My friend Gopal was really happy that he received a Rs. 12 lakh per annum offer letter. Rs. 1 lakh per month was a huge amount for Gopal who hails from a middle class background. But he was in for a rude shock when the salary hit his bank account at the end of the month. It was just Rs. 70,000/-. He came to me asking me to solve the case of the missing 30,000/-.
For most of us, Salary is the main source of Income. Hence, it is very important to plan our salary in such a way that we get the maximum take-home. I’ve seen a lot of my friends (mostly IT sector) who do not understand the components of salary. Consequently, though the number looks impressive on the offer letter, lots of it gets eroded, when it hits our bank at the end of the month. And ironically, most of us are now allowed to plan our own salary. This means, we are given an amount and a % of Basic salary and we are allowed to plan the rest.
At the time of joining or at the beginning of the financial year, we have an option of planning the structure. This means that it’s just us who are responsible for “Optimum Bank Balance” at the end of the month. Well, for a person who is totally unaware of the tax implications, here are a few tips to organize your salary to minimize the taxes.
Understanding the components:
A typical offer letter would contain a CTC (Cost to Company) and this includes the following items:
- Allowances (To be discussed in detail later)
- Provident fund (Employers contribution)
- Super-annuation (if applicable)
- Value of medical insurance premium (if applicable)
The below example represents the structure of a person having a CTC of Rs. 12,00,000/-
From the example above, it is very clear that we have the power to control nearly 40% of our CTC.
In the below section, we will see how we can reduce the incidence of taxes by some simple planning with the help of simple tools.
House Rent allowance is a very useful tool if you know how to use it. As per my study of the HRA rules, the optimum HRA component can be planned using a simple formula in the below table. However, in order to get the full benefit, we need to spend money towards the actual rent. Towards the end of the year, we need to submit receipts to the extent of this amount. The below table also shows the amount of actual spending required in order to avail the full benefit.
|Location||HRA % of Basic||Actual rent to be paid as a % of Basic|
|Delhi, Mumbai, Kolkata, Chennai||50%||60%|
|Other places in India||40%||50%|
#2. Fuel Reimbursement and Conveyance
Fuel Reimbursement is usually based on the company policy. But, nowadays most companies are encouraging this. As per the tax rules, this means that the company has to maintain documentation regarding the usage of office car or the usage of personal car for office use and that this amount should be fair. Therefore, it is very important to put a prudent number to this. Say around Rs. 60,000/- a year. In case, your company does not have Fuel reimbursement, a conveyance can be claimed, but it has to be limited to Rs. 9,200/- per year.
Leave Travel Allowance is an allowance given twice in a block of 4 years (pre defined by the Income Tax Rules) subject to submission of bills. While it is definitely a tax-saving allowance, it is important to remember that its not a regular one and will be available only once in 2 years and that too only the cost of transportation. Therefore, it is important to keep this amount low. I suggest to keep it at Rs. 15,000/-.
#4. Medical Reimbursement
As per the Tax laws, you can get a medical benefit of Rs. 15,000 /- a year subject to submission of bills. Again, this amount should not be confused with Premium paid by the company towards medical insurance.
#5. Food coupons
Allowance of upto Rs. 50 / – per meal provided per working day is available towards Food coupons. But this would mean your company will have to provide you with food coupons. The value would come up to Rs. 13,200 / – a year (Rs. 50 * 22 working days * 12 months).
So, once we do all this, the structure would look something like this:
|Items||Rs.||% of Total|
One can clearly see that the taxable portion of the salary has decreased from nearly 40% of CTC to 12% of CTC. The impact is as under:
|With Planning||Without Planning|
|Deductions for take home:|
Isn’t it nice to have about 10% more in your bank by some simple planning at the beginning of the year?