the tax by almost Rs 10,000 for someone in the 30% tax slab.
Opt for more long-term benefits
Tax can be reduced further if you opt for certain long-term benefits. Every month, 12% of your basic pay flows into your PF account with a matching contribution by your employer. While your contribution fetches you tax benefits under Section 80C, you can opt for investments that give you additional tax benefits over and above the Rs 1.5 lakh deduction under Section 80C.
Under Section 80CCD(2), up to 10% of your basic salary is fully deductible if invested in the national Pension System (NPS). Additionally, the employer’s contribution, which is up to 10% of the basic, is deductible under Section 80CCE over and above the Rs 1.5 lakh deduction limit for Sections 80C, 80CCC and 80CCD. In the highest 30% tax bracket, it will enhance your increment by 3% of your basic salary.
Become the consultant
Another way to ensure a higher take-home salary and lower tax is by becoming a consultant. Consultants can claim deduction for work-related expenses. As a consultant, your income is taxed under the head ‘income from business or profession’ and accordingly you can claim deduction of all expenses incurred, including telephone bills, travel, entertainment, stationery and depreciation of assets. This can go a long way in reducing the taxable income for the individual.
However, there are several hassles you need to go through as a consultant.
You will have to maintain proper books of accounts and get an audit report in case the gross receipts exceed Rs 15 lakh in a year.
A consultant is also liable to pay service tax if his income exceeds Rs 10 lakh.
It is wrong to assume that the tax burden will lessen if one becomes a consultant. It will depends on how much expenditure one has incurred against receipts.
However, you have to forego some benefits you would have otherwise enjoyed as a salaried individual. For instance, HRA, LTA and medical allowance are some key benefits that consultants are not eligible for.
So we advice taxpayers to think about the long-term benefits of continuing as an employee rather than becoming fixated with the short-term tax benefits of a consultant. They stand to reap certain incidental benefits that help build long-term savings in the form of Provident Fund, as well as certain terminal benefits like gratuity and superannuation.
We are of strong belief that above article would help you in preparing a tax efficient salary structure and will help you to increase your take home salary.