If you look at your Salary Slip it contains a lot of components – Some are Tax Free Salary Components while others are partially or fully taxable. Keeping this in mind its very important to maximise the tax free and partially tax free components in the salary. Here is a list of 11 components in your salary that is tax free. In case you have it in your pay slip, great – but in case you don’t have it – you can always discuss with your company and HR.
- 1 Fully Tax Free Salary Components
- 2 Fully Tax Free Salary Components (on submission of bills)
- 3 Salary Components with Perquisite Tax
- 4 Company Car/ Car Maintenance Allowance
- 5 Tax Free Salary Components – No more Valid
- 6 How much Taxes can be saved?
- 7 The Sad Part
- 8 Recommendation
Fully Tax Free Salary Components
Below are tax free salary components that you can get in salary:
Meal Coupons like Sodexo or Ticket are tax free subject to Rs 50 per meal. Assuming 22 days working month and 2 meals a day, meal coupon up to Rs 2,200 per month are tax free. Annually this amount comes to Rs 26,400.
Amount up to Rs 24,000 per annum is tax free, but this cannot be given for normal clothes. This is more common in manufacturing units where they have dress code; it would be difficult to implement the same in IT/ITES sector.
Children Education Allowance
Rs.100 per month per Child and Rs.300 for Hostel Expenditure for maximum of two children is a tax free salary component.
Best Investment to Save Tax
Section 80C offers more than 10 investments where you can invest to save tax, However many a times you need not actually do this investment as its already covered due to expenses like children tuition fee or automatic EPF deduction for salaried. In case you are new to taxes and investment do read our helpful guide on How to take maximum advantage of Section 80C and choose the best investment to save tax.
Fully Tax Free Salary Components (on submission of bills)
Following is the list of Allowances which is tax free on submission of bills:
House Rent Allowance (HRA)
HRA is present by default for most salaried employees. However the percentage of HRA as part of basic salary is sometime not optimal. For most optimal HRA – your HRA should be 50% of your Basic Salary and Dearness Allowance in case you stay in metro and at least 40% in case you live in other than metros.
The HRA that can be claimed for tax exemption is minimum of
- Actual HRA Received or
- 40% (50% for metros) of (Basic + Dearness Allowance) or
- Rent paid (-) 10% of (Basic + Dearness Allowance)
If you pay rent of more than Rs 1 Lakh, you need to give PAN Card number of landlord to your employer.
HRA & Home Loan Benefit at same Time – Possible?
Many employer (& employers) are confused if they can take advantage of both HRA and Home Loan for saving tax. This seems intuitive as how can you pay for home loan and also live on rent. However just for your information its completely legal to take advantage of both HRA & Home Loan as there are multiple situations where you need to live on rent but still pay home loan. You can read more about this our post – Can I claim Tax Benefit on both HRA & Home Loan?
Amount up to Rs 12,000 per annum is tax free against submission of bills.
Gift Vouchers up to Rs 5,000 per year is exempted from tax. It’s a good idea for companies to gift these on employees’ birthdays or marriage anniversary.
Mobile Phone and Internet Bill Reimbursement
We all use mobile phones and internet and many a time for office work too. The reimbursement of mobile and internet bills used for company purpose is tax free. There is no limit on the amount of reimbursement and is fixed by company depending on work profile.
On a conservative estimate you can easily claim Rs 500 for mobile and Rs 1,500 for internet expense tax free every month.
Submitting Income Tax Proof to Employer – Guidelines, Dos & Don’ts
On start of each financial year all salaried employees are asked to submit declaration of rent, tax saving investments among other things. We have details on why salaried class needs to submit these proofs to their employers, how it should be done, what documents to be submitted and if there is a deadline?
Leave Travel Allowance (LTA)
LTA is tax free only when you get your travelling expenses reimbursed from the company on submission of the bills. You can claim LTA twice for two domestic trips with family in block of four years. The present block is 2018 – 2021. There is no maximum limit of LTA and is decided by employer.
The meaning of ‘family’ for the purposes of exemption includes spouse and children and parents, brothers and sisters who are wholly or mainly dependent on you. Only expenses incurred in travelling is covered. You cannot claim hotel stay and food bills.
Assuming Rs 1,500 per ticket for one way train journey in 3AC, it costs Rs 12,000 for return journey for family of four. For journey by flight this expense can easily go to Rs 30,000 per trip. Since this can be claimed once in two years LTA of at least Rs 12,000 per year seems sensible.
Salary Components with Perquisite Tax
Funding Professional Education
Many companies fund higher studies or professional courses or certifications for their employees. This keeps their employees updated and more productive. In case of such funding, only 10% of the course fee is considered as perk and tax is calculated only on this perk value.
