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How to reduce tax burden on your salary
Rahul Shringarpure |
BS | February 20, 2007 | 08:15 IST
O
f late, Indian salaries have seen a quantum leap on the back of a sound economic growth. Though theaffluent salaried class is raking in the moolah, they have little or no time to tackle the complex issue of taxation.In such a scenario, remuneration planning plays an important issue. Normally, a salary structure comprisesbasic salary, dearness allowance and other allowances.Sometimes these allowances form a substantial part of the salary. Under the Income Tax Act, certainallowances are either fully exempt or exempt to a specified limit or fully taxable.So the remuneration should be structured in such a way that the total taxable income will come down. We willconsider an example to clarify this issue.Mr. X is working as a manager for ABC Pvt Ltd. The company offers him two alternative remunerationpackages. In one package, the firm gives allowances, and in the other, reimbursement. The salary packagesare illustrated in
Table I
. Now we will consider the effects of each allowance to arrive at the taxable income.
 
TABLE IITEMSPackage-IPackage-II
Basic salaryRs5,00,000Rs5,00,000Dearness Allowance(Not? Considered For Retirement) Rs.1,00,000Rs1,00,000-House rent allowance(hra)(actual rent paidrs.80,000)Rs1,00,000-Rent free accommodation(fair rent)-Rs1,00,000Transport allowanceRs 12,000-Conveyance fromresidence tooffice(estimated cost)-Rs 10,000Conveyance allowance(utilised rs. 20,000)Rs? 40,000-Free 1600 cc car (estimated expenses)-Rs 60,000Education allowance for 2childrenRs 10,000-Free education (estimatedcost)-Rs 10,000Medical allowanceRs 15,000-Medical reimbursement-Rs 15,000Telephone allowanceRs 10,000-Telephone reimbursement-Rs 10,000
Dearness allowance is fully taxable. If dearnessallowance is considered for retirement benefits, then while considering salary for calculating HRA exemptionand the value of rent free accommodation it is added to the basic salary.
 
TABLE IIITEMSPackage-IPackage-II
Basic salaryRs5,00,000Rs 5,00,000Dearness allowanceRs1,00,000Rs 1,00,000House rent allowanceRs 70,000-Rent freeaccommodation-Rs 50,000Transport allowanceRs 2,400-Conveyance fromresidence to office-EXEMPTConveyanceallowanceRs 20,000-Free 1600cc car-EXEMPTEducation allowanceRs 7,600-Free education-Rs 10,000Medical allowanceRs 15,000-Medicalreimbursement-EXEMPTTelephone allowanceRs 10,000-Telephonereimbursement-EXEMPTTaxable salaryRs7,25,000Rs 6,60,000TaxRs1,67,500Rs.1,48,000Education cessRs 3,350Rs 2,960TOTAL TAXRs1,70,850Rs 1,50,960
Only if you are staying in a rented accommodation,you can claim HRA exemption to the specified limit. HRA is exempt to the extent of minimum of i) Actual HRAreceived; ii) 50 per cent of salary; iii) Rent paid - 10 per cent of salary.So in Package-I: Rs 30,000 is exempt from HRA and Rs 70,000 is taxable. Sometimes, the companyprovides rent-free accommodation to employees. This is a perquisite and its taxable value is 10 per cent of the salary. So in Package-II, the taxable value of rent-free accommodation is Rs 50,000 per cent.In case of transport allowance, the exemption is up to Rs 800 per month, that is, Rs 9,600 per annum. So inPackage-I, Rs 9,600 is exempt and Rs 2,400 is taxable. In case of conveyance allowance, the facility istaxfree in the hands of employees. So in Package-II, such conveyance facility is provided and is fully exempt- irrespective of the cost. Such allowance is exempt from I-T to the extent it is utilised.Since Mr X has utilised Rs 20,000 of the Rs 40,000, the balance is taxable. Previously free-car facility wasconsidered as a perquisite and its value is added while calculating taxable income, but from assessment year 2006-07 onwards it is not considered as a perquisite. So under Package-II, such facility is received by Mr Xand is exempt.Now in Package-I, Mr X has received education allowance of Rs 10,000 for two children. As per I-T Act, such
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