The Salaried class has complained about the raw deal year after year in the income tax laws. But the good news is that you can still pay Zero (NIL) income tax on salaries up to Rs 20 lakh (salary here means cost to the company). You just have to invest in the right salary structure and the right tax saving schemes! We give you the details below.
Tax-efficient salary structure:
The salary structure is very important to keep taxes down. The good news is that most employers are partially flexible with the salary structure. We offer you one such sample salary structure for CTC (Cost to Company) of Rs 20 lakhs.
We have kept the following points in mind:
- Includes all components that are tax-free (medical reimbursement is no more tax-free)
- For most of the HRA benefits – it should be 50% of the basic salary (40% is good if there are rented houses in non-metro)
- Car maintenance – The company can reimburse Rs 1,800 per month for a car under Rs 1600 (Rs 2,400 per month for big cars) as well as Rs 900 per month tax-free allowance for driver salary.
- Transport allowance is no more tax-free (Budget 2018), but car maintenance is reimbursed.
- Employers can have the option of membership of both NPS and EPF. Keeping both makes the salary more tax-efficient, although taking home can go down
- Gift voucher of Rs 5,000 per year is tax-free. Some companies offer such vouchers on birthdays or anniversaries!
- Company-owned cars offer more tax benefits and are therefore recommended for higher salaries.
|Tax Efficient Salary Structure Example|
|Basic Salary||10,60,000||88,333||Fully Taxable|
|House Rent Allowance||5,30,000||44,167||Partially Tax Exempted|
|Car Maintenance||28,800||2,400||Tax Free if bills submitted|
|Meal Coupons||26,400||2,200||Tax Free up to Rs 50/meal (22 working days)|
|NPS (Employer Contribution)||1,06,000||8,833||Tax Free up to 10% of basic salary|
|EPF (Employer Contribution)||1,27,200||10,600||Tax Free up to 12% of basic salary|
|Phone & Internet Bill Reimbursement||36,000||3,000||Tax Free if bills submitted|
|Uniform Allowance||24,000||2,000||Tax Free if bills submitted|
|Children Education/Hostel Allowance||4,800||400||Tax Free if bills submitted|
|Newspaper/Journal Allowance||12,000||1,000||Tax Free if bills submitted|
|Gift voucher||5,000||Tax Free up to Rs 5,000|
|LTA (Leave Travel Allowance)||30,000||Tax Free if bills submitted|
|Gratuity||50,962||Paid while Leaving company|
|Cost to Company||20,41,162||1,62,933|
Income Tax Calculation for Salary (FY 2018-19):
Below is the income tax calculation for above salary.
|S.No.||Calculating Income Tax||FY 2019-20|
|1||Total Cost to Company||20,41,162|
|2|| Tax Free Components |
NPS (Employer Contribution)
EPF (Employer Contribution)
Mobile Phone and Internet Bill Reimbursement
Children Education/Hostel Allowance
Leave Travel Allowance
|3||HRA (Rent Paid is Rs 53,000 and in Metro City)||5,30,000|
|4||Standard Deduction (increased to Rs 50,000 in Budget 2019)||50,000|
|5||Gratuity (Not part of Salary but part of CTC – Non Taxable)||50,962|
|6||Tax Deductions |
Section 80C Exemption – 1,50,000
NPS 80CCD(1B) Tax Exemption – 50,000
Medical Insurance (Self & Parents) – 60,000
Interest on Education Loan – 50,000
|7||Home Loan Exemption||2,00,000|
|8||Income after Deductions [1 – (2 + 3 + 4 + 5 + 6)]||5,00,000|
|9||Basic Tax Exemption||2,50,000|
|10||Taxable Income [8 – 9]||2,50,000|
|11||Income Tax [5% of 10]||12,500|
|12||Rebate u/s 87A||12,500|
|13||Tax Payable [11 – 12]||0|
The following salary components are exempt from tax:
1. Car maintenance
2. Meal Coupons
3. NPS (Employer Contribution)
4. EPF (Employer Contribution)
5. Mobile phone and Internet bill reimbursement
6. Uniform Allowance
7. Child Education / Hostel Allowance
8. Newspaper / Journal Allowance
9. Gift Voucher
10. Leave Travel Allowance
11. Transportation allowance and medical reimbursement is not any more tax-free (Onwards from the financial year 2018-19)
You can claim the following tax deductions.
Section 80C/80CCC/80CCD (Rs 1,50,000): Investment in EPF, ELSS, PPF, FD, NPS, NSC, Pension Plans, Life Insurance, SCSS, SSA and NPS. Also includes Home Loan Principal repayment, Tuition Fees, Stamp Duty (Best Tax Saving Investments u/s 80C)
Section 80 CCD (1B) (Rs 50,000): Invest in NPS (Should you invest Rs 50,000 in NPS to save tax U / S 80 CCD (1B)?)
Section 24: Interest paid on Home Loan for Self occupied homes. No Limit for Rented house.
Section 80E: Interest paid on Education Loan. No upper/lower Limit! (Tax Benefit on Education Loan (Sec 80E))
Section 80D: Payment of premium for medical insurance for self and parents. A limit of Rs 5,000 is also included for preventive health screening (tax benefit status on health insurance
HRA or Home Loan?
We have shown tax deductions on both HRA and home loans. There are people who think that both cannot be used together. it is not true. You can take advantage of both HRA and Home Loan, even if your house and rent location are in the same city.
Monthly Salary Slip:
We have seen the salary structure and how you need to pay 0 income tax even if the CTC (the cost to the company) is Rs 20.41 lakh. Now let’s see how your monthly salary slip will look.
Gross salary – Rs 1,32,500
1. Basic salary – 88,333
2. HRA – 44,167
Deduction – Rs 30,033
1. NPS (Employer Contribution) – 8,833
2. EPF (Employer Contribution) – 10,600
3. EPF (Employee Contribution) – 10,600
4. Income tax – 0
Net salary = Rs 102,467 [1,32,500 – 30,033]
Food / Gift Coupon – Rs 2,200 monthly
· In addition, the employee will get Rs.2,200 meal coupons every month (which can be used for meals, eating at restaurants or grocery shopping).
Reimbursement (on submission of bill) – Rs. 1,35,600 (annual)
1. Car Maintenance – 28,800
2. Phone and Internet bill reimbursement – 36,000
3. Uniform Allowance – 24,000
4. Child Education / Hostel Allowance – 4,800
5. Newspaper / Journal Allowance – 12,000
6. LTA (Leave Travel Allowance) – 30,000
As you can see the monthly payment is not high and there are a lot of component reimbursements. Many employers cut reimbursements monthly and taxes at the end of the year if bills are not submitted for balance.
How does the Retirement Account look?
The good thing about the above salary structure is a lot of contribution goes too long term savings of NPS & EPF. Every Month Rs 31,167 contribution goes to your retirement savings as follows:
|Component||Employee Contribution||Employer Contribution||Total Contribution|
|NPS (10% of basic salary)||0||8,833||8,833|
|EPF (12% of basic salary)||10,600||10,600||21,200|
The drawback of the entire pay structure is that the monthly payment will be lower. If you have a higher monthly income plan, you will need to pay more taxes.