Hello everyone we all face the common situation as to how to plan for the salary every year and how to reduce tax on it and increase our home take salary. Well the people from the Accounts, Finance and HR still aware of the way to reduce the tax on their salary and by utilising their knowledge increase their home take salary, but other people are still can’t able to manage to increase their home take salary, they consider it to the best what they get from their HR/ Accounts department.
Today with this article, I would like to update all those people who wanted to reduce tax on their salary and increase their home take salary.
Well it is rightly said for the benefits one has to do proper planning, and same is applicable here, everyone has to do proper planning to get the best result and the Planning starts first with proper restructuring your salary.
First step which everyone should do, is to restructure your salary breakup, the best the salary structure is yours the best benefit you will get. Now the question is how to get the best structure of Salary, that today i will tell you.
What all allowances can be used while preparing salary structure?
Basic, HRA, Medical allowances, Transport allowance, children Education allowances, Uniform allowance, News paper & periodicals, LTA, Telephone allowance, CCA, Food allowances etc.
What is best Salary Structure?
The salary structure varies from person to person, it depends on how much expenses you are actually incurring under the respective allowances. For e.g. If a person is not incurring any expenses on News paper & periodical then he/she should avoid such allowance, and instead transfer its value to other allowance in which you will incurred more expenses.
General structure of Salary:
1) Salary structure for Gross Salary of Rs.50000/-pm, wherein the person is staying in rented house and wants to take HRA benefits, than the structure will depend on the actual rent paid to get the best benefits, let assume actual rent paid is Rs.15000/- :
Basic: 30000/- (Double of Actual Rent paid)
HRA: 15000/- (to the extent of actual rent paid)
Medical: 1250/- (Should be Min.1250/-pm, exemption available upto Rs.15000/-p.a)
Transport allow: 2000/- (Should be Min.800/-p.m, can be increased to the extent of actual exp.)
Children education: 200/- (Should be Min.100/- p.m. per child, maximum for 2 child)
News Paper & P: 750/- (to the extent of actual expenses)
Telephone allow: 800/- (to the extent of actual expenses, provided the amt is not reimbursed)
Note: the last 4 allowances can be change depends upon need in terms of value, and also can be replaced with any other allowance where you can take the benefit.
2) Salary structure for Gross Salary of Rs.50000/-pm, wherein the person is not staying in rented house and don’t wants to take HRA benefits:
Basic: 20000/- (Basic should be 30% - 40% of Gross salary)
HRA: 10000/- (Should be as less as required in other word keep it as balancing figure)
Medical: 1250/- (Should be Min.1250/-pm, exemption available upto Rs.15000/-p.a)
Transport allow: 5500/- (Should be Min.800/-p.m, can be increased to the extent of actual exp.)
Children education: 200/- (Should be Min.100/- p.m. per child, maximum for 2 child)
News Paper & P: 1050/- (to the extent of actual expenses)
Telephone allow: 1000/- (to the extent of actual expenses, provided the amount is not reimbursed)
Uniform Allow: 1000/- (to the extent on actual uniform expenses)
CCA: 10000/-( It is an taxable allowance)
LTA: (if any required).
Note:- he allowances can be change depends upon need in terms of value, and also can be replaced with any other allowance where you can take the benefit, if you are not eligible to any benefit under the above allowances, then simply increase the figure of BASIC, higher basic will also result into various benefit in long term perspective, i.e. at the time of enchasing leave, Gratuity etc.
Second Step, now once you have restructured your salary properly, here are the various exemption which can be used to reduced the tax on salary:-
Exemption Under section 10:
1) House Rent Allowance (HRA): Well this is a key factor to reduce the tax burden to the major extent. The exemption is available to the Minimum of:
1. Actual HRA
2. Rent Paid – 10% of Basic
3. 40a% of Basic (Non-Metros) or 50% of Basic (Metros)
Good News: If you are staying in your parents, Grandparents house, then also you can take the benefit of this section, Suppose the flat is registered in your mother name, than you can give rent to your mother and can claim HRA benefit, on the other hand since your mother is not having any other source of income, Rent Income in her hand will not come under taxable bracket, and also the keep in mind the taxable rent income is to be calculated after standard deduction of 30%.
Documents required to claim HRA:
1) There should be Rent agreement.
2) The Rent payment should be made monthly by cheque
3) At the time of paying rent, Rent receipt is to be collected.
Note: If the rent receipt is available with you and the payment has been shown in cheque then there is no need to submit rent agreement to your employer.
2) Medical Reimbursement: Medical Bill or any expenses incurred towards medical treatment on his or any member of his family subject to maximum of Rs. 15,000/- p.a. You will get the benefit only if the Copy of Bill is submitted to your employer.
3) Transport Allowance: A Minimum transport allowance of Rs.800/- is available without any documentation proof, i.e. 9600/- p.a, but if you thing that your actual conveyance/Transport allowance is more than 9600/- p.a., then you have to submit the actual expenses document to your employer, suppose your monthly railway pass is 1100/- p.m, you are using your bike from your home to your station and for that you pay monthly parking charges of Rs.500/- at railway station, you incurred around Rs.500/-p.m towards petrol bill, then your total expenses per month comes to Rs.2100/- p.m .i.e Rs.25200/- p.a, it means if you submit all the above bills, then instead of Rs.9600/-p.a. you will get exemption to the actual expenses incurred. i.e. in this case Rs.25200/-.