Gadgets for Personal & Professional Use
If the company provides gadgets like laptop or tablet for professional and personal use, only 10% of the cost of gadget is considered as perk. You would be taxed only on this 10% perk value.
Get Highest Fixed Deposit Interest Rates
Fixed Deposit with Banks is one of the most popular and convenient investment option. To help you choose the best, we compare the interest rates on fixed deposit across all major 48 banks in India including government, private, foreign and small financial banks in India every month. This may prove to be quite handy for you in choose the Best Bank FD scheme.
Company Car/ Car Maintenance Allowance
Company provided car lessens the tax burden for employees to a good extent and if your company provides such facility you must avail it.
Here is rough calculation of your benefit:
You have your own car and travel around 1,000 Kms per month and also keep a driver with monthly salary of Rs 8,000.
Assuming Rs 8 per KM as fuel and maintenance expense for running the car, you would be spending Rs 8,000 on car and Rs 8,000 on driver’s salary, making it total of Rs 16,000 per month.
Your company can only reimburse Rs 1,800 per month for car less than 1600 CC (Rs 2,400 per month for bigger cars) along with Rs 900 per month for driver salary as tax free allowance.
In case you have the same situation but the car is owned by company and also the driver is provided by the company, here is how things change. The company can now reimburse both the driver salary and running expenses fully tax exempted. But it would add Rs 1,800 per month for car less than 1600 CC (Rs 2,400 per month for bigger car) along with Rs 900 per month for driver salary as perquisite. This perk is added to the income and taxed accordingly.
Tip: Its tax efficient to get company owned car because then you can claim full reimbursement for fuel, maintenance and driver’s salary.
How much Taxes you Need to Pay this Year? Download Our Income Tax Calculator to Know your Numbers
Do you know how much tax you need to pay for the year? Have you taken benefit of all tax saving rules and investments? Should you use the “NEW” tax regime or continue with the old one? In case you have all these questions just Download the Free Excel Income Tax Calculator for FY 2021-22 (AY 2022-23) and get your answers.
Tax Free Salary Components – No more Valid
Following is the list of salary components which was tax free in the past but has been abolished since then.
Medical Reimbursement is No more Tax Free for FY 2018-19 as Budget 2018 introduced Standard Deduction of Rs 40,000 for salaried and subsumed Medical Reimbursement and Transport Allowance in the same.
You can claim up to Rs 15,000 per year against medical expenses by submitting medical bills. Even cost for eye testing and spectacles frame and lens costs are covered.
25 Best Tax Free Income & Investments in India
Everyone hates Taxes and go out in full force to save it – sometime legally and sometimes beyond the law. Fortunately there are still some tax Free incomes & investments. Learn about them here and use it to your advantage.
Transport Allowance is No more Tax Free for FY 2018-19 as Budget 2018 introduced Standard Deduction of Rs 40,000 for salaried and subsumed Medical Reimbursement and Transport Allowance in the same.
Transport Allowance up to Rs 3,200 per month for orthopedic person is still tax free.
How much Taxes can be saved?
If companies give all the above allowances, here is a rough estimate of how much you can save.
|Salary Components||Monthly (Rs.)||Annual (Rs.)|
|Mobile Phone and Internet Bill Reimbursement||2,000||24,000|
|LTA (Leave Travel Allowance)||12,000|
|Company Car/ Car Maintenance Allowance||1,800||21,600|
|Children Education/Hostel Allowance||400||4,800|
|Total Tax Free Salary Components (Rs.)||9,400||1,29,800|
As you can see the presence of above tax free salary components can easily lower your annual taxable income by Rs 1.3 lakhs. This means annual saving of Rs 6,500 for person in lowest tax bracket and Rs 40,000 for person in highest tax bracket.
How to Pay 0 Income Tax on Salary of Rs 20+ Lakh?
As you can see with the above income tax calculation, salary components and salary structure plays a very important role in how much income tax you pay. We have come up with some optimised salary structure using which you pay NO income tax even with CTC of more than Rs 20 Lakhs.
The Sad Part
Though the government keeps on tinkering with the tax rates and slabs every year but it has not looked into most of the above exemptions.
The exemption of children education of Rs 100 and Rs 300 for hostel is again not helping anyone. I hope that going forward finance ministers take a re-look at these exemptions and provide benefits which are relevant with market rates.
A lot of tax saving can happen by optimising and introducing right tax free salary components. So you should not only focus on CTC (Cost to company) but also look into the salary structure and components. Some companies allow you to design your own salary components keeping the CTC fixed. It’s a great initiative and you should take advantage of all the components above. In case you are not that lucky you might want to refer this post to your HR.