Income Tax is applicable to the salary earned by an employee from the employer. Income Tax Act, 1961 gives power to the government to take income tax from salaried persons. It is a direct tax which helps increase the revenue of the government for it to be able to spend throughout the year.

In India, there are different income tax slabs and income tax is charged according to these slabs. The government can only change the slabs of income tax from time to time. In India, the slabs for income tax for the Financial Year 2021-22 (Assessment Year 2022-23) are as mentioned below. In addition to income tax, a salaried person also has to pay education CESS as a percentage of the total tax liability.

Tax Slab(₹) Old Regime - Tax Rates New Regime - Tax Rates

0 – 2,50,000

0%

0%

2,50,000 – 5,00,000

5%

5%

5,00,000 – 7,50,000

20%

10%

7,50,000 – 10,00,000

20%

15%

10,00,000 – 12,50,000

30%

20%

12,50,000 – 15,00,000

30%

25%

15,00,000 & above

30%

30%

In India, there are different tax rates for different slabs of income. Every salaried person has to pay applicable Income-tax while as per the provisions of the law. This very much depends on the salary structure given by the company, until and unless specified by you.

Below mentioned are 8 highly recommended salary components in your CTC to reduce the outgo of income tax from your salary.

#1. House Rent Allowance (HRA)

Least of the following is exempt:

  • Actual HRA Received
  • 40% of Salary (50%, if house situated in Mumbai, Kolkata, Delhi or Chennai)
  • Rent paid in excess of 10% of salary.

If you live with your parents, and you are paying them rent and getting a receipt for the same, you can claim the HRA deduction for the same. Additionally, your parents must report the rental income in their tax return.

Suggested Read: How you can claim even if you don’t receive HRA.

#2. Employee Contribution to Recognised Provident Fund (EPF)

EPF is a very good tax-saving and investment scheme.

The employer is required to contribute to a recognised provident fund for the employee's benefit. The employee can also make a contribution. The employer’s contributions of up to 12% of pay (Basic + DA) are tax-free. The amount

  • The employer's contribution amount will be included in the C.T.C.
  • Employee contributions to Recognized P.F. will be eligible for the 80 C deduction.

#3. National Pension System (NPS)

The government of India has notified deductions for contributions to pension schemes. The deductions fall into three categories:

Section 80CCD(1) 80CCD(1B) 80CCD(2)

Eligible Assessee

An individual who deposits into his or her pension account as per National Pension Scheme or the Atal Pension Yojana, whether he or she is salaried or self-employed.

Individual taxpayer who have deposited the money in the National Pension Scheme will have an additional deduction.

Contributions made by the employer to the pension account of the employee.

 

A deduction u/s 80CCD(2) may be made after the employer's contribution is included in the employee's salary.

Contribution of

Employee

Own

Employer

Amount of Deduction

Salaried Individuals - 10% of salary (i.e. basic salary and dearness allowance) (subject to section 80CCE)

Self Employed Individual - 20% of Gross Total Income (subject to section 80CCE)

Rs. 50,000 regardless of whether a deduction is allowed under Section 80CCD(1).

Maximum 14% of the salary (in case the employer is CG)/10% of Salary (in case of other employer)

#4. Standard Deduction

Rs 50000 or the amount of salary, whichever is lower is allowed as deduction from the year 2019 and it covers both conveyance allowance and medical allowance, which were earlier calculated separately.

#5. Mobile Phone and Internet Bill Reimbursement (refund)

It is a compensation for the employee's house landline phone, broadband connection, and cell phone. The exemption amount will be the lesser of the two;

#6. Meal Coupons

Some workplaces issue food coupons that can be used to pay for meals at various restaurants. These meal vouchers are tax exempt up to Rs 50 per meal.

