Many salaried persons are not aware of this fact even after the HR guides them, but there are provisions that you are allowed to exercise to save on taxes if you organise your salary structure smartly.
Breakdown of salary items to help save taxes
There are various investments and expenses on which a person can avail tax rebates. If your company allows you to decide your salary structure or helps you in doing so, you can make complete use of these investments and expenses to save on taxes.
House Rent Allowance: If HRA
is part of the employee’s salary, it is tax-free up to the minimum value of up to:
* Fifty per cent of the annual salary in case of metros; and 40% in the case of non-metros;
* Actual HRA received;
* 10% of salary for rent paid;
* For HRA to be availed, the employee must produce rent receipts for the period from the landlord.
Conveyance Allowance: This amount is tax-free up to R9,600 annually if the employee is given a conveyance or transport allowance.
Education Allowance: Education allowance of up to R50 per month per child is allowed for up to two children. Also, R150 per month per child up to two children is allowed if they are in hostel. Under Section 80E, deductions are allowed for repayment of interest on higher education loan if the school/university or institute is recognised by the government.
Professional Tax: If a professional tax is being deducted from the employee’s salary, it can be reduced from the annual salary income to arrive at the taxable salary.
Medical Allowance: Any medical allowance is tax-free up to R15,000, if the employee produces valid bills and receipts.
Provident Fund: Under Section 80C, provident fund contribution deducted from the employee’s account is exempted from tax up to an amount of R1 lakh or 12% of the employee’s salary.
Perquisites better than allowances
If you are allowed the choice, perquisites are a better option than tax-deductible allowances. Perquisite may be defined as any casual emolument or benefit that is attached to an office or position in addition to the salary or wages. Perquisites are usually non-cash benefits given to the employee in addition to their salary or wages, but they can also be cash reimbursements of expenses for obligations incurred by the employee.
Perquisites are also referred to as ‘fringe benefits’ or ‘perks’. Under Section 17(2) of the Income Tax Act, a perquisite has been broadly defined to include:
* Rent-free or concessional rent accommodation provided by the employer;
* Any other benefit or amenity offered to the employee for free or at a concessional rate;
* Any amount paid towards the life insurance of the employee ;
Some of the fringe benefits which are taxable include:
* Twenty per cent of the expenses paid towards telephone or mobile bill for official purposes is taxed as a fringe benefit in the hands of the employer;
* Fifty per cent of the health club facility expense provided by the employer. So, reimbursement of medical bills is preferable than medical allowance;
* Five per cent of foreign travel expense from the employer to the employee;
* Depending on the population of the area where the house is situated, 7.5% or 10% or 15% of salary for the rent-free house. If the house is furnished without rent-free accommodation, then it is not taxable.
Under this arrangement, the salary structure should be:
Basic salary + Dearness Allowance (DA) + bonus + commission + all taxable allowances.
The taxable value of perquisites in the hands of the employee is generally its cost to the employer.
* Ask the dearness allowance to be added as a part of your retirement benefits as it will reduce your tax incidence with respect to HRA, provident fund, gratuity, etc.
* Ask for your pension or gratuity to be commuted to the maximum permissible limit up to which it is exempt from tax.
* If leave encashment is done on the termination of employment through superannuation, then it will be exempt from tax up to certain limits.
* Opt for the best combination of salary and allowances to get the maximum benefit of tax exemptions. Your company’s finance persons will be able to assist you if you are in doubt.