HRA, LTA, EPF, NPS: Know your salary structure to save taxes

The salary credit message at the end of the month makes you grin. But, wouldn't you admit that you understand little about your salary? What will make you grin broader is if you can reduce your taxable salary income. For example, you can save up to Rs 24,000 in taxes if you avail of food coupons, a non-taxable salary component. All you need is knowing your salary structure better and accordingly plan your taxes.

Key components of salary

i) Basic salary

This is the most significant part of your salary that forms the base for other salary components. For example, your employee provident fund (EPF) is deducted at 12 per cent of your basic salary, while the amount of tax-exempt gratuity or leave encashment also depend on it. Basic salary is always fully taxable.

ii) Dearness allowance

DA is paid as per a certain percentage of the basic salary and is always fully taxable. Typically, government employees receive it. Very few private employers offer it to their employees.  

iii) Allowances

Allowances such as house rent allowance (HRA), entertainment allowance, conveyance allowance, leave travel allowance (LTA), medical allowance or simply a special allowance make for a big chunk of your salary. These allowances are fully or partly taxable. If partly taxable (such as HRA and LTA), you must make sure to get tax deduction on the same.

iv) Reimbursements

Employees are allowed to claim reimbursements (up to a limit) on certain expenses that they make for official purposes such as phone calls, conveyance and hotel or restaurant expenses. You need to produce bills to get reimbursement on the same. Reimbursements are not taxable, hence a great option to reduce taxable salary income.

"The reimbursements in salary structure typically reduce the net take home pay in the months where the invoices are not submitted to the employer for claiming reimbursement.  However, this is a viable model and during the year the employees can claim the reimbursements after submitting bills/supporting documents," says Sudhakar Sethuraman, Partner, Deloitte India.

v) Perquisites

Perquisites may be fully taxable, partially taxable or fully exempt. These include rent-free or concessional accommodation, car facility, interest-free or concessional loan, free or concessional education for children, gifts and food vouchers.

vi) Retirement benefits

The employer and employee contribute 12 per cent of the employee's basic salary every month towards EPF. An employee may contribute more in EPF or in voluntary provident fund to avail extra tax deduction under section 80-C of the Income-Tax Act.

When you become eligible for receiving gratuity, pension and leave encashment benefit, a formula is used to arrive at tax-exempt values of the same.

Gross salary

An aggregate of basic salary, DA, allowances, reimbursements and retirement contributions (after permissible exemptions) make for your gross salary. A standard deduction of Rs 50,000 is given on your gross salary to arrive at taxable salary income.

Smart ways to reduce taxable salary income

1) If HRA is part of your salary - If you are living on rent, you must produce rent receipts to your employer to claim tax deduction. If you live with your parents, you may pay rent to your parents, but they should include the rent amount in their taxable income.

2) If HRA is not part of your salary, but you are living on rent, you can claim tax deduction of up to Rs 60,000 under Section 80GG on rent paid.

3) If your employer provides food vouchers as one of the perquisites, then up to Rs 50 per meal during working hours is tax-free. "This is a straight-up saving of Rs 24,000 annually," says Archit Gupta, founder & CEO, Cleartax.

4)  Those who spend a significant amount on domestic travel would make higher tax savings on having LTA component in their salary structure, suggests Gaurav Aggarwal - Director, Unsecured Loans, Paisabazaar.com. You can claim LTA twice in a block of four years.

5) Aggarwal suggests leasing a car through the employer can significantly reduce tax liability as the lease rental amount is directly deducted from salary by the employer before tax computation.

6) Declare all your expenses and investments in the beginning of the financial year to avoid TDS. This will increase your in-hand salary. "Employees should make sure to make qualifying investments or expenses and provide documentary proofs to their employers by the pre-set due dates. Else, the employer would deduct the differential TDS from the employee during the final months of the financial year," cautions Aggarwal.

6) If you invest in National Pension System (NPS), you can claim an additional deduction of Rs 50,000 annually under Section 80CCD(1B). For instance, if you have exhausted Rs 1.5 lakh tax deduction available under Section 80C (EPF, PPF and ELSS etc), you should consider contributing Rs 50,000 per annum towards the NPS. Now a deduction of Rs 2 lakh (Rs 1.5 lakh under Sec 80C and Rs 50,000 under Section 80CCD(1B) will be available to you.

Also read: Income tax pampers senior citizens with extra benefits; here's the list

Also Read: Centre made Rs 100 crore by sharing vehicle data with private companies: Nitin Gadkari