#7. Uniform allowance

You may be eligible for a refund for the costs of buying and maintaining the office uniform. The exemption amount will be the lesser of the two;

  • Total amount spent
  • Amount of compensation received

#8. Leave Travel Allowance

You are eligible to claim exemption for LTA if you are going on a vacation subject to exemption limit as specified under the Income Tax Act, 1961. This exemption applies to the employee's when the journey is performed by rail, aircraft, or bus. The exemption is as below :

  1. If travel by Air : Maximum exemption shall be economy fare calculated by the airlines considering shortest route to the Destination.
  2. Where place of origin and destination is connected by Railways and the Journey is performed between such places : Maximum exemption shall be not more than air-conditioned first class rail fare by the shortest route.
  3. Where place of origin and destination is not connected by Railways : In case recognized public transport exist, maximum exemption will be of amount not exceeding first class fare of such transport by shortest route. In case recognized public transport does not exist, amount equal to air conditioned first class rail fare.

This exemption does not apply to any additional local transportation, sightseeing, hotel accommodations, meals, or other expenses. The lower of the two exemptions will be allowed:

  • The employer provides LTA.
  • Exemption based on expenses incurred or the applicable amounts subject to the conditions covered above for each method of transportation.

#9. Transportation or Conveyance Allowance

This refund is offered for travel to and from work.

You can claim a monthly exemption of up to ₹ 1,600. However, tax exemption on conveyance allowance has been replaced and included in the Standard Deduction allowed. Therefore, no separate exemption will be allowed for conveyance allowance.

  • The exemption is increased to ₹ 3,200 in the case of handicapped individuals.

#10. Medical Reimbursement and Medical Allowance

Medical allowance is a part of the salary, exactly like dearness allowance. It is totally taxed.

Medical reimbursement is a refund of the employee's or his family's medical expenses. The exemption amount will be the lesser of the two;

  • Amount actually reimbursed or
  • Rs 15,000

However, with the amendment coming in Budget 2018, tax exemption on medical reimbursement has been replaced and included in the Standard Deduction allowed. Therefore, no separate exemption will be allowed for Medical Reimbursement from FY 2018-19.

#11. Car maintenance allowance

If an employee uses a company's car and the company repays the driver's wage, insurance, maintenance, and fuel expenses, the taxable value is Rs 2,700 per month (cars with cubic capacity within 1.6 Litre) or Rs 3,300 per month (cars with engines over 1,600 cc) (car with cubic capacity exceeding 1.6 Litre).

An exemption of Rs 2,700 per month or Rs 3,300 per month in respect of the driver salary, maintenance, and fuel expenditures paid and refunded by the employer if the employee owns the car.

How are these Allowances Calculated in a Salary?

Let's look at an example to see how you can save money on taxes by properly structuring your salary.

Mr. Shah works for a reputable company and earns INR 10,00,000 per year. Let's look at his pay structure from different angles:

Particulars Salary Structure 1 Salary Structure 2

Basic Salary

5,00,000

4,00,000

+ HRA

3,00,000

2,00,000

+ Provident Fund (12%)

60,000

48,000

(+) Standard Allowance (Conveyance allowance + medical reimbursement)

40,000

40,000

(+) Leave Travel Allowance

30,000

30,000

(+) Other Allowances

70,000

2,82,000

Total

10,00,000

10,00,000

(-) Exempted HRA (assuming 50%)

2,50,000

2,00,000

(-) Standard Allowance

50,000

50,000

(-) Leave Travel Allowance

30,000

30,000

(-) Other allowances

Meal allowance

Mobile bill reimbursement

Gift voucher

Child’s education allowance

Child’s hostel allowance

Newspaper/Journal allowance

Internet Bill reimbursement

 

26,400

10,000

5,000

2,400

7,200

16,000

12,000

Total taxable Salary

6,70,000

6,41,000

Less: Profession Tax Paid

2,500

2,500

Income under the head Salary

6,67,500

6,38,500

(-) Deductions under Section 80C

1,50,000

1,50,000

Total Taxable Income

5,17,500

4,88,500

Tax on income

16,640

0 (Rebate u/s87A)

Saving in tax

16,640

Conclusion

The earlier-mentioned components help employees save money by providing tax-free methods to pay for things like lodging, meals, and phone calls. Make the most of them by structuring your salary in such a manner that you can plan your taxation.

Sections 80C and 80D can help you save even more money on taxes. Connect with a trusted advisor to learn more!