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Structure your pay slip to reduce your tax burden

No one likes paying a lot of income tax. The good news is that the government gives you several options to reduce your tax burden under various sections of the Income Tax Act, like Section 80C, through which you can reduce your taxable income by Rs. 1.5 lakh by investing in certain schemes. If you are a salaried person, you can reduce the amount of tax you pay by restructuring your salary.

Your salary has several components, some of which are fully or partially taxable, while others are fully tax exempt. So, your focus could be on minimising the tax burden while maximising your take-home salary. Of course, the extent to which you can restructure your salary depends on how flexible your company is. The best way of getting a tax-optimised salary is during negotiations when you join the company.

Let’s look at some of the options you have to reduce your tax burden:

Basic exemption

The earlier conveyance allowance and medical reimbursement was scrapped and replaced with a basic allowance, which is a deduction of Rs. 50,000 from your salary.

House rent allowance, or HRA.

HRA is exempt from income tax to a certain extent. The lowest of the three is exempt from your taxable income:

  1. Actual HRA
  2. 50% of basic salary and dearness allowance in metro cities (Mumbai, Calcutta, Chennai and Delhi) and 40% in non-metro cities
  3. Rent paid less 10% of the basic salary

There are some points you need to remember here. You can claim HRA exemption only on the production of actual rent receipts, or rent agreement with the owner. If you are living with your parents and pay rent to them, you can claim these payments as exemptions.

Leave travel allowance / leave travel concession

This exemption, which can be availed twice in four years, only covers the cost of travel to the destination and return, whether by train, bus or air, against actuals. It does not cover hotel stays, local transport, meals and other expenses. But don’t forget to claim it.

Child education/hostel allowance

Child education is exempt up to Rs. 100 per child per month, or 1,200 per annum, for two children.  If your child stays in a hostel, you can claim deductions up to Rs. 300 per child per month, which translates to a yearly exemption of Rs. 3,600 per child.

Mobile/Internet bill reimbursement

Usually, these bills if paid by the employer or reimbursed on actuals are tax exempt. Most employers have a reimbursement cap for different grades of employees.

Gift vouchers

Any gift voucher up to Rs. 5,000 given by an employer is tax exempt. See if you can make this a component of your salary.

Meal coupons

These coupons offered by an employer are tax free up to Rs. 50 per meal. At 22 working days per month, this comes to Rs. 26,400 per annum tax free.

Newspaper/journal/magazine allowance

Subscriptions for personal development are exempt to a limit against actual bills.

So, while negotiating a salary, pay careful attention to the structure. See if you can arrive at a balance between meeting your daily expenses and having enough left over for long-term financial goals. Employers are generally sympathetic to these requests. Please note that some of these benefits are not exempted from tax under the new tax regime.

Invest your savings in mutual funds and other instruments through ICICIdirect to fulfil your financial goals.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

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