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How can I configure my pay to minimise my tax outgo?

The Income Tax Act offers exemptions for certain categories of allowances. You can opt for some of these to minimise your tax outgo. Besides these, there are some tax-free allowances on which the employer has to pay the fringe benefit tax.

Print Edition: December 25, 2008

My employer allows me to structure my salary by choosing from a range of allowances and perks. How can I configure my pay to minimise my tax outgo?
— Prakash Jindal

The Income Tax Act offers exemptions for certain categories of allowances. You can opt for some of these to minimise your tax outgo. These tax-free allowances include conveyance allowance (for commuting between residence and place of work up to Rs 800 a month); leave travel allowance (exempt once in two calendar years) given against actual bills; medical reimbursement (up to Rs 15,000 a year against actual bills) and education allowance (Rs 100 per month per child for up to two kids). Besides these, there are some tax-free allowances on which the employer has to pay the fringe benefit tax. For details on efficient pay structures, read the cover story in our issue dated 4 September 2008.

I am self-employed and pay a monthly rent of Rs 7,000. Is this expense eligible for deduction from my total income?
— Diwakar Sinha

You are entitled to a deduction under Section 80GG if you do not claim deduction under Section 10(13A) for any house rent allowance received or if you, your spouse or a minor child do not own any residential accommodation. If you satisfy both the conditions, you can subtract the least of the following from your total income:
a) Actual rent paid minus 10% of income.
b) Rs 2,000 per month.
c) 25% of total income.
The total income for this purpose means the net total income after allowing all deductions except the one under Section 80GG.

I am eligible for Esops from my employer but will have to pay FBT on them. What is the taxability of Esop shares?
— Divya Malik

Your employer will be charged the fringe benefit tax at 33.99% on the difference between the fair market value on the day of exercise of the Esop and the exercise price. In some cases, employers recover this FBT from the employees. The FBT thus recovered is deemed to be personal income tax paid by the employee and can’t be offset against his personal income or claimed as a refund from the tax department. When the shares are sold, the difference between the sale consideration and the fair market value on the date of exercise will attract capital gains tax.

When I shifted to a new city, I spent more than what I was given as transfer allowance and daily allowance. Am I liable to pay tax on these allowances?
— Rupa Rani

The transfer allowance given to an employee to meet the cost of travel and transportation is exempt from income tax to the extent it is actually spent. Ditto for the daily allowance given to meet the daily expenses. As you have spent both the allowances, no tax is payable. However, you will have to submit the bills of the expenses incurred to claim exemption.

I earn Rs 1.8 lakh a year. How much do I need to invest to reduce my tax to nil? I support my parents, bear my younger sister’s education expense and am pursuing a diploma course. Which of these expenses is tax deductible?
— Raghava Rao

The basic exemption limit for men is Rs 1.5 lakh a year. You need to invest Rs 30,000 under Section 80C to reduce your tax to zero. The expenses incurred to support your parents, your sister’s education and your diploma are not tax deductible. For Sec 80C investments, see Query Corner, 11 December 2008.

Are matters of tax taxing your brain? Singh & Gupta, chartered accountants, will answer your queries on taxation.

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