While negotiating salary, employees tend to give more emphasis on the cost to company (CTC) and ignore their salary component.
Although in most cases, employees have hardly any control over their salary structure but nowadays employers are getting flexible and allow their employee to design their salary component according to their short-term and long-term financial goals.
Generally your salary slip i.e CTC has four component- basic, allowances, perquisites and retirement benefits.
Usually, it forms the most part of your salary and it’s an important part of planning your tax liability for the year. Various other components in your salary slip depend on your basic salary.
Basi salary is fully taxable.
Higher basic salary can provide higher tax-free allowances like House Rent Allowance (HRA), entertainment allowances.
So if you fall under lower tax bracket, you can save tax by reducing basic salary and adding fixed allowances which do not depend upon expenditure like Allowance for transport children education allowance, Hostel expenditure allowances etc.
For taxpayer falling under higher tax bracket, it would be advisable to have a high basic salary.
It is generally defined as a fixed quantity of money or other substance is given regularly in addition to salary for the purpose of meeting some particular requirement connected with the service rendered by the employee or as compensation for unusual conditions of that service.
From the financial year 2018-19, a standard deduction of Rs. 40,000/- is introduced for a salaried person only. This standard deduction will replace tax-free medical allowance and transport allowance. An employee should avoid these allowance.
There are various allowances which are exempt from tax under section 10(14).
Recommended to Read: Top 10 Common Allowances For an Employee
The term “perquisite” signifies some benefit in addition to the amount that may be legally due by way of contract for services rendered.
For an employee, perquisites mean any extra facilities received free of cost from his employer. Example: Free accommodation, a supply of gas, helper, Car, Food etc.
Very few perquisites are tax-free (exempted).
The most important benefit which an employee receives from an employer is their post-employment benefit.
Indian Government encourages taxpayers to save money for their retirement.
For receiving retirement benefits, a prescribed sum is deducted from the salary of the employee as his contribution towards a pension fund. The employer also contributes simultaneously an equal amount to the fund [Included in CTC].
Most of these benefits are exempted from tax in both years of contribution and maturity of the fund.
By investing in National Pension Scheme (NPS), you can get a maximum deduction of Rs.2,00,000/-. [ Under section 80CCD(1) and 80CCD(1B)]
Recommended to Read: Save tax by Investing in National Pension Scheme (NPS)
Apart from the tax saving component within the salary slip, an employee can get various other deductions under Chapter VI-A.
|Deduction Under Chapter VI-A (FY 2018-19)|
|Section||Deduction of||Maximum Amount|
|80C||1. Life Insurance
2. Public Provident Fund
3. Child Tuition Fees
4. National Saving Certificate (NSC)
5. Principal Amount of Home Loan
|80D||Health Insurance Premium
Medical Expenses for senior Citizen
(After Budget 2018)
|80TTA||Interest on Saving Account||Rs.10,000/-|
|80TTB||Interest income earned
by senior citizen
|80GG||Rent paid for accommodation
(not applicable for an employee receiving HRA)
|80E||Interest on Education Loan||Interest Paid in each
8 years (Continuously)
|80EE||Interest on Home Loan
(For 1st Time Home Buyers)
Make dearness allowance(DA) as a part of the basic salary. This will minimize tax incidence on HRA (house rent allowance), gratuity and commuted pension.
Ask the employer to pay commission at a fixed percentage of turnover achieved by you as it will reduce tax incidence on HRA, entertainment allowance, gratuity and commuted pension.
Plan your affairs in such a way that retirement, termination or resignation, as the case may be, takes place at the beginning of a financial year.