Minimum Tax Maximum Salary

Minimum Tax Maximum Salary

When you get Salary Statement at the end of month, you wish to get more in hand and less tax, here is cheat sheet on how to maximize salary in hand structuring salary most tax efficient way.


Many at times we keep noticing that we end up receiving less than what we projected in the beginning. Let’s take the case of Mr Santosh who is a Corporate employee working for the past 2 years. He is married individual with his dependent parents and his two children studying in Class X & Class VIII. He also has his dependent elder sister who is physically baled person since last 5 yrs. In the month of February, he was got a mail from his HR Department to send his deductions under schedule VI else he would to subject to TDS. Next month, Santosh was shell shocked to when he hardly received any salary from employer.


To avoid facing situations like Santosh, we are spelling out the Cheat Sheet to ensure you save maximum tax.


Let’s assume Mr Santosh draws an annual salary of INR 7 Lacs per annum. General Components of salary mainly include:

  1. Basic Salary & Dearness allowance

  2. House Rent allowance (HRA)

  3. Conveyance Allowance

  4. Children education allowance

  5. Deductions under Schedule VI

  6. Special Allowance (explained)

  7. Perquisites (explained)

Basic Salary & Dearness allowance

Basic salary is always a pay band mechanism which states something like 5500-250-6600-500-7800-750-10200. This can have interpreted as that Mr Santosh Basic pay band would start with 5500 and keeps on adding 250 for year till it reaches 6600, from thereon it would increase by 500 ever year till it reaches 6600 & thereon.


DA is allowance which is always paid as % of BS for each employee. Usually, 90% of BS would be given as DA. It is important note whether DA would form a part of retirement benefit or not, for some significant allowance calculations which the HR Team would be able to assist well.


House Rent Allowance (HRA)

HRA is tax exemption allowance which is paid by employer to employee for residing in house. HRA allowance depends on type of city Mr Santosh resides.


Taxable amount of HRA is as least of the following:


Particulars

Amount

Actual HRA Received

XXX

50% of Salary (BS+ DA)

XXX

Excess of Rent paid over 10% of salary

XXX



50% of basic Salary should be replaced with 40% in case, Mr Santosh is not residing in Metro Cities like Chennai, Delhi, Kolkata & Mumbai.


The term “salary” includes basic salary, dearness allowance ( if it enters into retirement Benefits ) and any commission based on the fixed % of turnover achieved by the employee.


However, in case any employee is

  1. Residing in his own house

  2. Residing with his parents in their house or he doesn’t pay rent 3rd point becomes ZERO

  3. When the rent paid does not exceed 10% of salary.                                                                                                                                


For Example:, let’s assume Mr Santosh earns a basic Salary of 30,000 and rents a flat of Rs 5000. He received an HRA of Rs 6000 from his employer.



Particulars

Amount

Actual HRA Received

6,000

50% of Basic Salary (BS+ DA entering into retirement Benefit)

15,000

Excess of Rent paid over 10% of salary (5,000- (10% * 30,000)

2,000

Therefore, an amount of Rs 2000 is deduction will can be claimed by Mr Santosh.


Hostel Education Allowance

Let’s say that Mr Santosh is planning for his children in boarding school for a better education. The hostel fee as the school was Rs 20,000 per child per annul. So Mr Santosh would be paying now around Rs 40,000 (20k*2) for hostel fee. Now Mr Santosh can claim around Rs 3600 per child per annul for max of 2 children as deduction under Hostel education.

Conveyance Allowance

Travel allowance/Conveyance allowance is fully taxable, but an amount upto to Rs 1600 per month i.e. Rs 19,200 per annum can be claimed as deduction from allowance. It is advisable for the Mr Santosh to appropriately claim his TA deduction to reduce his tax burden.

Children Education Allowance

Since Mr Santosh two children are studying, he claim upto Rs 1,200 per children per annum for max of 2 children i.e. Rs 2,400 per annum. (100*12*2)

Special Benefits available to senior Officers in Organizations

Let’s say Mr Santosh got promoted as a Deputy Zonal Manager and he posted in Mumbai where he has been provided a special bungalow, Office car Facility, Domestic Servants for his help etc.

Expenses paid for domestic servants is a deductible allowance to Mr Santosh. Let’s say Mr Santosh pays around Rs 2,000 he can claim Rs 36,000 as a deduction under his income.


However, in case Office Car Facility, it depends on for which purpose is Mr Santosh using such facility. Let’s say his company incurs an expenditure of Rs 7,000 per month for providing such facility as perquisites since Mr Santosh is a Deputy Zonal Manager Level Rank.

1- If Mr Santosh uses the car purely for Office purpose, he claims full exemption of such allowance.

2- However, in case he uses it partly for his office & his personal,

  • If the expenditure is meet by Company purely, he claim upto Rs 2700 per month (1800 for car+ 900 for driver) in case of small car i.e. cars with engine cc of <1600cc. Otherwise, he can claim upto Rs 3300 per month month (2400 for car+ 900 for driver).

