We’re always complaining how our ‘in hand salary’ isn’t enough because most of it goes into paying taxes. Um, that won’t be the case anymore.
Here are the different ways (legal, of course!) in which you can actually avoid paying taxes and take home more of your salary. But before we begin, you need to slice through your confusing yet tempting salary slip:
Usually a salary slip looks something like this:
Some parts of this salary slip are 100% taxable while some are not. The non-taxable ones are obviously the interesting parts, read on to find out how you can devour them without getting taxed!
Slice #1: Basic- This one’s 100 taxable
- Most important part of your salary
- Constitutes 35%-50% of your salary
- All other layers are structured around this
- The entire amount is taxable
Slice #2: House Rent Allowance: Partly taxable
House Rent Allowance a.k.a HRA is provided by the company to employees for paying their house rent. It is calculated by taking a percentage of the “basic” component of your salary. And this percentage is usually 40%-50% of your basic salary. For e.g. if the basic salary is 40,000 HRA will be between 16,000-20,000. HRA is meant to support the house rent which employees pay, and that’s why it’s exempted to some extent by the Income tax authorities. The exemption amount is calculated as the minimum of the following 3:
40% of your basic salary (50% if you live in a Metro City like Mumbai, Delhi, Kolkata, Chennai.)
Actual rent minus 10% of basic
HRA component specified on your salary slip
To avail this HRA tax deduction you need to show valid proof of rent that you are paying every month.
Slice #3: Conveyance: Partly taxable
This is amount on your salary slip allocated for your traveling expenses and it differs from company to company. But one can exempt Rs. 1600 per month (Rs. 19,200 yearly) from taxes.
Slice #4: Medical Allowance: Partly taxable:
If you or your family have incurred any medical bills then you can show it to your employer and up to Rs. 15,000 of your salary will be tax free provided you show them bills worth that much.
NOTE: The government in the latest budget 2018 has introduced a standard deduction of Rs. 40,000 for every employee for travel and medical purposes. And it has removed the tax benefits on the above two (medical and travel allowances). This is done to reduce paperwork and eliminate the need for providing proof to claim tax benefits. So earlier employees could claim tax deductions on Rs. 34,200 provided they had bills to support it, but now all employees can claim a tax deduction on Rs. 40,000 without bills.
Slice #5: C.L.A a.k.a Company Leased Accommodation:
This is an alternative to house rent allowance. In this the company enters into a leased agreement with a landlord and pays rent every month to the landlord on your behalf.
The amount shown as a company leased accommodation is generally the amount that your company spends on the house that they will provide you. As this is an expense which your company is making for you, they show it in your salary slip and also as part of your C.T.C (Cost To Company). And since you are getting a free house to stay, it is a virtual addition to your monthly “in hand” salary and you do not actually take this money home.
Slice #6: L.T.A a.k.a Leave Travel Allowance: Partly Taxable
This refers to the allowance given by the company to the employee if you have applied for leave for travel. It covers transport ONLY in India (domestic transport not international). And the tax exemption can be made only up to the amount provided by the company under L.T.A. not more than that. It only covers expenses made on travel and not other expenses such as food, stay etc. It covers exemption for a family (i.e. spouse, two children, parents and siblings). And an employee can claim L.T.A only for 2 journeys made in a block of 4 years. These block years are different from Financial Years and created by Income Tax Department. Currently, we are in the block year of 1st January 2014 – 31st December 2017.
Note: The L.T.A. benefit is not entitled to all the employees, based on various factors such as grade, pay-scale, etc. an employer decides whether a certain amount can be allocated for L.T.A.
Slice #7: Special Allowance: Fully Non-Taxable
This is the amount that does not fit into any of the above heads but makes a part of your pay package. It is the leftover amount after allocating amounts for basic, C.L.A or HRA, transport allowance, medical allowance etc. In some companies it also means the allowance given to employees to meet specific expenses to achieve efficient performance of duties. If this special allowance is the expense made by the company specifically to achieve efficient performance of duties then tax on it can be fully deducted up to the amount actually spent.
The Icing on top of your salary slip- EPF: Although, you think that your in hand salary is small thanks to taxes, you might be wrong. Not all of it goes into paying taxes some of it is icing in the form of EPF – 12% of your salary goes towards a retirement fund which will be given to you on retirement or leaving your job whichever is earlier.
And lastly, because you can’t ‘Eat your cake and Have it too’, a portion of this cake has to go to the government i.e. Income Tax: Tax deducted on your salary by the Income Tax department according to tax slabs below. These can be reduced by investing in tax saving instruments.
Cess: A 4% cess will be charged to all individuals in addition to the tax slabs
Surcharge: A 10% surcharge will be additionally charged for individuals whose income exceeds Rs.50 Lakh and is up to Rs 1 crore. And a surcharge of 15% will additionally be charged for individuals whose income is above Rs. 1 crore.
Different companies have different salary structures, all companies do not provide all benefits, some also offer a few other benefits, but the above ones are the most common ones.
I am sure you’ve fully understand your salary structure by now, if you still find something confusing about your salary slip, comment and let us know, we will break that down for you. You can also use this online calculator to help you calculate your total income in hand.