Every year there is an appraisal season in all companies and employees are rewarded for their hard work and good performance. Some people switch jobs to change their work profile or to get a higher pay package. In either case, you must pay attention to the structure of compensation being offered. You should always ask for a tax-friendly CTC because a higher package does not always mean that your take-home salary will increase by the same margin.
If your current or prospective employer lets you decide the compensation structure, then you can use some tricks given below to make your salary tax-efficient. They will help you pay less money as taxes and take home a bigger salary.
Salary Structure includes various components like:
- Fixed Salary: This includes basic, DA, HRA, conveyance allowances, city compensatory allowance, special allowances, etc.
- Variable Salary: It includes performance-based incentives, sale based incentives and profit-based bonuses.
- Reimbursements: It includes reimbursement of conveyance, medical, telephone, etc.
- Contributions: It includes the benefits offered by the company like Provident Fund, ESI, Statutory Bonus, etc.
Salary Structure on the Basis of Level of Employee
- Salary structure for a junior-level employee: Employees at the junior level need a higher take-home salary. They try to add more fixed allowances in the salary structure such as food coupons, conveyance and telephone etc. These allowances are fixed and payable monthly to the employee. However, employees get taxed on these to a certain extent.
- Salary structure for a senior-level employee: Here, the employee anyway comes in a higher tax bracket. The concern here is not only to maintain a higher take-home salary but also to reduce one’s tax burden. Hence, there is a need to add more benefits to the salary structures of employees at senior levels.
However, the aim for all the levels of employees is more allowances, less tax and more take-home salary.
Tax Impacts of the Salary Components
- Fixed Salary is that part of the salary which is fixed and is the basis on which other components of the salary are calculated.
- Basic Salary: Generally, it is 40% to 50% of CTC (Cost to Company). Basic salary is fully taxable. Statutory components like PF, bonus, gratuity and other benefits like LTA are calculated based on this amount. Hence, an increase or decrease in basic salary may impact the CTC of an employee.
- Dearness Allowance: Very few private companies use it as salary component. It is mostly given to government employees. This component is also fully taxable.
- HRA- House Rent Allowance: HRA is paid to an employee to meet expenses against paying rent of a home. Normally companies keep it 40% to 50% of basic salary depending upon where you live. In case you stay in metro cities then HRA will be kept 50% of basic salary and in case you stay in non-metro cities then HRA will be 40% of basic salary. It is due to the fact that HRA is non-taxable salary component and its taxability depends upon where you live.
- Conveyance Allowance: Conveyance allowance is paid to an employee against expense to commute between office and home. Conveyance allowance is non-taxable up to Rs 1,600 per month. (Note: Conveyance Allowance & Medical Reimbursement have been replaced by a Standard Deduction of Rs 40,000. The change in law will be applicable from FY 2018-19)
- Special Allowance: This allowance component is mainly used to adjust rest of the amount which is to be given to an employee. It is fully taxable allowance.
- Variable Salary: As the name implies variable salary varies depending upon the performance of an employee. Nowadays, many companies are keeping this as part of their employee CTC. Earlier, only employees related to sales or profit-making department used to have a variable component in their salary but now even employee from support functions like HR, admin, QA, Training etc have variable components in their salary. Companies are not willing to pay more fixed but open to pay higher variable pay as a variable is related to sales and profitability of an organisation. The company has no problem in paying money to employees if the company is making profits. This is the reason that fixed salary is decreasing and variable pay percentage is increasing day by day.
- Other Allowances/ Reimbursement: These are also taxable but can get tax deductions upon actual bills. This component is added to both junior- and senior-level employees’ salary structures, as it gives tax-free income and helps increase the net salary. Reimbursement is paid to employees against expenses made and bills submitted. Examples of reimbursement or allowances are;
- Medical Reimbursement: Medical reimbursement non-taxable up to Rs 15,000 per annum. Company may pay it monthly, quarterly, half-yearly or annually. Employees need to submit medical bills in support of medical expenses. Medical expenses bills for spouse, child and dependent parents are also acceptable. (Note: Conveyance Allowance & Medical Reimbursement have been replaced by a Standard Deduction of Rs 40,000. The change in law is applicable from FY 2018-19)
- LTA – Leave Travel Allowance: Leave Travel Allowance or Leave Travel Concession (LTC) is paid for travel cost incurred by an employee on travel. Every company has its own rule to decide on an amount of LTA to be given to an employee. A company may prefer to keep it equal to the monthly basic salary of the employee or make it fixed depending upon grade and native place of an employee. It is a non-taxable income to the extent bills of travel are submitted but there are some rules which should be kept in mind while taking benefit of LTA for tax.
- Training Reimbursement: It is provided to the employee for an expense incurred on professional training related to their job profile. Each employee needs to provide bills for same.
- Mobile/ Telephone Reimbursement: Mobile reimbursement is paid to employees against expense incurred in using mobile/ telephone for official purposes. Employees need to submit the bill for same. The employer can fix an amount for such reimbursement. Such amount should be logical and linked to employee’s profile.
- Books and Periodicals: This is paid to an employee to reimburse expenditures made on the purchase of books and periodicals related to their job profile. It is non-taxable if bills are submitted.
- Children Education Allowance: It is exempted from tax up to Rs 100 per month per child for two children.
- Children Hostel Allowance: It is paid to meet expenses for children’s hostel allowance. It is exempted from tax up to Rs 300 per month per child for two children.
- Uniform Allowance: It is fully exempted from income tax on actuals. An employee has to produce bills to claim the same. This allowance is given to meet the expenditure on the purchase and maintenance of office uniform or office formal wear worn while performing office duties. Generally, all offices have dress code i.e. employee should be smartly dressed in formals. In this case, according to the dress code of the office, an employee can claim uniform reimbursement for formal clothes purchased for office wear.
- Daily Allowance: If your normal place of duty is not fixed and you have to travel to different places, your employer can include daily allowance to meet ordinary daily charges incurred, if you are absent from normal place of duty. Reimbursement received is fully exempt from income tax against actual bills. It can be granted either on tour or period of journey in connection with transfer.
- Tour Allowance: Though there is no formal name for this but any allowance granted to meet the cost of travel on tour or being transferred from one place to another is called tour allowance. Reimbursement is fully exempted from income tax against actual expenditure incurred. It also includes cost towards moving your belongings to another city.
- Food coupons or Meal Pass: It is given to employees for meals during working hours. Rs 50 per meal up to 2 meals per day is tax-free.
- Contributions: Contribution means the contribution made by employer for employee’s long-term saving schemes or social benefits scheme as per statutory compliance.
- Employee Provident Fund: It is the contribution made by the employer (12% of Basic salary) against EPF. It is a statutory obligation on part of the employer. The employee gets the benefit of the contribution to PF (12% of basic) made from his salary under section 80C of the Income Tax Act, 1961.
- ESIC (Employee State Insurance Corporation): The employee’s contribution to the ESIC is 1.75% while the employer needs to deposit 4.75% of the gross salary of the employee to the ESIC, in case employee’s gross salary is less than Rs 21,000. Hence, the employer keeps it as part of the employee’s CTC.
- Statutory Bonus: It is a statutory bonus which is paid to employees whose basic has been raised from Rs 10,000 to Rs 21,000. Accordingly, the calculation ceiling has also been raised from Rs 3,500 to Rs 7,000. Even if the salary of the employee is more than Rs 7,000, the bonus should be calculated on Rs 7,000 only. Employer keeps it as part of the CTC and it is fully taxable.