How Can I Structure My Salary to Minimize TDS? Seeking Practical Advice!

Hi Shalini,

Please help me out with the best salary break-up that can help reduce the TDS amount.

Thank you.

Hi Shalini,

The contents of the salary breakup may be as follows. You can prepare it according to your own preference. HRA would be 50% or 60% of the basic salary.

- Basic
- HRA
- CCA - 825/- is exempted from tax
- Other Allowance
- Mobile Reimbursement
- Medical Reimbursement of 1250/month is exempted from tax

Gross Per Month = Sum of all the above.

Gross Per Annum = 12 * Gross/Month

PF Contribution = 12% of Basic/Annum

ESI Contribution = 4.75% of Gross/Annum

Medical = The mediclaim facility provided to employees who are not covered under ESI, as the maximum ceiling for ESI is 10000/Month. If one gets more than this, it will be covered under Mediclaim or depend on company policy.

Ex-Gratia/Bonus = A fixed amount as a bonus

Annual Fixed Gross Cost = Gross/Annum + Ex-gratia

Annual Total Cost = AFGC + PF + ESIC

Annual total cost is also known as CTC.

Apart from this, food coupons, holiday packages, and furnishing items are included in the CTC.

I hope this helps to clarify your queries to some extent.

Regards,
Amit Seth.

Hi, Shalini,

Please find below the breakdown of how you can save tax under these components:

Basic

HRA: up to 50% tax exempted in Metros. Other Cities 40% & 30% (refer to the Tax Rulebook). Provided he/she can produce the rent receipt.

Conveyance Allowance: 800 monthly tax exempted.

Medical Allowance: up to 1250 monthly tax exempted provided he/she can produce the medical bills.

LTA: If a person claims ONCE in a 2-year block (As per income tax TWICE in a 4-year block) provided he/she can produce the tickets.

Food Allowance: Sodexo coupons.

Telephone/Mobile Reimbursement: On bills Tax-free.

Driver salary: for high-salaried people.

Vehicle Maintenance: Producing Bills.

Petrol: for high-salaried people; producing bills.

Newspapers & Magazine Reimbursements: producing bills.

If you break the salary into 2 parts like fixed salary (from where the employee will get the salary into their account) and Reimbursements, then they will get more benefits and save TAX.

Hope I have clarified your queries to a certain extent.

AMATYA

Hi Gunjan,

Thank you for your message. I appreciate your questions regarding salary and reimbursements. Here are the corrected versions of your queries:

1) What do high-salaried individuals mean in terms of driver salaries and petrol reimbursement? Is there a specific amount, and if so, what is that amount?

2) Are reimbursements considered a part of the taxable salary?

3) Can a person receive conveyance allowance, driver, vehicle maintenance, and petrol reimbursement all at the same time since the purpose is the same?

4) Are telephone bills, petrol, driver, and vehicle maintenance amounts entirely tax-free? If not, to what extent?

I understand you have several questions, and I would be happy to provide answers. Feel free to reach out if you need further clarification.

Regards,
Gunjan

Reimbursement of expenses like telephone bills, etc., is useful. However, keep in mind the Fringe Benefits Tax (F.B.T.), which may range from 5% to 50%.

Hi,

Good information shared by Amatya.

Dear Gunjan,

High-salaried people stand for those who are getting a high package, and saving taxes is tough for them without these components. Amount reimbursement is also a part of the taxable salary, but they are exempted from taxes up to a certain level. Are telephone bills, petrol, driver, and vehicle maintenance bill amounts completely tax-free? If not, then to what extent?

- Telephone bills: 30,000/- per annum
- Petrol: 72,000/- per annum
- Driver salary: 60,000/- per annum
- Vehicle maintenance: 25,000/- per annum

Hope this information is sufficient for your needs.

Regards,
Amit Seth.

Hi,

Nice information from Amit. Thank you. I would like to know how all these expenses are calculated for sales and marketing professionals, as they have separate conveyance, mobile reimbursements, etc.

Kindly clarify the same, Amit.

Thanks,
Gowri

Thank you, Gowri, for the appreciation.

For the sales team, the structure would remain almost the same. The only difference is that conveyance would not be added to their salary structure unless it is a fixed amount for a month. Mobile reimbursement may be added as a fixed amount per month. If it exceeds the fixed limit, then after producing the bills for the same with special approval from their senior, it can be reimbursed.

I hope this answers your query.

Regards,

Amit Seth

Amit,

Thanks for your reply, and yes, it solved my query. :)

What if your conveyance and mobile reimbursements are fixed? Do we add the details of the same in their appointment letter itself, or do you have a separate format in which we give all their reimbursements (including mobile, conveyance, travel, etc.) details?

Thanks,
Gowri

Dear Gowri,

Welcome. If it's fixed, then definitely you should show it in the salary break-up as shown in the appointment letter. No need to add any other format for the same.

Regards,
Amit Seth

Dear Amit/Sandhya,

I was looking for some details on tax-friendly compensation structures and found some very valuable inputs here, given by you. Thanks for sharing them with all of us.

In my organization, we have a very general compensation structure that does not help the employees in tax saving. From the next financial year, I plan to make some changes to it.

I will be grateful if you can tell me about the salary components that are tax-friendly and do not attract FBT as well.

