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Below article might be useful to readers in India as frequently, questions on salary optimization are asked by assessees in India (Jan 011)

Structuring your salary to maximize take home salary


We all know the numbers on the CTC (Cost To Company)but the take home is vastly different. This is mostly due to one single component- Taxes. Taxes are applicable on most aspects of our salary. There are limited ways we can save on taxes by way of deductions- Most used sections under the IT Act, 1961 are- 80C, 80D, 80G and Sec 24.

But, did you know we can save much more on taxes by structuring our salary better? 


Below are few components which can be used to reduce the tax liability on salary income:-


Allowances/ Reimbursements- Allowances are normally paid irrespective of the employee actually incurring them. These are fully taxable if no bills are provided. However, if the expenses are incurred actually and bills provided, they are not taxable up to a specified limit under each head.
  1. Conveyance: For conveyance, up to 800 per month is allowed as deduction without providing any bills.
  2. Medical Allowance: Bills have to be provided; up to 15,000 per annum is allowed as deduction. This can be claimed for self, spouse, children, parents and siblings who are dependent on the assessee.
  3. Leave and Travel Allowance:2 trips in a block of 4 years is allowed and only travel within India can be claimed as deduction. It can be claimed for self, spouse, children, parents but only if the employee (assessee) is travelling along with them. There is no maximum limit on this, but the unutilized amount will be paid once the block is completed (after deducting taxes).
  4. Education Allowance: An amount of up to 2,400 per annum is tax-free.
  5. Qualification Allowance: An amount of 24,000 per annum is tax-free.
  6. Training Allowance: An amount of up to 14,000 per annum is tax-free if the employee provides relevant bills.
  7. Telephone Allowance: An amount of 12,000 per annum is tax free if the phone is used for official purposes and bills submitted.
  8. Professional Journal : An amount of 12,000 per annum is tax-free.
  9. Uniform Allownace : An amount of 24,000 per annum is tax-free.
  10. HRA: House Rent Allowance can be claimed if one lives in a rented premises and the rent exceeds 10% of the salary. The actual HRA exempted from tax is least of the following:

o    The actual amount of HRA received.

o    40% of salary. This increases to 50% if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata

o    Rent paid minus 10% of salary (basic component + dearness allowance)

o    Salary for the purpose of HRA means: Basic + D.A (only if it is forming part of salary for retirement benefits) + commission (if it’s a fixed % of sales turnover).


 Disclaimer –

Above is only an attempt to give readers an overview of tax planning in salary. It is a very vast subject and cannot be examined in just few weeks. In fact, books are published only on tax planning on salary income.