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5 Ways To Restructure Your Salary To Reduce Income Tax Outgo

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How To Restructure Your Salary To Reduce Income Tax Outgo?
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As the financial year draws to a close, many Indians grapple with the burden of income tax. However, there’s a silver lining amidst the tax maze – restructuring your salary intelligently can significantly reduce your tax liability. Today, we’ll delve into savvy strategies tailored to help you optimize your salary structure and retain more of your hard-earned income.

Understand Your Current Compensation Structure

Begin by dissecting your current salary package. Identify components such as basic salary, bonuses, allowances, reimbursements, and other perks your employer provides. Knowing how each element is taxed under Indian tax laws will serve as a crucial foundation for your tax optimization strategy, and you can save more than Rs 1 lakhs on your taxes, depending on your income and age. 

Illustration: Let’s say your salary is Rs 25 Lakhs annually, and you take it all in hand. According to the old tax regime, you must pay Rs 5,69,400 in taxes, but you can structure your salary to lower this tax.

Here’s how you can structure your salary.

Opt for Meal Coupons:

Your employer’s meal coupons are exempt from tax up to a specific limit, allowing you to save on your tax bill while enjoying meals. The catch is that coupons up to Rs 50 are exempt. Yet, we can still leverage some benefits from it, considering a five-day workweek. So you’ll get an exemption of Rs 13,000 annually, reducing payable tax by Rs 4,056 in the Old Tax Regime.

PaymentUnstructuredStructured
Salary25000002487000
Meal Coupons013000
Total Income25000002500000
Payable Tax569400565344

Leave Travel Allowance (LTA)

LTA can be claimed for domestic travel expenses you and your family incur, providing further tax savings. Utilize these allowances effectively to minimize your taxable income. On average, a person spends 5% – 10% of their income on vacations, and let’s consider you go with the upper limit, so with a salary of Rs 25 lakhs, you’ll be taking Rs 2.5 lakhs as your LTA allowance, which reduces payable tax by Rs 82,056. But we can structure this income further. 

PaymentUnstructuredStructured
Salary25000002237000
Meal Coupons013000
TLA0250000
Total Income25000002500000
Payable Tax569400565344

Consider House Rent Allowance (HRA)

HRA can be a valuable tax-saving tool if you’re a salaried individual paying rent. Claim HRA exemptions by submitting rent receipts to your employer. HRA exemption is allowed for the least of the following:

  • Actual HRA received by the employee
  • 40% of the salary is in a non-metro city, and 50% is if the rented property is in a metro city.
  • Actual rent paid should be less than 10% of salary.

In context, you pay Rs 20,000 in rent monthly, making it Rs 2.4 lakh per annum, which can be claimed as HRA. The exemptable amount on your income will be the one which is lowest amongst the three:

  • The actual HRA is Rs 2.4 Lakhs
  • Considering you stay in a metro city, 50% of your salary will be Rs 12.5 Lakhs
  • 10% of your salary will be Rs 2.5 lakhs

So, your entire HRA will be exempted in this situation as it is the lowest, bringing your payable tax down by Rs 1,56,936 as per the old regime. Can we tailor further for more savings?

PaymentUnstructuredStructured
Salary25000001997000
Meal Coupons013000
TLA0250000
HRA0240000
Total Income25000002500000
Payable Tax569400412464

Other Allowances

Apart from the expenses mentioned earlier, organizations can also provide their employees with other allowances like allowance on their phone bill and internet connection as it is used for the company’s work, considering your phone and internet cost you around Rs 1,000 a month, you can add it as an allowance reducing Rs 12,000 from your income. 

You can also consider requesting a travel/fuel allowance from the company, which, on average, ranges from Rs 1,200 to Rs 19,200. Considering you travel using your own vehicle, you’ll easily claim up to Rs 19,200 in some cases; if we add these numbers, you’ll save Rs 1,66,670 on your taxes.

PaymentUnstructuredStructured
Salary25000001965800
Meal Coupons013000
TLA0250000
HRA0240000
Travel/Fuel Allowance019200
Cellular allowance012000
Total Income25000002500000
Payable Tax569400402730

Seek Professional Advice

Navigating India’s tax landscape can be complex, and seeking guidance from a tax consultant or financial advisor is advisable. They can offer personalized advice, help you maximize deductions and exemptions, and ensure compliance with tax regulations, ultimately optimizing your tax-saving potential.

Restructuring your salary to minimize income tax is wise and essential for maximizing your take-home pay. If you strategically leverage tax-saving investments, employer-provided benefits, allowances, and deductions available under Indian tax laws, you can significantly reduce your tax burden. Check if you can get a salary restructure to help you save taxes further.

FAQ

  1. What are the new income tax slabs under the revised tax regime for FY 2023-24?

    The new income tax slabs are as follows:
    Up to ₹3,00,000: Nil
    ₹3,00,001 – ₹6,00,000: 5%
    ₹6,00,001 – ₹9,00,000: 10%
    ₹9,00,001 – ₹12,00,000: 15%
    ₹12,00,001 – ₹15,00,000: 20%
    Above ₹15,00,001: 30%

  2. Why is there no income tax up to ₹7 lakh under the new regime?

    A tax rebate is provided to resident individuals, bringing the tax amount down to zero if the total income does not exceed ₹7 lakh.


  3. Are there any deductions available for pensioners under the new tax regime?

    Yes, pensioners can claim a standard deduction of ₹15,000 or 1/3rd of the pension, whichever is lower.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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