We pay taxes on various components of our income every year. However, if we can restructure our salaries, it will help decrease our tax liability and increase our take-home pay.
Salary provided by your employer has many break-ups. But employers are now offering their employees the freedom to restructure their salary in ways that will benefit their employees in reducing their tax liabilities and also increase their in-hand pay.
Here are the components of your salary and how you can claim compensation on them to reduce paying taxes:
House Rent Allowance or HRA
If you are a salaried employee and you pay rent on your house, you can claim HRA to reduce paying taxes on your house rent. Amount paid on house rent enjoy partial tax exemption. You can claim an exemption on paying taxes for both, your house rent as well as your home loan repayments (if any). If you are staying in a rented house and making repayments on another home/property, you can claim for tax benefits on both, even if both the houses are located in the same city. Furthermore, if you are paying rent to your parents for living in their house, you can claim HRA deduction for this rent if your parents own the house/property.
Leave Travel Allowance or LTA
LTA is another component of your salary. This allowance can be used to reduce the amount of tax you have to pay. However, what you must remember here is that, LTA applies to travel within India only. If this component is available in your salary break-up, you can claim for LTA for 2 journeys in a span of 4 calendar years.
National Pension System or NPS
In a corporate set up, the contribution that your employer makes towards your NPS will be eligible for tax benefits. Under Section 80CCD(2), up to 10% of your employer’s contribution towards your NPS of basic + DA will be permitted for tax deduction. This is over and above the limit of Rs.1.5 lakh under Section 80C + up to Rs.50,000 exemption for any contributions that you make towards your NPS, which is permitted under Section 80CCD(1B).
If you have received any bonus from your employer, the full amount will be eligible for tax deduction. However, more often than not, employers hand over any applicable bonus to employees after deducting the tax beforehand. Therefore, if you provide your employer with details of your tax-saving investment, they can help you receive the maximum in-hand bonus. If you do not follow this procedure, then you will have to claim for a refund on the tax paid on your bonus at the time of filing your Income Tax Return.
You can lower your tax deductions significantly by claiming reimbursement for expenses incurred by you in the form of telecom expenses, fuel charges, driver expenses, purchases of books and periodicals necessary for your job, food coupons, etc.
Salary loans or advances
If you have requested for an advance on your salary, then it will become taxable for the year you have received such an advance. You will not be taxed for this income again when the tax for it was originally due. If your employer has offered you a concessional or interest-free loan, in that case, this benefit will also be taxable, unless the amount is below Rs.20,000 and for specific medical purposes. Under our income tax laws, the interest will be calculated using State Bank of India (SBI) rates and the interest will be included in your salary, thereby, eligible for tax deduction.
Employee Stock Option Plans or ESOPs
As a way to retain their employee base, many companies are offering their employees additional benefits such as employee stock option plans or ESOPs. When the ESOPs have been vested, you will be able to purchase them at a lower price than the current market value of the stock. The ESOPs purchased by you will be taxed. The tax on these ESOPs will be calculated by taking the difference between the share’s FMV or fair market value on the exercise date of the option less the exercise price. However, to reduce the amount you pay on taxes for the purchase of such ESOPs, you can choose to exercise the option when the FMV of the shares are lower, thus reducing the difference.
If you can find a way to save on each of these components of your salary, you can significantly save on the amount you will pay on taxes, invariably increasing your take-home pay.