  • If the expenditure is met by Mr Santosh & he later claims reimbursements expenses, then it would Rs 1500 per month ( 600 for car + 900 for driver) in former case & Rs 1800 ( 900 for car + 900 for driver) in the later case.



However, let’s say that Mr Santosh has his own new Honda Civic car which he wants to start using for his office & personal use too. In such case, he would be entitled to Rs 3300 per month month (2400 for car+ 900 for driver) provided he maintains specified documents as stated by his employer.


Schedule VI Deduction

Nature of Expenditure to claim deduction

Amount of Deduction

Every Individual can claim a deduction of around Rs 1,50,000 by investing into list of specified investments life insurance policies, mutual funds, 5 yrs Fixed Deposit etc. However, what is interesting is there are many other allowances too which many of the individuals may not be aware of.

Rs 1,50,000

To Promote more of investments govt has re-introduced a scheme wherein any investment or purchase of Infrastructure bonds, Individual can claim a deduction of

Rs

In India, the % of people investing into the capital markets has always been pretty low. To boost the %, govt has initiated a scheme called as Rajiv Gandhi Equity Linked scheme wherein any individual with an annual income less than 10 lacs can invest in such scheme and claim a tax deduction of least of the following-50% of sum invested OR Rs 25,000

50% of amt Invested or Rs 50,000 WILL

Since we know health is wealth, Govt has taken this step ahead and started to incentives people with Any expenditure towards medical insurance policy for Self, Spouse & Dependent Children upto Rs 25,000 is deductible allowance. However, incase of expenditure for medical policy towards dependent parents would be upto Rs 30,000.


However, recently now any expenditure incurred for preventive health check-ups are also eligible for tax deduction upto Rs 5,000

Rs 30,000- Sr Citizens

Rs 25,000- Others

Rs 5,000 for preventive health check-ups

As our parents grow old, they might be subject to illness. But in case, if they have to subject to some illness like Blindness, hearing impairment, Mental illness etc. These kinds of illness might require healthcare expenditure to spent regularly. In our Example, Mr Santosh’s dependent sister has been suffering from Blindness and he usually spends around Rs 10,000 for her annual treatment & Checkups. Now Mr Santosh is entitled to claim such expenditure as tax deductions to the whole extent.

Any expenditure incurred in maintenance of those people or any sum invested for buying a specific policy for them.

If there is any educational loan which Mr Santosh wishes to take for his children in the near future for their Higher Education, he can also plan up & also claim such interest payment of the loan as his deduction for a maximum period of 8 yrs.

No limit but upto 8 yrs only

Govt of India has always needed a helping hand from the citizens of India in developing the infrastructure, aid country people in case any calamity or take care of the unorganized populations. Govt has given initiatives to the individuals who can donate to different trusts, charitable institutions, Different type of funds like PM Relief Fund etc.

Depending on the type of donation, the deduction limit would decided either 100% of amount donated or 50% .

In India, they are a lot of Political parties like BJP, Congress, TMC, TDP etc who always have a huge party funds to develop their parties. For Instance, if Mr Santosh is huge follower of BJP, he may be donating Rs 5000 annually for the welfare of parties. But what he doesn’t know is that those donations made to political parties can be claimed as deductions with no cap limit. However, such donations must be to a registered political party.

NO Limit on the amount of deduction.

As usual, many of salaried people have savings account with huge salary getting credited. But usually banks pay interest charges around 4-6% on SB A/c’s half yearly. Now, Mr Santosh had received around Rs 19,000 as interest from his 3 Bank accounts i.e say ICICI Bank, Bank of India & HSBC Bank & his Deposits. Now, Mr Santosh can claim such income as additional interest income which is chargeable to tax and later claim an amount upto Rs 10,000 as deduction. So now Mr Santosh would be liable to pay tax only on Rs 9,000.

Rs 10,000 or any amount as claimed. WIL


As usual, many of salaried people have savings account with huge salary getting credited. But usually banks pay interest charges around 4-6% on SB A/c’s half yearly. Now, Mr Santosh had received around Rs 19,000 as interest from his 3 Bank accounts i.e say ICICI Bank, Bank of India & HSBC Bank & his Deposits. Now, Mr Santosh can claim such income as additional interest income which is chargeable to tax and later claim an amount upto Rs 10,000 as deduction. So now Mr Santosh would be liable to pay tax only on Rs 9,000.

Rs 10,000 or any amount as claimed. WIL


Now Mr Santosh is very happy that he was unaware of a lot of tax benefits which he would have claimed till date. Probably, he feels he should immediately get in touch with HR Department to restructure his salary slip to claim a lot of benefits.


The Basic Purpose of identifying all these deductions is to help out individuals to structure their salary slip accordingly to claim the maximum benefit of tax deductions unlike Mr Raghav in earlier article who has paid huge taxes.