Any kind of puzzle can seem like a mammoth task, until you find that one key piece that makes everything else fit right and speeds up the solving. Anybody who has tried Sudoku or the good old 100 piece jigsaws, will agree. Income tax and returns might seem like a puzzle too, but you just might be missing that key piece.
If you are among those who fall in the 20-30% tax bracket, it is quite likely that the income tax is chipping off a big amount from your take-home salary. Income tax can seem very taxing.
The key piece here is to lower their tax outgo is to restructure their salary in a way that a big part of the salary can be claimed as reimbursements. Let’s see the math here through an illustration.
Restructuring the salary
This works only if the HR department of the employer allows you to do so. The HR departments of many organizations are flexible in this regard and can help you tweak your salary package to make it more tax-efficient.
Before we proceed with the restructuring, let’s take a look at the monthly salary structure of Mr.Gupta.
| Fixed salary | |
| Basic salary | Rs 30,000 |
| Housing Rent Allowance | Rs 12,000 |
| Special allowance | Rs 55,000 |
| Total (a) | Rs 97,000 |
| Reimbursements | |
| Medical | Rs 1,250 |
| Leave travel allowance (LTA) | Rs 1,000 |
| Telephone | Rs 750 |
| Total Reimbursements (b) | Rs 3,000 |
| Grand Total (a+b) | Rs 1,00,000 |
Mr.Gupta gets 55% of his salary as special allowance while his monthly reimbursements are only Rs 3,000. Even within the limit of Rs 3,000, if he claims LTA every month, it would be taxable.
Considering that Mr.Gupta claims a deduction of Rs 3.5 lakhs (Rs 1.5 lakh under Section 80 C and Rs 2 lakh against interest paid on home loan) every year under different provisions of the income Tax Act, the tax that he pays based on the above salary structure is Rs 90,434 annually or Rs 7,536 monthly.
Since Mr.Gupta is claiming deduction against home loan interest, we assume that he is not claiming HRA deduction.
He can now ask the HR department to restructure his salary in a more tax-efficient manner.
| Fixed salary | |
| Basic salary | Rs 30,000 |
| Housing Rent Allowance | Rs 12,000 |
| Special allowance | Rs 35,000 |
| Total (a) | Rs 77,000 |
| Reimbursements | |
| Medical | Rs 1,250 |
| Leave travel allowance (LTA) | Rs 1,000 |
| Telephone | Rs 1,750 |
| Travel/conveyance | Rs 8,000 |
| Food coupons | Rs 5,000 |
| Entertainment | Rs 6,000 |
| Total reimbursements (b) | Rs 23,000 |
| Total salary (a+b) | Rs 1,00,000 |
In this case, we have simply shifted Rs 20,000 from special allowance to reimbursements by adding three more categories under reimbursements and increasing the claim against telephone expenses by Rs 1,000.
As a result, Mr.Gupta’s taxable income comes down drastically (assuming Rs 3.5 lakh claimed as deduction under different provisions of income tax act) and the total tax out flow reduces from Rs 90,434 every year to Rs 40,994.
Points to remember:
Before you go for an overhaul of salary structure, these are a few points you must keep in mind.
Limits prescribed: There are certain limits prescribed by the Income Tax Department as far as different reimbursement heads are concerned. The maximum medical reimbursement one can claim without paying tax is Rs 15,000 a year. Similarly, LTA can be claimed only twice in a block of four years (the current block years is 2014 to 2017), else the amount claimed is taxable. Deduction against HRA can be the least of the actual HRA received, rent paid in excess of 10% of salary, or 40% of Salary.
You need bills to claim reimbursements: Claiming reimbursements can be a tedious job, especially if you are doing it every month, given that you need bills to provide against some heads of reimbursements. Bills have to be produced against reimbursements for LTA, telephone usage, entertainment, books or periodicals, medical, etc. So while restructuring your salary, bear in mind that you have genuine bills saved up.
Be on the right side of the law: Tax department has increased its due diligence process and any reimbursement claims based on fake bills can land you in trouble. Therefore, decide the amount and heads of reimbursements only after carefully evaluating your ability to produce bills.
Besides, your salary structure should not give an impression that you have been resorting to illegal means to save taxes. Who knows, it can leave a bad impression on your prospective employers if and when you decide to leave your current organisation.
We hope this gives you better returns and more time to solve your crosswords. Puzzles are for leisure. Normally anyway.
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