Salary may look like a simple word, but once you zoom in, you’ll notice it’s a mix of multiple components each of which affects your tax liability. A smart salary structure helps you take home more money, legally reduce taxes and strike the right balance between current earnings and long-term savings.
This guide explains every element of a salary package and how you can optimize each one.
Understanding Salary Components
Salary broadly has four parts: basic salary, allowances, perquisites and retirement related contributions. Each serves a different purpose and offers different tax benefits depending on whether you choose the old tax regime or the newer simplified tax regime.
Basic Salary
Basic salary is fully taxable. Many exemptions under the old tax regime such as House Rent Allowance and Leave Travel Allowance are linked to basic salary. Higher basic increases retirement benefits, while a lower basic allows more flexibility in structuring allowances.
Allowances
Allowances are fixed amounts paid over and above basic salary. Some are tax exempt under the old regime.
Common allowances include:
- House Rent Allowance
- Transport allowance for specially-abled employees
- Leave Travel Allowance
- Children’s education and hostel allowance
- Uniform or corporate attire allowance
- Special allowances for official duties
House Rent Allowance continues to be the biggest tax saver under the old regime. The exempt amount is based on actual rent, city of residence and a percentage of basic salary.
Perquisites
Perquisites are benefits provided by your employer in addition to your salary. When structured correctly, they reduce taxable income without reducing take-home pay.
Popular tax-efficient perquisites include:
- Meal vouchers within prescribed limits
- Gift vouchers up to the allowed exemption
- Mobile and internet reimbursements based on actual bills
- Books, periodicals and professional development costs
- Employer-provided gym or sports facilities
- Car benefits depending on official usage, fuel and maintenance responsibility
Retirement Benefits
These components strengthen long-term savings while offering tax advantages.
Provident Fund
Employer contribution is exempt up to the specified percentage of salary.
Employee contribution qualifies for deduction under Section 80C.
National Pension System
Employer contribution is exempt up to the prescribed limit.
Employee contribution qualifies for additional deduction over and above Section 80C.
A combined annual threshold applies if employer contributions to PF, NPS and superannuation exceed the capped limit, after which the excess becomes taxable as per income-tax rules.
Updated Exemption Overview
Below is the updated summary as per current tax rules, without referring to any calendar year:
HRA Exemption Rules
Lower of the following:
Actual HRA received
Fifty percent of basic salary for metro cities and forty percent for non-metro
Rent paid minus ten percent of basic salary
Medical Reimbursement
Earlier exemption up to ₹15,000 is withdrawn; now covered through employer-provided health insurance instead of reimbursement.
Transport Allowance
General exemption discontinued except for employees with disabilities.
Leave Travel Allowance
Actual travel cost exempt for approved journeys within India, twice within the applicable block period, subject to conditions.
Meal Vouchers
Exempt up to ₹50 per meal, subject to limits for number of meals.
Gift Vouchers
Exempt up to ₹5,000 per year.
Telephone & Internet
Fully exempt to the extent of actual business use and bills submitted.
Books & Periodicals
Exempt based on actual expenses for professional use.
PF & NPS
PF: Employer exemption up to statutory percentage
NPS: Employer contribution exempt up to ten percent of salary; employee contribution eligible for separate deduction
Choosing the Right Tax Regime
Your salary structure depends heavily on whether you choose:
Old Regime :– allows exemptions and deductions
New Regime :– offers lower tax rates but removes most exemptions
Employees with significant HRA, LTA, PF, NPS contributions or investments generally benefit from the old regime. Those without major deductions often benefit from the newer simplified structure.
Conclusion
A well-structured salary can significantly reduce your tax burden, increase your take-home income and strengthen long term savings. By understanding how each component works basic pay, allowances, perquisites and retirement benefits, you can choose the most tax-efficient combination for your financial goals.
If you want to restructure your salary or need clear tax guidance, feel free to reach out to CA in Delhi at [email protected]. Our team will be happy to assist.
