New Delhi: All the working professionals seek to maximise their take-home salary. There are many components in the salary which can help to reduce the tax burden. However, some of the salary components are taxable (fully or partial), while others may be fully exempt from tax.
It is important to understand the salary components such as basic salary, take-home salary, CTC, gross salary, gratuity, net salary. Apart from the section 80C of the income tax, there are many other allowances which can help to reduce the tax liability for the salaried class. Given below are some of the components that can be used while planning a salary structure in order to reduce the tax burden.
1. Employee’s Provident Fund- Employee and employer contribute 12 per cent each of basic salary to EPF account. From the employer’s 12 per cent contribution, 8.33 per cent goes towards employee pension scheme (EPS). Under section 80C of the Income Tax Act, the contribution deducted from the employee’s account is exempted from tax up to Rs 1.5 lakh. It may also be noted that under certain conditions, the interest earned on EPF is also tax-exempt.
2. House Rent Allowance (HRA)- It is not fully taxable. A part of HRA is exempted under Section 10 (13A) of the Income-tax Act, 1961, subject to certain conditions. The amount of HRA exemption is deductible from the total income before computing taxable income. This salary component helps an employee to save tax. the tax benefit is available only for the period in which the rented space is occupied.
3. Children education allowance- An education allowance of Rs 1,200 per year child is paid by an employer to his or her employee. It is eligible for deduction from employee’s taxable income. It is provided up to a maximum of two children for the employee. Apart from this, one can claim a deductions for tuition fees for children under section 80C of the income tax act.
4. Health Insurance premium- One can save taxes under Section 80D of income tax. If the medical insurance is purchased for the taxpayer, spouse or children, the maximum deduction that can be claimed is Rs 25,000. However, if the taxpayer’s parents are covered and above 60 of age, then a tax deduction of up to Rs 30,000 can be claimed.
5. Communication bill reimbursement- This component includes telephone, mobile phone bill reimbursements. It also covers broadband internet connection as well.
6. National Pension System (NPS)- There are two types of the NPS account. NPS Tier-I account is the primary account with a lock-in period while NPS Tier-II account is an optional account no lock-in periods. The subscribers can avail a deduction of Rs 2 lakh in total under Section 80 CCD (1) section 80 CCD (1B) of the Income Tax Act. It helps to build a retirement corpus.