Negotiating a package for a new employee is never easy as it must be a win-win situation for both - employer and employee. In an effort to maximise the take-home salary every month and minimise the tax outgo, some part of the salary is converted to components which attract tax benefits.
Along with an anticipation to maximise the take-home salary every month, an employee also aims at building a capital and a retirement fund to secure his future. Some part of these investments are taxable whereas some are tax free.
Let us break down the components of a salary package which can help in saving taxes:
1. House Rent Allowance (HRA)
HRA is one of the most common tax-saving components of your salary. This is provided for the rented accommodation you are living in. This can be partially or completely exempt from taxes.
If you live in an accommodation where you are are not paying rent (e.g. with your parents) but are receiving HRA, the HRA will be fully taxable. However, another way of claiming this tax benefit is, if you pay the rent to your parents, they give you a rent receipt for it and in turn offer it for tax. If you live with your spouse in a rented accommodation then the tax benefit of HRA should be claimed by the one having a higher basic pay.
2. Leave Travel Allowance (LTA)
Salaried employees can avail exemption for a trip within India under LTA. The exemption is only for the shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, children, and parents, but not with other relatives. The exemption for LTA can be allowed twice in a block of four years. The ongoing block is 2017-2021. While considering the block of years, the calendar year is followed and not the financial year.
The exemption can only be claimed upon submitting the travelling bills to the employer. This benefit is not provided by all employers and therefore you must check with your employer prior to making a claim.
3. Standard Deduction
Previously, the employer used to provide conveyance allowance and medical reimbursements. However, an amendment has been passed in the recent budget and it has been replaced with a standard deduction of Rs 40,000. This standard deduction is a one time claim and reduces tax outgo.
The rebate provides a marginal relief to people in the lower income bracket. It is being provided to reduce the tax burden of lower income bracket. If your total income in a year is equal to or less than Rs 3,50,000 then you can claim a rebate of maximum Rs 2,500 on your total tax outgo. However, if the total tax outgo is less than Rs 2,500 then you will not be liable to pay any tax.
5. Arrears of Salary
If you receive a salary for the past years, because of which you fall in the higher tax bracket. Don’t worry, you will not be liable to pay a higher tax. You can claim a lower tax rate by filing Form 10E on the income tax portal.
Apart from the above tax saving components, listed below are a few ways, where a small effort from your end will help further increase your in-hand salary.
1. One effective way to ensure a higher salary in hand every month is to declare your investments promptly to the employer at the beginning of the financial year. This will enable the employer to consider these investments before he arrives at your tax liability and the TDS deductible every month. This will help in a lower TDS every month ensuring a higher take home.
2. At the beginning of the Financial Year, it is not only important that you declare your investments but it is equally crucial that you disclose possible losses from other sources of income which again will reduce your tax liability for a year. Eg. If you have an ongoing home loan, you can go ahead declaring details of home loan repayment, the principal component will help you in your 80C deduction while the interest repayment for a self-occupied house will result in a loss from house property which can be adjusted against your salary income and thereby bring down your tax liability for the year.
3. In case you have changed your jobs during the year, you must furnish details of income and the taxes deducted by your previous employer to safeguard yourself against a higher TDS by your current employer.
Archit Gupta is founder and CEO of ClearTax