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Image Of The Best Salary Structure to Save Tax

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

24-June-2021 |

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.

     

  5. 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

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

Looking to get a new plan? 
Connect with us now

+91

TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

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Salary Structure to Help You Save on Income Tax | Tata AIA Blog
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