Career Center - Tips and Advice

Share Now

5 Tips to save income tax on your salary

The first step towards smart tax planning is devising a good salary structure. That largely depends on your needs and expenses. In other words, what might be a good salary structure for your colleague may not necessarily be the best option for you. It is therefore important to have your salary structure tailored to your needs and requirements. 
 
Here are 5 tips to help you devise a good salary structure to reduce your tax burden: 
 
1.Tweak your basic pay
Your basic salary is fully taxable according to the law. You could ask your company to lower your basic salary and incorporate allowances instead. However, your basic is linked to other components of your salary like Provident Fund (PF). Thus, a lower basic may also mean a lower amount under PF. It is therefore necessary to choose your basic figure wisely. One way to decide what your basic should be is to analyze your expenses. If you have a large number of immediate expenses that require a higher take-home pay, a lower basic will be of help. If, on the other hand, you want to save for retirement, you could opt for higher basic pay. 
 
save tax on salary
 
2. Perks and allowances
You can claim tax-free allowances under a host of heads like travel and conveyance, medical expenses, books and periodicals and telephone expenses. While some of these have an upper limit (medical expenses for tax exemption, for example, is capped at Rs. 1,250 per month), there is no limit for certain others. That, however, does not mean that you can insert any figure you want to -- the taxman will certainly raise objections if the amount is unrealistic. Further, these allowances are only tax-free against bills and receipts. If you cannot produce proper bills to claim these allowances, they become fully taxable. 
 
3. Postpone incentives
If your pay package includes an incentive at the end of the year, see whether postponing it for a few days will save you tax. The Union Budget, where the government declares its tax norms, is usually read out well in advance of the end of the financial year. If the budget provides a lower income tax rate for the following year, you could ask your employer to postpone paying your incentive till the next financial year. 
 
4. Purchase a pension scheme
You can reduce your taxable income further by asking your employer to deduct a part of your salary for the National Pension Scheme (NPS). Contributions to NPS, which fall under Section 80CCD(2) of the Income Tax Act, allow you to claim tax benefits over and above the Rs 1.5 lakh tax exemption limit under the Section 80C the Act.  
 
5. Use a company car
If your position entitles you to a company car, take it. You will end up paying less in taxes for the company car than if you buy your own car and pay EMI. A company car is listed as a perk, with Rs. 1,800 per month deductible as tax for vehicles up to 1,600cc displacement (the tax goes up to Rs. 2,400 per month for larger cars of more than 1600cc displacement). The tax for your personal car, on the other hand, will be higher over a period of time. Further, your personal car will depreciate in value after a few years while you can simply return the company car.
 
Before signing an offer letter for a new job, closely examine the compensation structure you are being offered. If the salary package is not structured properly, you may receive a shock when you see your first salary in your account. It is better to ask your prospective employer in advance to rework your salary structure according to your needs.
 
Also Read: