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How to reduce tax burden on your

salary
Last updated on: February 20, 2007 14:34 IST

Of late, Indian salaries have seen a quantum leap on the back of a sound economic
growth. Though the affluent 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 comprises basic salary, dearness allowance and other allowances.

Sometimes these allowances form a substantial part of the salary. Under the Income
Tax Act, certain allowances 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 will consider an example to clarify this issue.

Mr. X is working as a manager for ABC Pvt Ltd. The company offers him two
alternative remuneration packages. In one package, the firm gives allowances, and
in the other, reimbursement. The salary packages are illustrated in Table I. Now we
Sena-NCP-Cong govt will run full
will consider the effects of each allowance to arrive at the taxable income.
term: Sharad Pawar
TABLE I

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ITEMS Package-I Package-II

Rs Rs
Basic salary
5,00,000 5,00,000

Dearness Allowance (Not

Rs
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House rent
Rs
allowance(hra) (actual -
1,00,000
rent paid rs.80,000)

Rent free accommodation Rs

-
(fair rent) 1,00,000

Transport allowance Rs 12,000 -

Conveyance from

residence to - Rs 10,000
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Conveyance allowance
Rs 40,000 -
(utilised rs. 20,000)

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(estimated expenses)

Education allowance for 2

Rs 10,000 -
children

Free education (estimated

- Rs 10,000
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Medical allowance Rs 15,000 -

Medical reimbursement - Rs 15,000

Telephone allowance Rs 10,000 -

Telephone reimbursement - Rs 10,000

Dearness allowance is fully taxable. If dearness allowance is considered for

retirement benefits, then while considering salary for calculating HRA exemption
and the value of rent free accommodation it is added to the basic salary.

TABLE II

ITEMS Package-I Package-II

Rs
Basic salary Rs 5,00,000
5,00,000

Rs
Dearness allowance Rs 1,00,000
Gandhi died due to accidental 1,00,000

reasons: Odisha booklet

House rent allowance Rs 70,000 -

Rent free
- Rs 50,000
accommodation

Transport allowance Rs 2,400 -

Conveyance from
- EXEMPT
residence to office

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Rs 20,000 -
25 years: Raut allowance

Free 1600cc car - EXEMPT

Education allowance Rs 7,600 -

Free education - Rs 10,000

Medical allowance Rs 15,000 -

Medical
Help for people trapped in wrong - EXEMPT
reimbursement
gender
Telephone allowance Rs 10,000 -

Telephone - EXEMPT

reimbursement
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Rs Search
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7,25,000

Rs
Tax Rs.1,48,000
1,67,500

Education cess Rs 3,350 Rs 2,960

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Kashmir at UNESCO Rs
TOTAL TAX Rs 1,50,960
1,70,850

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 HRA
received; 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 company provides 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 in Package-I, Rs 9,600 is exempt and Rs 2,400 is taxable. In
Moneywiz Live! case of conveyance allowance, the facility is taxfree in the hands of employees. So in
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Package-II, such conveyance facility is provided and is fully exempt - irrespective of
BSE 40,356.69 +70.21 09:00 15:59
the cost. Such allowance is exempt from I-T to the extent it is utilised.
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Since Mr X has utilised Rs 20,000 of the Rs 40,000, the balance is taxable.
Previously free-car facility was considered 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 X
and 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 allowance is exempt to the extent of Rs 100 per month
per child. So in this case Rs 2,400 is exempt and Rs 7,600 is taxable. In Package-II,
the company is providing free education to the employee's children at a school run
by the employer at an estimated cost of Rs 10,000. In this case, there is no
exemption and it is fully taxable.

In Package-I, Mr X has received a medical allowance of Rs 15,000. Such allowance is

fully taxable as per I-T Act. Sometimes the firms reimburse medical expenses. Such
reimbursements up to Rs 15,000 is exempt. In Package-II, Mr X has received Rs
15,000 as medical reimbursement, which is fully exempt. Telephone allowance is
fully taxable. So in Package-I, Mr X telephone allowance of Rs 10,000 is fully
taxable, but reimbursement of the same is fully exempt.

Now we will calculate the taxable income and the tax liability of Mr X under both the
packages. We can notice that by restructuring a remuneration package one can very
well reduce his taxable salary. Further some company provides LTC, leave travel
concession facility to the employees, such facility is tax-free provided the assessee
has availed LTC, twice in a block of 4 years. So the employee should take a note of
this fact.

Rahul Shringarpure

Source:

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