While most of us focus on the increment of our CTC, we forget to pay attention to the actual salary structure. Although a better and higher CTC is an important point of salary negotiation, it is equally vital to design the pay structure in such a way that you can take home a maximum amount of the CTC and decrease the tax amount. There are four essential components of your salary structure which are treated in different ways to reduce your tax liabilities if planned properly. These elements can be classified as the basic salary, retirement benefits, allowances and perquisites.
Basic salary is fully taxable which is why it is recommended to keep your basic salary as low as possible while designing the pay structure. If you want to have a tax efficient pay structure, you’ll have to choose either a higher take home amount or maximum tax benefits.
Retirement Benefits/ Contribution
Not paid immediately to the employees and allotted like long-term savings for them, the retirement benefit contribution is one of the most critical components of any salary structure. To allow employees, lead a dignified life post retirement, it is important to set appropriate ratio for such contributions. Tax laws allow some deductions and exemptions towards these contributions.
Certain allowances are exempted at source as per the Income Tax Act. If these allowances are a part of your salary structure, your overall tax liability will be decreased to a great extent.
Perquisites are additional benefits that are provided by the employer to its employee. The Income Tax Act allows tax exemptions, again, on certain perquisites, which, if present in your salary structure, can result in additional tax savings.
Consider your long term and short term financial goals thoroughly while planning the design of your salary structure for acquiring maximum benefit.