Explained: How to structure your salary to reduce your tax burden

When an employer when employees a person, he specifies his cost to the company (C.T.C). It means that the organization is going to spend that much amount per year to employ that person


Sunainaa Chadha New Delhi
When an employer employs a person, he specifies his cost to the company (C.T.C). It means that the organisation is going to spend that much amount per year to employ that person. Now, the  employee can actually decide his salary structure in a way to minimise his tax liability.
Pick the right tax regime
One of the first things to do is to figure out which of the tax regimes are beneficial.  The new tax regime is different in two ways from the old one.

Firstly, it has more slabs with lower tax rates. And secondly, all the major exemptions and deductions available to taxpayers in the existing (old) tax regime are not allowed if the new tax regime is chosen.

" If  the advantage of lower rates in the new tax regime outruns the benefit of the exemptions and deductions available under the old tax regime, the taxpayer can then choose the new tax regime.To know which tax regime is better, the taxpayer should calculate the income tax liability at the applicable normal tax rates, i.e. at old tax slab rates, after availing all the eligible exemptions and deductions from their income," said Archit Gupta, CEO and founder of Clear.

For example, salaried individuals can claim the exemption for LTA, HRA, standard deduction of Rs 50,000.

Also Read: Avoid these common errors in self-assessment tax calculation

Also, individuals are allowed to claim deduction under Section 80C up to Rs 1.5 lakh, the deduction for interest on housing loans, NPS contribution, etc.

Further, the taxpayer should calculate the income tax liability as per the tax slab rates of the new tax regime.

Now they can compare and choose the tax regime best suitable to them.

"There is no fixed category of taxpayers for whom you can specify which tax regime is better. It will vary depending on the deduction or exemption the taxpayer can claim in the particular year. Hence, the decision to opt for a new tax regime or an old tax regime depends taxpayer wise," added Gupta.

Most taxpayers benefit from old regime when they maximise Section 80C

Clear has observed that most taxpayers benefit from being in the old regime when they maximize section 80C and go for tax deductions and benefits available in their salary structure, such as claiming HRA, receiving a part of CTC as reimbursements etc. Only 15% of total filers on Cleartax benefited from being in the new regime and opted for it.

Those who don't invest in any tax saving instruments can choose new regime

The taxpayers who do not prefer to invest in tax saving instruments and are not eligible for any exemptions from income may choose the reduced slab rates of the new tax regime.
"Individuals with income under the head ‘Salary’, ‘House Property’, ‘Capital Gains’ and ‘Other Sources’ can choose every year to switch between the old or new tax regime. But the individuals who have income from business or profession get only one chance to return to the old regime after they opt for the new tax regime. They can choose the new tax regime only once in a lifetime," said Gupta.

Also Read: Ask for a benefit illustration of the 'tax-saving' plan you're being sold
The Basic Salary should not be more than 40% of CTC
An individual’s salary has many components, however, the basic salary is the most important component of the salary, as it is utilised to calculate other key tax saving components such as house rent allowance (HRA) and employee provident fund (EPF).

"As the basic salary is always taxable, therefore, it is advisable that it should not be more than 40% of the CTC. However, keeping the basic salary low will reduce other constituents of the salary," said Vipul Jai, Partner, PSL Advocates and Solicitors

The Income Tax Act prescribes certain allowances like HRA, DA, Travel allowance etc, for all salaried individuals, which are exempt at source. Therefore, negotiating a lower basic salary and higher allowances, will help an individual minimise his/her tax liability.
Certain expenses are exempt from tax

"Employers can include various components in the salary of their employees like company-paid accommodation, allowances for uniforms, meal coupons, conveyance, telecommunications like Wi-Fi and mobile, periodicals, car lease / maintenance and driver's salary etc. to reduce their taxable salary." said Sandeep Bajaj, Advocate, Supreme Court of India.

Certain expenses like telecommunication and internet charges are exempt from taxation. Consequently, individuals can effectively decrease their tax liability by retaining records of their telephone and internet bills. Furthermore, provisions within the Income Tax Act allow for deductions related to conveyance costs. Hence, employers can offer a conveyance allowance to their employees to effectively mitigate their tax liability.

Also Read: Active or passive ELSS? Investment advisors divided over clear winner

"Another example can be meal allowances in the form of Sudexo Vouchers or other alternates thereof to reduce their tax burden. However, it should be kept in mind that meal allowances are subject to a maximum limit of Rs. 50 per meal. Consequently, employers can pay their employees in the form of meal vouchers which can be utilized to provide for the daily meals of the employees and to minimize their tax liability. Additionally, employees have the opportunity to claim a standard deduction of Rs. 50,000 from their overall salary, which serves as an exemption," said Bajaj. 

Following are the component which shall be considered while structuring salary in order to minimize tax liability, as per Jai:

 1. Basic Salary and Allowances: Individual‘s basic salary is subject to income tax. However, certain allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and medical allowances can be tax-free up to a specified limit, as long as the taxpayer can substantiate the same with valid proof and meet the conditions stipulated by IT Department. 

2. Tax-Exempt Investments: Investment in tax-saving instruments like Employees' Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity-Linked Savings Scheme (ELSS) can offer substantial tax deductions under Section 80C of the Income Tax Act.
3. Salary Restructuring: If an individual’s employer allows, they can consider restructuring salary to include more tax-free allowances and benefits. For example, on can opt for a higher HRA component if you are paying rent, or receive meal and travel allowances instead of taxable components.
4. Flexible Benefits: Some employers offer flexible benefit plans allowing individuals to choose from a range of tax-free components based on their needs. This could include benefits like medical insurance, meal vouchers, or even a car allowance.
5. Bonuses and Perquisites: Consider negotiating for performance-based bonuses and non-monetary perquisites like company-provided accommodation, vehicle, or club memberships. These may have specific tax implications based upon prerequisites however, will help in minimising tax liability on salary. 
6. Salary Splitting: If an individual’s family member is falling in lower tax bracket, he/she can explore opportunities to split his/her income by investing in the name of such family member, as long as it's done within legal limits and through legitimate financial arrangements.
7. Home Loan Interest: If an individual has availed a home loan, the interest paid can be claimed as a deduction under Section 24 of the Income Tax Act. This can significantly reduce the taxable income.
8. NPS and Section 80CCD: The National Pension System (NPS) allows for additional tax benefits under Section 80CCD. The contributions made by the employer and employee can be claimed as deduction.
What are the key factors to consider to ensure hygiene in my tax life? Clear's Gupta has the following advice:
Using your last filed ITR as a starting point.

Seeing where you could not maximize your benefits.

Check if 80C was exhausted, aim to do that next time around.

Plan early and begin tax saving early with small amounts.

See all the available benefits via employer and claim them, try to submit bills and receipts on time.


First Published: Aug 14 2023 | 10:09 AM IST

Explore News