Salaried class have always complained of raw deal year after year in income tax laws. But the good news is you can still manage to pay Zero (NIL) income tax on salary of up to Rs 20 lakhs (Salary here means cost to company). All you need to have is right salary structure and invest in RIGHT Tax saving plans! We give you details below.
Tax Efficient Salary Structure:
Salary structure is very important to keep taxes low. The good news is most employers are partially flexible with salary structure. We give you one such sample salary structure for CTC (Cost to Company) of Rs 20 lakhs.
We have kept following points in mind:
- Included all components which are tax free (Medical Reimbursement is No more Tax free)
- For most benefit of HRA – it should be 50% of Basic salary (40% is good if rented houses are in non-metro)
- Car Maintenance – The company can 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.
- Transport Allowance is NO more tax free (Budget 2018) but Car Maintenance reimbursement is.
- Employer can have option of subscribing to both NPS & EPF. Keeping both makes salary more tax efficient, though take home may go down
- Gift Voucher worth Rs 5,000 per annum is tax free. Some companies give such vouchers at birthdays or anniversaries!
- Company owned cars give much more tax benefit and hence is recommended for high salaries.
|Tax Efficient Salary Structure Example|
|Basic Salary||10,60,000||88,333||Fully Taxable|
|House Rent Allowance||5,30,000||44,167||Partially Tax Exempted|
|Car Maintenance||28,800||2,400||Tax Free if bills submitted|
|Meal Coupons||26,400||2,200||Tax Free up to Rs 50/meal (22 working days)|
|NPS (Employer Contribution)||1,06,000||8,833||Tax Free up to 10% of basic salary|
|EPF (Employer Contribution)||1,27,200||10,600||Tax Free up to 12% of basic salary|
|Phone & Internet Bill Reimbursement||36,000||3,000||Tax Free if bills submitted|
|Uniform Allowance||24,000||2,000||Tax Free if bills submitted|
|Children Education/Hostel Allowance||4,800||400||Tax Free if bills submitted|
|Newspaper/Journal Allowance||12,000||1,000||Tax Free if bills submitted|
|Gift voucher||5,000||Tax Free up to Rs 5,000|
|LTA (Leave Travel Allowance)||30,000||Tax Free if bills submitted|
|Gratuity||50,962||Paid while Leaving company|
|Cost to Company||20,41,162||1,62,933|
Income Tax Calculation for Salary (FY 2018-19):
Below is the income tax calculation for above salary.
|S. No.||Calculating Income Tax||FY 2019-20|
|1||Total Cost to Company||20,41,162|
|2||Tax Free Components||400,200|
|3||HRA (Rent Paid is Rs 53,000 and in Metro City)||5,30,000|
|4||Standard Deduction (increased to Rs 50,000 in Budget 2019)||50,000|
|5||Gratuity (Not part of Salary but part of CTC – Non Taxable)||50,962|
|7||Home Loan Exemption||2,00,000|
|8||Income after Deductions [1 – (2 + 3 + 4 + 5 + 6)]||5,00,000|
|9||Basic Tax Exemption||2,50,000|
|10||Taxable Income [8 – 9]||2,50,000|
|11||Income Tax [5% of 10]||12,500|
|12||Rebate u/s 87A||12,500|
|13||Tax Payable [11 – 12]||0|
Following salary components are tax exempt:
- Car Maintenance
- Meal Coupons
- NPS (Employer Contribution)
- EPF (Employer Contribution)
- Mobile Phone and Internet Bill Reimbursement
- Uniform Allowance
- Children Education/Hostel Allowance
- Newspaper/Journal Allowance
- Gift voucher
- Leave Travel Allowance
- Transport Allowance & Medical Reimbursement is No more tax free (from FY 2018-19 onwards)
Also Read: 25 Tax Free Incomes & Investments in India
You can claim following tax deductions.
Section 80C/80CCC/80CCD (Rs 1,50,000): Investment in EPF, ELSS, PPF, FD, NPS, NSC, Pension Plans, Life Insurance, SCSS, SSA and NPS. Also includes Home Loan Principal repayment, Tuition Fees, Stamp Duty (Best Tax Saving Investments u/s 80C)
Section 80CCD(1B) (Rs 50,000): Investment in NPS (Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?)
Section 24: Interest paid on Home Loan for Self occupied homes. No Limit for Rented house.
Section 80E: Interest paid on Education Loan. No upper/lower Limit! (Tax Benefit on Education Loan (Sec 80E))
Section 80CCG: 50% of investment in RGESS approved stocks & mutual funds. Max investment limit is Rs 50,000 (RGESS – Save Taxes up to Rs 25000) (No more applicable from FY 2017-18 on wards)
Section 80D: Premium payment for medical insurance for self and parents. Also includes Rs 5,000 limit for preventive health checkup (Making Sense of Tax Benefit on Health Insurance u/s 80D)
HRA or Home Loan?
We have shown the tax deduction on both HRA and Home Loan. There are people who think that both cannot be used simultaneously. This is NOT true. You can take benefit of both HRA and Home Loan even if your home and rented place is in the same city.
Monthly Salary Slip:
We have seen the salary structure and how you need to pay 0 income tax even when the CTC (Cost to company) is Rs 20.41 lakhs. Now lets look at how your Monthly Salary Slip would look like.
Gross Salary – Rs 1,32,500
- Basic Salary – 88,333
- HRA – 44,167
Deductions – Rs 30,033
- NPS (Employer Contribution) – 8,833
- EPF(Employer Contribution) – 10,600
- EPF(Employee Contribution) – 10,600
- Income Tax – 0
Net Salary = Rs 102,467 [1,32,500 – 30,033]
Food/Gift Coupon – Rs 2,200 monthly
- Additionally Employee would get Food Coupons worth Rs 2,200 every month (which can be used for meals, eating out in restaurants or buying grocery).
Reimbursement (on submission of bills) – Rs 1,35,600 (Yearly)
- Car Maintenance – 28,800
- Phone and Internet Bill Reimbursement – 36,000
- Uniform Allowance – 24,000
- Children Education/Hostel Allowance – 4,800
- Newspaper/Journal Allowance – 12,000
- LTA (Leave Travel Allowance) – 30,000
As you can see the monthly payout is not high and a lot of components are reimbursement. To balance this a lot of employers pay all reimbursement monthly and deduct taxes at the end of year if the bill is not submitted.
How the Retirement Account looks?
The good thing about the above salary structure is a lot of contribution goes to long term savings of NPS & EPF. Every Month Rs 31,167 contribution goes to your retirement savings as follows:
|Component||Employee Contribution||Employer Contribution||Total Contribution|
|NPS (10% of basic salary)||0||8,833||8,833|
|EPF (12% of basic salary)||10,600||10,600||21,200|
The drawback of the entire salary structure is that the monthly payout would be lower. In case you plan to have high monthly income, you’ll need to pay more taxes.
We hope this would help you to restructure your salary (CTC) in a way that you can balance your tax outgo and monthly payout.