Restructuring the salary for tax saving means including more tax-free components in it without changing your total salary. As you may know, your salary is broken down into various components such as basic salary, HRA, LTA, special allowance and so on. The taxability of each of these components varies. While some components are fully taxable, others can be claimed as tax-exempt if you meet certain conditions. Given an option, you would want to have a higher portion of the ones which can be claimed as exempt.
Let's break these components into allowances, reimbursements, contributions, and others.
Allowances are typically fixed monthly pay components. Some of the most widely known allowances include house rent allowance and leave travel allowance.
Below is the list of allowances which can be claimed as exempt:
- House rent allowance
- Leave travel allowance
- Children education allowance
- Hostel Allowance
- Meal allowance
- Professional pursuits allowance
- Uniform allowance
If you are missing on any of these, you can consider adding them to your pay.
Reimbursements are components which you get only upon submission of proof of expenditure.
Below is the list of reimbursements which can be claimed as tax-exempt:
- Telephone expenses
- Internet expenses
- Driver's salary
- Travel/Fuel reimbursement
Contributions are often overlooked part of the pay components. Your employer makes contribution to your Provident Fund Account, and this amount is tax-exempt. You cannot simply ask your employer to increase its PF contribution as there is a statutory ceiling to this exemption.
However, here are some options for you:
i. Check if you can increase your basic salary. Some companies provide the flexibility to change it within a certain range. Higher the basic salary, higher would be the employer's contribution to PF which is fully exempt from tax.
ii. The PF law provides an option to pay only the minimum PF amount which is computed as if your monthly basic salary is Rs 15,000 even if the actual monthly basic salary is much higher. Many employees opt for this. If you are one of those, you can change the option, and calculate the same on your actual basic salary. This would result in higher tax-exempt contribution to PF.
Another contribution for which you can get tax benefit is the contribution to NPS (National Pension Scheme). Employer's contribution to NPS is exempt up to 10 per cent of your basic salary. If you do not have this component, you can consider having it.
The commonly known other components include basic salary, incentives, etc.
The following are the other components which can be claimed as tax-free:
i. Gifts with an amount less than Rs 5,000
ii. Food Coupons
iii. Books and Periodicals
iv. Also, get a health insurance policy from your employer if the policies permit. It will be useful during any medical emergency and also reduces your tax burden.
Can you really choose the salary components? How?
Now, let's understand if you can really choose these salary components.
Some employers offer a flexi-basket of pay components and allow their employees to pick the ones relevant to them from the basket. In such cases, select the components wisely. In other cases, you can write to your payroll/HR team to check if they can consider adding some of these components. Such facility can benefit not only you but many others in your company.
As the new financial year is still more than two months away, your employer may have enough time to restructure your salary.
The writer is Managing Director of H&R Block India