4) Children Education Allowance: If you have children than Rs.100/- per month per child can be claimed for the maximum 2 children, i.e. under this allowance Rs.2400/- p.a. can be consider if you have 2 children.
5) News Paper & Periodical: If this allowance is in your salary structure then by submitting the news paper bill, if you have purchased any professional business related article or books, then bill for the same can be submitted to your employer and to that extent your salary will be tax free.
6) Telephone Allowance: If you are not reimbursing your telephone expenses from your employer than to the extent of actual expenses you can convert your taxable salary in to tax free salary, If you have post paid number submit the copy of bill to your employer, but if you have prepaid number, the chances are quite difficult, you may save the messages of your mobile recharge, but it all depends upon your employer to consider it or not, its better to get switch to post paid to avail this benefit.
7) Uniform Allowance: Now a day’s very few organisation provides this allowances, Uniform allowance includes the expenses incurred towards the formal wear for the offices, to the extent the actual expenses incurred.
8) Leave Travel Allowance: Two trips in a block of 4 Yrs Amount not exceeding Air Economy or Rail AC I Fare shall be for shortest distance and for a single destination. In case you have been unable to claim the benefit in a particular 4 year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.
Exemption Under Chapter VI A (i.e. 80C, 80D, 80E, etc):
1) Deduction under Sec 80C:
· LIC premium subject to maximum of 10% of sum assured.
· Deposit in NSC
· Employees EPF/VPF deducted from salary subject to maximum of 12%
· Public Provident Fund
· Tax saving Mutual Funds
· Equity linked saving Scheme
· Deposit in tax saving Post of office scheme.
· Tuition fees, maximum 2 children, only Tuition fees component will be considered, that also paid to school, colleges, Institution for full time course. Fees paid to private tuition and classes are not eligible for deduction.
· Stamp Duty & Registration fees paid for purchase of new house etc.
· Principal Home Loan Repayment.
· NHB scheme
· ULIP of UTI/LIC
· 5 year fixed deposit in scheduled bank
· 80 CCC – Contribution to Pension fund
Note: Above all deduction will be eligible to the maximum limit of Rs. 1 lakh.
2) Deduction Under Sec 80D: Medical insurance premium paid by employee for self & dependents. Max Rs. 15000/- per year and Rs 20000 in case of dependent parents (In case of Senior Citizens)
3) 80DD - Exemption for Handicapped Dependencies: Max of Rs. 75000/- in case of more than 80% handicap, Rs. 50000/- lesser than 80%
4) 80DDB - Medical Treatment (Specified Disease only):
• Rs 40000/- or actual expenditure whichever is lower
• Rs 60000/- or actual expenditure whichever is lower [ in case of Senior Citizens ]
5) 80E - Repayment of Loan of higher education: Only interest paid on loan taken on Higher education qualifies for exemption
6) 80U - Deduction for self severe disability: Max of Rs. 100000/- in case of more than 80% handicap, Rs. 50000/- lesser than 80%
7) 80TTA - Section 80 TTA is proposed to be introduced to provide deduction to an individual or a Hindu undivided family in respect of interest received on deposits (not being time deposits) in a savings account banks, cooperative banks and post office. The deduction is restricted to Rs 10,000.
It is also proposed to provide that where the income referred to in this section is derived from any deposit in a savings account held by, or on behalf of, a firm, an association of persons or a body of individuals, no deduction shall be allowed under this section in respect of such income in computing the total income of any partner of the firm or any member of the association or any individual of the body.
The section is applicable with effect from April 01, 2013 and will apply from AY 2013-14 and onwards.
Exemption Under section 24b on Interest on Home Loan:
Tax Saving from Home Loans
Use your home loan efficiently to save more tax. The principal component of your loan, is included under Section 80c, offering a deduction up to Rs. 1, 00,000. The interest portion offers a deduction separately under Section 24b, up to Rs. 1, 50,000 if the house is self occupied, and if it is let out there is no limit for exemption.
The interest Component paid will get set off against Income from salary and will reduce tax on Salary.
Rebate Under Section 87 A:
Finance Bill, 2013 has been introduced new section 87A for Income Tax Deduction of Rs. 2000/- for Assessment Year 2014-15. This rebate can be availed by an individual resident in India, whose total income does not exceed five Lakh, shall be entitled to a deduction, from the amount of income-tax
These amendments will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.
Last but not the Least
Keep in mind the below points, to avoid the hassles of last minute tax planning:
· Give your employer details loans and tax saving investments before hand, to prevent any excess deduction.
· Check the Form 16 received at the end of each year from your employer thoroughly.
· Check Form 26AS whether the effect of TDS deducted has been reflected there or not.
· It is important to start your tax planning well before 31st March, and to file your returns before the 31st of July each year.
Save your Tax increase your home take salary and just enjoy.
Regards
CA Vinay Parmar
CAclubindia
