What is the Best Salary Structure That Can Help You Save on Income Tax?

When you start your career and receive the salary in your first month, one of the main concerns will be your Income Tax payment. You might get surprised by the TDS structure followed by your employer!

The Government of India has introduced several tax* deductions and exemptions as part of the Income Tax Act, 1961, to encourage individuals to make smart investments and use the salary components to minimise tax based on income. So, here is a detail about how to make a salary structure to save income tax.

Important Components Of A Salary

It is essential to know the key components that make up your salary for availing of the best benefits.

1. Basic Salary - It is the most prominent part of your salary, and it is fully taxable.
   
   

2. Dearness Allowance - It is a fraction of the basic salary provided to government employees predominantly and is completely taxable.
   
   

3. Allowances - Employers provide special financial benefits to assist you with various personal and other expenses. It is over and above the basic salary.
    

   1. House Rent Allowance - If you are staying in rented accommodation, then the minimum of the following is tax-exempt:
      
      

      • Actual HRA amount received

      • 50% or 40% of basic salary based on the metro or non-metro cities

      • Total annual rent paid - 10% of salary.
        
        

   2. Leave Travel Allowance - Provided as financial assistance for your travel on vacation with or without family. It is based on certain conditions and applies to the travel fare by air, rail, etc. You can avail of it two times in a block of four years. The amount exempt is a minimum of
      
      

      • Actual LTA received

      • Travel expenses on the conditions mentioned.
        
        

   3. Medical reimbursement - It refers to the medical expenses incurred for the employee or his family, and the exemption is lower of the two:
      
      

      • ₹ 15,000

      • The actual amount spent for medical treatment
        
        

   4. Conveyance allowance - An employee can get a tax exemption of ₹ 1,600 per month.
      
      

   5. Provident Fund - The employer's contribution to a recognised provident fund is tax-exempt for up to 12% of the basic salary. The employee can also invest in the same, and it qualifies for tax deduction under Section 80C.

    

4. Retirement Benefits - Employers can contribute to the National Pension Scheme(Section 80CCD(2)), and the contribution of up to 10% of basic salary plus dearness allowance is tax-deductible. Employers can also contribute towards a Superannuation Fund, which is eligible for tax deduction up to ₹ 1,50,000.
   
   Employees can contribute towards the NPS(Section 80CCD(1)) and get a tax benefit up to ₹1,50,000. Also, any other additional contribution done in this regard can qualify for a deduction of ₹50,000(Section 80CCD(1B)) over and above Section 80CCD(1). And, the employee contribution to the Superannuation Fund qualifies for tax deduction under Section 80C.

    

Tax Deductions Under Section 80C



It is one of the most common tax provisions that you can utilise for tax benefit. You can invest in various financial products such as life insurance, Equity Linked Savings Scheme, National Saving Certificate, Public Provident Fund, Sukanya Samridhi Yojana, principal amount paid towards housing loan, etc., to avail of the deduction.



It is important to note that the premium amount paid towards any life insurance plan, such as the comprehensive savings plan, also qualifies for such a tax^* deduction. Therefore, we at Tata AIA insurance offer a savings insurance plan that provides a life cover and guaranteed¹ returns on maturity applicable for tax^* deduction under Section 80C.



Let us take an example to understand how different salary components and other investments help save on the tax payment.


 

Scenario 1: Basic Income Tax Salary Structure



Consider Ms Deepika with the following salary structure with no allowances availed and investments made:



Particulars	Amount (₹)
Basic Salary (₹ 40,000*12)	480000
Dearness Allowance (20%of Basic Salary)	96000
Gross Total Income	576000
Less Standard Deduction	50000
Net Taxable Income	526000


 

The Income Tax Calculation based on the new regime is as follows:



Tax Slab(₹)	Rate	Tax(₹)
Up to 250000	Nil	Nil
250000 - 500000	5%	12,500
500000 - 750000	10%	2,600
Total		15,100
Cess	4%	604
Total Income Tax Liability		15,704


 

Therefore, the total tax liability is ₹ 15,704.



Scenario 2: Salary Structure for Tax Benefit in India



Now, let us consider Ms Surekha having a different salary structure with the key components of salary utilised well:



Basic Salary(₹ 40,000*12)	₹4,80,000
DA(20% of Basic Salary)	₹96,000


 

Tax exemption on HRA



Minimum of	HRA received	₹ 35000
	50% of Salary	₹ 288000
	Rent paid(91600) - 10%of Salary	₹ 34000


Therefore, the amount to be added to the total income is ₹ 1000 (35000-34000)




Tax exemption on LTA



Minimum of	LTA received	₹30000
	Actual amount spent	₹28000


Therefore, the amount to be added to total income is ₹ 2000(30000-28000)


 

Tax exemption on Medical Reimbursement



Minimum of	Amount received	₹22000
	15000	₹15000
	Actual amount spent	₹35000


Therefore, the amount to be added to total income is ₹ 7000(22000-15000)



Tax exemption on Provident Fund



Contribution by the employer to a recognized Provident Fund	₹70,000
Exemption(12% of Salary)	₹69,120


Therefore, the amount to be added to the total income is ₹880(70000-69120)


Now, let us calculate the Net Taxable Income based on the above-furnished information, the contribution of the employer and employee towards NPS and the deduction under Section 80C:

 

Particulars	Amount (₹)
Basic Salary(₹ 40,000*12)	480000
Dearness Allowance (20%)	96000
Total	576000
HRA	1,000
LTA	2000
Medical reimbursement	7000
Contribution done by employer to PF	880
Contribution by employer to NPS	58000
Contribution by employee to NPS	58000
Professional Tax	2000
Gross Total Income	704880
Less Standard Deduction	50000
Less Professional Tax	2000
Gross Taxable Income	652880
Deduction under Section 80C
Contribution of Employer to NPS	57600
Contribution of Employee to NPS	57600
Life Insurance Premium	34000
Net Taxable Income	503680

 


Income Tax Calculation based on the Old Tax Regime as deductions and exemptions are not allowed as per the New Regime for FY 2020-21:




Tax Slab(₹)	Rate	Tax(₹)
Up to 250000	Nil	Nil
250000 - 500000	5%	12,500
500000 - 750000	20%	736
Total		13236
Cess	4%	529
Total Income Tax Liability		13765


The Income Tax liability has decreased by ₹1,939.




Conclusion



Paying income tax is a moral obligation. However, as permitted and advised by the government, you can work on the best salary structure to save tax while making investments for a secure financial future.



L&C/Advt/2022/Feb/0237