Every salaried employee is liable to pay taxes to Income Tax Department! However, the HR department of almost every company designs the salary break-up in a way that the employees get host of allowances and services which can be claimed to reduce taxes. In the interim Budget 2019, interim Finance Minister Piyush Goyal introduced a host of good news for taxpayers, by increasing standard deduction up to Rs 50,000 and giving tax rebate to employees earning salaries up till Rs 5 lakh. Ramki Gaddipati, Co-founder and CTO, Zeta says, “Salary break-up is an HR initiative by design. It’s done to help you save taxes, wherever possible. As simple as it sounds, layering your salary structure can be a bit complicated. It can be quite the rally of matching your expectations of a higher take-home salary; while keeping your tax cuts to minimum. “
Let’s try to make this an easy drill by giving you a basic outline of a typical salary structure, as per Zeta.
Basic Pay: Your basic pay is the fixed income component, and all contributions such as PF, etc are based on this number. This is a taxable component. But, HR’s salary design includes ways where you can save tax. Your basic pay forms the foundation of all your future salary hikes.
Standard Deductions: You’ll see a component for standard deductions in your salary slip. This is the built-in tax deduction, which you can take home while prepping up for your year-end taxes. The good news here is that you don’t need to submit any bills or proofs to claim this entire amount.
HRA: Known as House Rent Allowance, HRA comes with some exemptions under Section 10(13A) of the Income-Tax Act, 1961. To claim this exemption, you’ll need a proof of your rent receipts.
Reimbursements: These are over and above your salary. It consists of fuel bills, meal vouchers, data access and so on. All reimbursements paid against actual bills are completely exempted from income tax.
Gross pay v/s Net Pay: These numbers pretty much set the course of your career graph. It is the summation of your present salary structure, bonuses, perks, pension policies and so on. Gross Pay Gross Salary is inclusive of Basic salary, HRA and other benefits/allowances. It is the amount paid before any tax or other deductions including bonuses, PF, gratuity and other perks.
Net Salary: It’s basically your take-home salary or the in-hand salary. It is what your bank account is credited with on your pay day. Your take-home salary is calculated after deducting Income Tax at source, provident fund (12% of your Basic Pay), professional tax and other deductions as per your company policy.
Here’s a tip, when negotiating your salary — Ensure that your basic salary is 50-60 percent of your gross salary.
The case of missing numbers
Your math is likely to be challenged when it comes to your ‘take-home’ or ‘in-hand’ salary. More often than not, the number seems to be different than the actual expectation. The reasons for this could be one too many. But, the good news you can claim all those missing numbers. All you need to do is make the right investments and restructure your salary to avail maximum tax-saving benefits.
You can discuss, understand and negotiate with your HR to ensure that you claim those missing numbers. For this, ensure that your salary is loaded with allowances. At this point, we’d also like to clear that allowances needn’t necessarily be over and above your Gross salary. Allowances can be a part of your CTC — Cost to Company. Employees can select a number of tax friendly components to cut down on the overall taxes. Most of these allowances are exempted under the Income Tax Act, 1961.
Plan wise, save more!
The Income-tax Act is kinder than you would think. You can save close to Rs 1,50,000 on taxes and claim tax-saving benefits up to Rs 80,000 through your salary.