12 ways to lower taxes on Salary

The financial year is going to end soon and you may be busy planning last minute tax saving for FY 2016-17. But no matter what time of the year it is, understanding how to save taxes on salary can be very helpful.

Changes announced in Budget 2017, have lowered taxes for all in FY 2017-18 (unless you earn more than Rs 50L).

Take a look here to check how much tax you will save in FY 2017-18. You can also use our calculator here.

If you are looking for information on how to lower taxes on SALARY INCOME, this article explains how.

This article will help you to

  • Change your salary structure
  • Save tax legally on salary income

[Need help with investing to save taxes for FY 2016-17? Find out more]

There are various allowances and perks which are exempt from tax and you can easily claim them provided that they are a part of your salary structure. So by restructuring your salary, and including these allowances, you can reduce your taxes in a big way. You will have to rework your salary structure with your Employer.

What you can do to 

  • Ask your employer/HR/Payroll department to restructure your salary
  • Make sure you submit all bills/receipts on time. Most of these allowances can only be claimed via the employer (and not at the time of filing your income tax return)

With the help of these allowances/perks, your taxable income will be lower and your take home will be higher.

 

Here is the list of such 12 benefits that can lower your tax outgo significantly

 Allowance/Perks/Tax Benefits

Name of the Tax Benefit Purpose of Allowance/perks Max Exemption
Medical reimbursement Medical expenditure of employee or dependants  Rs 15,000 per year
Conveyance Allowance Commute between office and place of residence Rs 1600 per month.
Leave Travel Allowance Fare expenses for travel in India Actual travel  expenditure or amount provided in the CTC whichever is lower
House Rent Allowance (HRA) For rent of a house near the place of work. Minimum of the following :

1)      Actual HRA(Given in CTC)

2)      50% of (basic + dearness allowance)if metro city otherwise 40% if non-metro

3)      Total rent – 10% of Basic salary

 

Use HRA calculator

Mobile reimbursement and residential telephone bill reimbursement Telephone expenses for official use Actual bill amount or amount provided in CTC whichever is lower
Uniform allowance Expenses for purchase and maintenance of official uniform Minimum of actual expenses and allowance received
Children education allowance Education expenses of children Rs 100/month per child(up to two children)
Children  hostel allowance Hostel expenses of children Rs 300/month per child(up to two children)
Books & Periodicals Expenses on books, newspaper & magazines. Actual expenses.
Food coupons Company provides food coupons Rs13,200/year ( Rs 50 per meal considered for 22 working days in a month, which works out to Rs 1100 per month)
Fuel reimbursement Expenses of fuel, driver’s salary Rs 1800/month. in case cubic capacity of engine is 1.6 litres OR

else 2400 /month along with Rs900/month for driver’s salary

(Note: This exemption depends on whether car is owned by employee or employer)

Club facility Expenses incurred towards payment of fees to acquire corporate membership. Actual expenses

 

Example to understand salary restructuring to lower your tax outgo in FY 2017-18

Below we have explained how you can change the structure of your salary to reduce your taxes. In this example Basic Salary has not been changed. This is because change in Basic Salary can impact EPF contribution that you and your employer make. Lowering EPF may not be a good thing for building a retirement corpus. We have considered LTA taxable before and after CTC tweak, as LTA can only be claimed twice in a block of 4 years. HRA has been claimed after tweak assuming that rent paid per month is Rs 12,000 and the employee is living in one of the metros. Do remember that whoever you are paying rent to (say parents) must include this income in their income tax return.

You can talk to your HR or Payroll department to restructure your salary components to enjoy these tax benefits.

CTC CTC Tweaked
Basic Salary          2,22,000             2,22,000
HRA          1,80,000             1,50,000
Special Allowance              80,000                 44,200
LTA            18,000                 10,000
Conveyance allowance                 19,200
Medical reimbursement                 15,000
Mobile reimbursement                 14,400
Food coupons                 13,200
Residential phone bills                 12,000
CTC          5,00,000             5,00,000

 

Taxable Salary CTC CTC Tweaked
Basic Salary          2,22,000             2,22,000
HRA          1,80,000                 69,000
Special Allowance              80,000                 44,200
LTA              18,000                 10,000
Total taxable salary          5,00,000             3,45,200

 

Tax outgo CTC CTC Tweaked
Tax outgo              12,500                         –
(FY 2017-18)
Cess 3%                   375                         –
Total Tax             12,875                         –

 

As you can see earlier tax payable was Rs 12,875. It has been brought down to 0 after restructuring.

You can use any of the components mentioned in the table above to restructure your CTC and reduce the tax paid by you. You must also try to claim 80C deduction so that your tax outgo is minimum. Your contribution to EPF is eligible for deduction under section 80C.

You can read our detailed guide on salary income – here.

Hope you found this useful – do ask us if you have any questions or need help. Write to us support@cleartax.in

 

 

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