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Salary Components which Can save your Income Tax

As per the Income tax Act, 1961 salary is one of the 5 heads of income. Salary comprises of basic salary, bonus, wages, commission, gratuity, encashment of leave salary, advances and arrears, profits in lieu of salary, allowances and perquisites. Salary income is the compensation that an employee is entitled to receive or has received for providing services to or on behalf of his employer. It is taxable in the hands of individuals   either in the year of accrual or receipt whichever is earlier.

The Act however lays down a tax friendly framework to take advantage of various concessions, exemptions, deductions, relief and rebates and henceforth to implement an appropriate tax planning scheme intended to reduce the tax burden.

How to plan the salary structure:

  • House Rent Allowance(HRA):  Where the salaried employee receiving HRA is living on a rented accommodation he can claim exemption to the extent of the least of the following 3 components

                            1. Actual amount of HRA received or

                            2. Rent paid minus 10% of Salary

                            3. 40% of Salary (50% if it is a metropolitan city)

The salary in this given context means Basic salary and also dearness allowance.

  • Provident Fund: Employees are eligible to avail the benefit of exemption of the amount transferred from their salary to the provident fund account provided as per section 80C. The exemption is however restricted to the lower of the following alternatives-(a) Rs. 1lakh (b) 12% of salary.
  •  Conveyance Allowance: Employees are entitled to claim an exemption upto Rs. 800 per month. It is in connection to the expenditure incurred from the place of residence to the office premises and vice versa.
  • Children Education Allowance: Employees are entitled to claim exemption under this category for not more than Rs. 100 per month per child of a maximum of 2 children. Further, an additional amount of Rs. 300 per month per child upto 2 children is allowable if they are in a hostel.
  • Leave travel concession: The monetary value of any travel concession or assistance received from employer by employee in the course of any leave is exempt from tax in the hands of the employee.
  • Leave Encashment: This component is a lumpsum amount received by the employees. It is exempt subject to certain prescribed conditions, if it is received at the event of termination of employment.
  • Medical Reimbursements: It provides the   benefit of exemption of the actual expenses incurred towards medical purpose of the employee or any member of his household subject to the provision of bills, however such an exemption is restricted to Rs.15,000. On the contrary receipt of medical allowance attracts taxable provisions.
  • Uniform Allowance: It is a tax free allowance provided only for uniforms and not for civil dresses.
  • Telephone Reimbursement:  Telephone including mobile expenses actually incurred for official purpose reimbursed by the employer shall not attract tax in the hands of the employee. Furthermore telephone facility provided at residence is also exempt from tax as against telephone allowance.
  • Reimbursements in the form of corporate membership fees, sports club, health club uniformly provide to all employees is not taxable.
  • Professional Tax: Where such amount has been paid by employer on behalf of the employee, it shall not be taxable.
  • Free Meals:  Employees are entitled to avail the tax exemption to the extent of Rs. 50 per meal provided by the mode of non-transferrable vouchers at eating joints.
  • Rent free Accommodation: Where a free or concessional accommodation is provided by the employer it shall attract tax based on certain prescribed conditions.
  • Perquisite of Car: Car provided by company  and also expenses incurred for personal and official use being reimbursed by company

 

Expenses(Rs.)

Driver Salary(Rs.)

Total(Rs.)

Upto 1.6  Litre

1800

900

2400

More than 1.6 Litres

2400

900

3300

  • Asset assistance perquisite: Asset in the form of laptops and computers provided by the company shall not attract taxable provisions.

 

 

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