Maximum taxes can be saved by different allowances in best salary structure. The salary structure varies from person to person, it depends on how much expenses you are incurring under the respective allowances. For e.g. If a person is not incurring any expenses on Education Allowances, then he/she should request to employer to replace such allowance to other useful allowance in which you will incurred more expenses and get better tax benefits.
Followings are different types of allowances :
- House Rent Allowance: If you live in a rented an accommodation and are entitled to a house rent allowance (HRA). Employees, who live with their parents/spouse and they are paying rent to them, are entitled to full HRA tax exemption.Tax Implications: You get tax exemption based on whichever of the following is lower
a) Actual HRA received.
b) Rent paid minus 10% of the basic pay.
c) 50% of the basic pay if you live in a metro city and 40% of the basic pay in other cities.The main documents that are required for an HRA exemption claim include the rent agreement and receipts towards the monthly rents in a financial year.
- Conveyance Allowance for travel between home and office is exempt up to Rs 1600 per month.
- Children’s Education Allowance is exempt up to Rs 100 per month per child up to a maximum of two children. Also, Rs. 300 per month per child up to two children is allowed if they are in hostel.
- The value of any travel concession or assistance received by or due to you from your employer for yourself and your family about proceeding on leave to any place in India subject to prescribed conditions.
- Leave encashment while in service is taxable, but is exempt at retirement, subject to prescribed limits and conditions.
- An allowance to the extent incurred to meet the cost of travel on tour or on transfer, expenses incurred on conveyance in the performance of official duties, expenditure on helper engaged in the performance of duties, daily charges on account of absence from normal place of duty on tour are exempt.
- Reimbursement of health insurance premium by your employer for you and your family is exempt.
- Actual expenditure incurred on your medical treatment or any of your dependents is exempt up to Rs 15,000 per annum as medical reimbursement subject to provision of bills. If you get a medical allowance instead of reimbursement, the same is fully taxable.
- In case you are entitled to a free or concessional company-provided accommodation, the same would be valued based on stipulated conditions.
- If the company provides you a car for personal and official purposes and reimburses the fuel, insurance, maintenance and driver’s salary, the taxable value shall be: in case the cubic capacity of the car is less than or equal to 1.6 litres – Rs 1,800 per month (plus Rs 900 for the driver) and in case the cubic capacity of the car is greater than 1.6 litres – Rs 2,400 per month (plus Rs 900 for the driver).
- In case you use your own car for official and personal purposes and the company reimburses the running and maintenance cost, the taxable value shall be: in case, the cubic capacity of the car is less than or equal to 1.6 litres – actual amount met or reimbursed by the employer less Rs 1,800 per month (plus Rs 900 for the driver) and in case the cubic capacity of the car is greater than 1.6 litres – actual amount met or reimbursed by the employer less Rs 2,400 per month (plus Rs 900 for the driver).
- The reimbursement of telephone expenses including a mobile phone actually incurred by you on behalf of your employer is not taxable in your hands. Telephone facility received by Employee at his residence provided by employer is also not taxable in hand of employee as against Telephone Allowance.
- Dearness allowance to be added as a part of your retirement benefits as it will reduce your tax incidence with respect to HRA, provident fund, gratuity, etc.
- The reimbursement of health club, sports club membership fees and similar facilities provided uniformly to all employees would not be taxable in your hands.
- Free meals (Food Coupons) provided to you through paid vouchers, not transferable and usable only at eating joints to the extent of Rs 50 per meal and Rs. 35 for tea and snacks during working hours. Assuming company could provide Rs.135 for two meals & tea snacks during work hours, exempted allowance will be Rs. 42,120/- i.e.(Rs.135*26*12)
- Uniform Allowance – Uniform allowance is not considered as Perquisite U/s. 10(14). This however needs to be a uniform not a civil dress.
- Asset assistance given by your employer. For example, provision of a computer or laptop owned by the company and provided to you or any member of your household is not taxable in your hands.
- Interest Free/Concessional Loan: One of the perquisite only given by rich or profitable companies linked to tenure of employee in company. If total loan amount is less than or equal to Rs 20,000 then loan is non-taxable. In most of the cases, loan is at concessional interest rate of as low as 1%.
- Driver / Chauffeur Salary: If your company agree to provide driver to run the car than driver salary is also excluded from taxable income as a perquisite. Normally driver’s salary is restricted up to Rs 12,000 per month to avoid misuse of tax savings. The perk value of driver’s salary is only Rs 900 per month irrespective of capacity of car. This component is tax free against bills.
- Education Facilities: If your company is willing to sponsor your higher studies or professional course, the taxable value is only 10% of total course fees. Though company can include the same in your CTC but it will help you in tax savings of 20% if you are in highest income tax bracket.
Rough estimate of how much taxes can be saved by different allowances.
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As you can see the above salary components can easily lower your annual taxable income by Rs. 179720. Indirectly this means annual saving of Rs. 8986 for person in lowest tax bracket (5% tax slab) and Rs. 53916 for person in highest tax bracket (30% tax slab).
Note that, we have not considered other tax-free allowances like driver salary, Interest free loan, reimbursement of health club etc, that could be save your more taxes.