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How to reduce tax burden on your salary

Rahul Shringarpure | BS | February 20, 2007 | 08:15 IST

Of late, Indian salaries have seen a quantum leap on the back of a sound economic growth. Though theaffluent salaried class is raking in the moolah, they have little or no time to tackle the complex issue oftaxation.

In such a scenario, remuneration planning plays an important issue. Normally, a salary structure comprisesbasic salary, dearness allowance and other allowances.

Sometimes these allowances form a substantial part of the salary. Under the Income Tax Act, certainallowances are either fully exempt or exempt to a specified limit or fully taxable.

So the remuneration should be structured in such a way that the total taxable income will come down. We willconsider an example to clarify this issue.

Mr. X is working as a manager for ABC Pvt Ltd. The company offers him two alternative remuneration

packages. In one package, the firm gives allowances, and in the other, reimbursement. The salary packagesare illustrated in Table I. Now we will consider the effects of each allowance to arrive at the taxable income.

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TABLE I

ITEMS Package-I Package-II

Basic salaryRs5,00,000

Rs5,00,000

Dearness Allowance(Not? Considered ForRetirement) Rs.1,00,000

Rs1,00,000

-

House rent allowance(hra)(actual rent paidrs.80,000)

Rs1,00,000

-

Rent free accommodation(fair rent)

-Rs1,00,000

Transport allowance Rs 12,000 -

Conveyance fromresidence tooffice(estimated cost)

- Rs 10,000

Conveyance allowance(utilised rs. 20,000)

Rs? 40,000 -

Free 1600 cc car(estimated expenses)

- Rs 60,000

Education allowance for 2children

Rs 10,000 -

Free education (estimatedcost)

- Rs 10,000

Medical allowance Rs 15,000 -

Medical reimbursement - Rs 15,000

Telephone allowance Rs 10,000 -

Telephone reimbursement - Rs 10,000Dearness allowance is fully taxable. If dearness

allowance is considered for retirement benefits, then while considering salary for calculating HRA exemptionand the value of rent free accommodation it is added to the basic salary.

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TABLE II

ITEMS Package-I Package-II

Basic salaryRs5,00,000

Rs 5,00,000

Dearness allowance Rs1,00,000

Rs 1,00,000

House rent allowance Rs 70,000 -

Rent freeaccommodation

- Rs 50,000

Transport allowance Rs 2,400 -

Conveyance fromresidence to office

- EXEMPT

Conveyanceallowance

Rs 20,000 -

Free 1600cc car - EXEMPT

Education allowance Rs 7,600 -

Free education - Rs 10,000

Medical allowance Rs 15,000 -

Medicalreimbursement

- EXEMPT

Telephone allowance Rs 10,000 -

Telephonereimbursement

- EXEMPT

Taxable salaryRs7,25,000

Rs 6,60,000

TaxRs1,67,500 Rs.1,48,000

Education cess Rs 3,350 Rs 2,960

TOTAL TAXRs1,70,850

Rs 1,50,960Only if you are staying in a rented accommodation,

you can claim HRA exemption to the specified limit. HRA is exempt to the extent of minimum of i) Actual HRAreceived; ii) 50 per cent of salary; iii) Rent paid - 10 per cent of salary.

So in Package-I: Rs 30,000 is exempt from HRA and Rs 70,000 is taxable. Sometimes, the companyprovides rent-free accommodation to employees. This is a perquisite and its taxable value is 10 per cent ofthe salary. So in Package-II, the taxable value of rent-free accommodation is Rs 50,000 per cent.

In case of transport allowance, the exemption is up to Rs 800 per month, that is, Rs 9,600 per annum. So in

Package-I, Rs 9,600 is exempt and Rs 2,400 is taxable. In case of conveyance allowance, the facility istaxfree in the hands of employees. So in Package-II, such conveyance facility is provided and is fully exempt- irrespective of the cost. Such allowance is exempt from I-T to the extent it is utilised.

Since Mr X has utilised Rs 20,000 of the Rs 40,000, the balance is taxable. Previously free-car facility wasconsidered as a perquisite and its value is added while calculating taxable income, but from assessment year2006-07 onwards it is not considered as a perquisite. So under Package-II, such facility is received by Mr Xand is exempt.

Now in Package-I, Mr X has received education allowance of Rs 10,000 for two children. As per I-T Act, such

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allowance is exempt to the extent of Rs 100 per month per child. So in this case Rs 2,400 is exempt and Rs7,600 is taxable. In Package-II, the company is providing free education to the employee's children at aschool run by the employer at an estimated cost of Rs 10,000. In this case, there is no exemption and it isfully taxable.

In Package-I, Mr X has received a medical allowance of Rs 15,000. Such allowance is fully taxable as per I-TAct. Sometimes the firms reimburse medical expenses. Such reimbursements up to Rs 15,000 is exempt. InPackage-II, Mr X has received Rs 15,000 as medical reimbursement, which is fully exempt. Telephoneallowance is fully taxable. So in Package-I, Mr X telephone allowance of Rs 10,000 is fully taxable, butreimbursement of the same is fully exempt.

Now we will calculate the taxable income and the tax liability of Mr X under both the packages. We can noticethat by restructuring a remuneration package one can very well reduce his taxable salary. Further somecompany provides LTC, leave travel concession facility to the employees, such facility is tax-free provided theassessee has availed LTC, twice in a block of 4 years. So the employee should take a note of this fact.