Awaiting your response.

Regards,
Bhavna

Hi Bhavna,

Thank you for the appreciation. I believe we have detailed the components quite broadly, which should be sufficient to prepare a tax-friendly salary structure. With regards to FBT, most of these components attract a nominal percentage of FBT to the organization.

Wishing you all the best.

Regards,
Amit Seth.

Dear all,

This is an excellent post with valuable inputs shared by Amit & Amatya. Besides the above components, in some cases, a company can pay a scholarship allowance to selected employees' children, at least 1.25 lakhs per annum, and the company can claim this as a deductible expenditure in their accounts.

Regards,
Rajat

Hi All,

Can anybody please tell me what should be the percentage of dearness allowance, i.e., DA, and how do we calculate it using the Consumer Price Index? Also, I want to know if DA and CCA are the same??

Chanchala

Hello Rajat Sir,

This is Chanchala. Your session on the 'S Curve' during the Citr HR meet was excellent! :) I could not convey to you that day since it was getting late, and I had to leave. I hope to learn a lot of things from your sessions in the future.

Thanks and regards,
Chanchala

Dear All,

I have gone through all the posts in the thread. I would like to draw attention to some things:

1. If an employee claims for Vehicle maintenance allowance (Rs. 1200 pm generally), he cannot claim Conveyance allowance for tax exemption.
2. You can also include "Children education allowance" in your structure. Rs. 100 per child per month is tax exempt. If the child is staying in a hostel, Rs. 100 + Rs. 300 is tax exempt for every child.
3. Apart from this, Expenses borne by employees as tuition fees of their children are included under 80 (c) in the financial year 2007-2008. So, at the time of TDS, you can consider this also.
4. One good way to give tax benefits to your employees is to give a reasonable amount of PF contribution. This component and the interest earned on this are Tax benefits. This should not add cost to your company as you can show both components in CTC.

Regards,
Ash.pgdm

Hi Amit & Rajat,

Thank you for the valuable inputs on the topic. I have a question regarding the PF contribution in the salary breakup. What does the law say? Can we include PF contributions from both the employer and the employee in the CTC to increase the CTC amount, or should only the employee's contribution be shown? I have noticed that companies have their own ways of handling this.

Regards,
Neha

Hi Neha,

CTC includes both employee and employer contributions to PF. The employer's contribution is mentioned while preparing the salary break-up, whereas the employee's contribution is already hidden in their salary break-up.

Regards,
Amit Seth

Hey friends,

This is a compensation and benefits query.

In a usual salary breakup, the component called "Special Allowance" is a balancing figure. The practice followed across the industry is that the amount for special allowance (i.e. the balancing figure) should not be more than the "Basic OR Basic+Dearness Allowance."

1. I'm not sure whether it should not be more than only Basic or a combination of Basic+DA.
2. I would like to know if there is any law supporting this practice because as I understand, if the basic is less, then it has a tax implication. In such a case, I would have to refer to the correct reference/clause as per the law, which will support the practice.

Looking forward to some help on the above-raised query.

Thanks in anticipation!

Hi,

In reference to your query, I would like to clarify that there is no law which states that special allowance should not be more than Basic. However, as a practice, most companies follow the rule of providing basic pay between 30-50% of the Cost to Company (CTC). Please note that there is no specific law mandating this practice.

Thank you,
Katyana

Hi,

There is no law. Even IT talks about certain amounts for exemptions. What exactly is the requirement?

Siva

Don't worry about it. There is no law that I am aware of, so sp allow is always considered as a balance amount.

Basic amount is kept at 30-35% of the total to save on the Gratuity component. Gratuity is payable on Basic+DA and is applicable for those who complete 5 years of continuous service. Also, if Basic is higher, the outgo on PF is also higher, reducing the take-home component. Basic also has a bearing on the Bonus payable. All these factors need to be considered while working out a pay structure within the agreed CTC. Employees are more concerned with what they get in hand, and higher retained earnings will reduce the monthly take-home pay. Basic has no connection with income tax. Tax is calculated based on existing tax laws, and exempted components currently include HRA (with certain conditions if rent receipts are produced), Transport allowance - Max Rs800 per month, Medical allowance - Max Rs1250 per month, and LTA as per applicable conditions once every two years.

Knpk

Dear All,

Recently, we appointed a Vice President of Finance in our company. We follow the following structure for compensation: Basic salary + DA = 40%, HRA = 20%, CCA = 15%, Special Allowance = 20%, and Washing Allowance = 5%.

I am seeking suggestions on the new breakdown for the VP level appointment that includes tax benefits. Please advise.

Regards,
G. Tamizhannal
Email: tamizhannan2002@yahoo.com

Guys,

Check this. How does this sound for the salary breakup? Please let me know if there is a limit set by the Income tax in the % column:

Monthly Breakup

Gross: 100% - (825+800+1250)

Basic: 46.63
HRA: 20.98
Exempted CCA: 825
Exempted Conveyance Allowance: 800
Exempted Medical Allowance: 1250
Exempted Mobile Allowance: 2.3
Exempted PDR Allowance: 2.77
Exempted Sodhexo Pass: 5.54
Exempted LTA: 4.61
Other Allowance: 17.17