Namaste from Moneyम्जी!
Salary! What a simple word it is. Zoom in, and you will realize this simple word is made up of so many components. These components can decide your taxability factor. Would you like to take home most of your pay or would you like to save tax or how about striking a right balance?
Moneyम्जी will help you in understanding the components of salary.
See, salary has 4 components- Basic, allowances, perquisites and retirement benefits/contribution
Basic – Basic salary is fully taxable, but certain exemptions like House Rent Allowances and Provident Funds are also exempted as a percentage of basic salary. Generally, junior employees keep basic salary less and allowances and perquisites high as they are exempt till certain extent. Senior employees try to keep basic salary high as it would fetch them additional tax benefits.
Allowances– Certain allowances are exempt till certain extent. Hence, they help you in reducing tax liability. Example: House Rent Allowance, Transport Allowance, Leave Travel Allowance, etc.
Perquisites– These are the additional benefits provided by the employer like meals, gift vouchers, telephone reimbursement,car, etc. Including these perquisites intelligently as a part of your salary can help you save tax.
Retirement Benefits/ Contribution– See, the employer here acts like your parents, who won’t give you your entire pocket money right now, but at a time when you will need it the most. A part of your salary is deducted and deposited as your long term saving (post retirement). This deposit is exempt up to a certain percentage, and hence the right ratio will save you a great amount of taxes.
Let’s have a look at the amount of exemptions provided under these structures:
Amount exempt is the lower of the following three
– Actual HRA received
– 40-50% of basic in metro cities and 40% in case of non metro
– Rent paid less 10% of basic salary
Medical (allowance) reimbursement
Exempt up to Rs 15,000 per annum
Exempt up to Rs 1,600 per month, i.e., Rs 19,200 per annum
Leave Travel Allowance/Leave Travel Concession
Actual travel cost can be claimed exempt twice in a block of four years
Uniform allowance /corporate attire
Exempt to the extent of expenditure incurred
Children’s education allowance
Exempt up to Rs 100 per month for 2 children
Children hostel allowance
Exempt up to Rs 300 per month for 2 children
This is detailed, depending upon your usage of the car for official purpose, private purpose or mixed purpose. Click here to know more.
Exemption: Rs 50/meal up to Rs 2,200 per month
Health club, sports and similar facility
Exempt: If provided uniformly to all employees shall be exempt from tax
Exempt: Can be claimed exempt up to Rs 5,000 per annum
Exempt: Exempt to the extent of actual expenditure towards the mobile and telephone expenses
Books and periodicals
Exempt: To the extent of actual expenditure towards purchase of
books and periodicals
Employer’s contribution: Exempt up to 12% of salary
Employee’s contribution: Qualifies for tax deduction up to Rs 1.5 lakh u/s. 80C
Contributions to NPS
Employer’s contribution: Exempt up to 10% of salary
Employee’s contribution: Employee’s own contribution of up to Rs 50,000 is eligible for deduction over and above the limit of Rs 1,50,000
The benefits mentioned above will greatly help you structure your salary in a tax efficient way. You can thank Moneyम्जी or post any queries at firstname.lastname@example.org. Moneyम्जी would be glad to help you 🙂