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What’s In Your 10 Layered Slice Of Cake?

What’s In Your 10 Layered Slice Of Cake?

We’re always complaining about how our ‘in hand salary’ isn’t enough because most of it goes into paying taxes. Um, that won’t be the case anymore. 

Here are the different ways (legal, of course!) in which you can actually avoid paying taxes and take home more of your salary. But before we begin, you need to slice through your confusing  yet tempting salary slip.

Usually, a salary slip looks something like this:

salary-slip-format-in-word

Some parts of this salary slip are 100% taxable while some are not. So let’s find out how we can avoid paying taxes on those that aren’t 100% taxable…

Slice #1. Basic

This portion of your salary is fully taxable

  • Most important part of your salary
  • Constitutes 35%-50% of your salary
  • All other layers are structured around this
  • The entire amount is taxable

Slice #2. House Rent Allowance

You can claim deductions on this portion of your salary

House Rent Allowance (HRA)  is provided by the company to employees for paying their house rent. It is calculated by taking a percentage of the “basic” component of your salary. And this percentage is usually 40%-50% of your basic salary. For instance, if the basic salary is Rs. 40,000 HRA will be between 16,000-20,000. HRA is meant to support the house rent which employees pay, and that’s why it’s exempted to some extent by the income tax authorities.

To calculate the exemption amount just take the minimum of the following 3-

  • 40% of your basic salary (50% if you live in a Metro City like Mumbai, Delhi, Kolkata, Chennai.)
  • Actual rent minus 10% of basic
  • HRA component specified on your salary slip                                                                              

To avail this HRA tax deduction you need to show valid proof of rent that you are paying every month. 

Here's how Rhea reduces her tax liability

Rhea lives in Kolkata and pays Rs. 20,000 as rent every month(Rs. 2,40,000 yearly). Her basic salary is Rs. 4,80,000 and her HRA is Rs. 2,40,000. To calculate the amount that will not be taxed from her rent she takes the minimum of these three-

1. She lives in Kolkata which is a metro city, 50% of her basic pay
Rs. 2,40,000
2. Actual rent minus 10% of basic =  2,40,000-48000
Rs. 1,92,000
3. Actual HRA on salary slip
Rs. 2,40,000

Since, Rs. 1,92,000 is the least it can be removed from HRA and not taxed at all. While the balance (2,40,000-1,92,000 = 48,000) will be taxed along with the other components of her salary.

Slice #3. Conveyance

You can claim deductions on this portion of your salary

This is the amount on your salary slip allocated for your travelling expenses and it differs from company to company. But one can exempt Rs. 1600 per month (Rs. 19,200 yearly) from taxes. 

Slice #4 Medical Allowance

You can claim deductions on this portion of your salary

If you or your family have incurred any medical bills then you can show it to your employer and up to Rs. 15,000 of your salary will be tax-free provided you show them bills worth that much. 

NOTE: The government in the latest budget 2018 has introduced a standard deduction of Rs. 40,000 for every employee for travel and medical purposes. And it has removed the tax benefits of Rs. 19200 and Rs, 15,000 on medical and travel allowances respectively.

This is done to reduce paperwork and eliminate the need for providing proof to claim tax benefits.  So earlier employees could claim tax deductions up to Rs. 34,200 provided they had bills to support it,  but now all employees can claim a tax deduction up to Rs. 40,000 without bills.  

Slice #5. Company Leased Accommodation

CLC (Company Leased Allowance) is an alternative to house rent allowance where your company enters into a leased agreement with a landlord and pays rent every month to the landlord on your behalf.

The amount shown as a company leased accommodation is generally the amount that your company spends on the house that they will provide you. As this is an expense which your company is making for you, they show it in your salary slip and also as part of your CTC (Cost To Company). And since you are getting a free house to stay, it is a virtual addition to your monthly “in hand” salary and you do not actually take this money home.

CTC- Cost To Company

The cost incurred by a company while hiring someone. Apart from the basic salary, CTC includes house rent allowance, medical insurance, provident fund and other similar allowances offered by a company to an employee.

Slice #5. Leave Travel Allowance

LTA-Leave Travel Allowance refers to the allowance given by the company to the employee if you have applied for leave for travel. It covers transport  ONLY within India. And the tax exemption can be made only up to the amount provided by the company under LTA not more than that. It only covers expenses made on travel and not other expenses such as food, stay etc. It covers exemption for a family (i.e. spouse, two children, parents and siblings). And an employee can claim LTA only for 2 journeys made in a block of 4 years. These block years are different from Financial Years and created by Income Tax Department. Currently, we are in the block year of 1st January 2014 – 31st December 2017.  

Note: The LTA benefit is not entitled to all the employees, based on various factors such as grade, pay-scale, etc. an employer decides whether a certain amount can be allocated for LTA.

Here's how Rhea reduces taxes payable

Rhea has an LTA of Rs. 23,000 by her employer but she spends only Rs. 18,000 on her flight tickets to Goa. Thus, she will get an exemption of only Rs. 18,000 as LTA is allowed only on transport and not other holiday expenses.

Slice #7. Special Allowance

This portion of your salary is fully taxable

This is the amount that does not fit into any of the above heads but forms a part of your pay package. It is the leftover amount after allocating amounts for basic, CLA or HRA, transport allowance, medical allowance etc. This portion is fully taxable.

Slice #8. Overtime

This portion of your salary is fully taxable

Any extra amount paid to an employee for working more than the regular working hours falls under the overtime section of the salary slip and it is fully taxable.

Slice #8. Bonus

This portion of your salary is fully taxable

At the end of every year based on an employer’s financial performance, they’re eligible to get incentives and payouts that fall under bonus. These may differ from company to company and are negotiated at the time of taking up the job, or promotion. Whatever falls under bonus is fully taxable

Slice #10. Arrears

This portion of your salary is fully taxable

Arrears is that portion of your salary that you were supposed to receive in previous years but have received it in the current year. This is fully taxable.

Sometimes because of ‘arrears’ appearing in your income, you might move up a tax slab. Don’t worry about this the IT department allows you to claim tax relief under section 89(1) of the Income Tax Act. But unlike other sections of your salary, the calculation for this slightly complicated so it’s best to consult a CA for this step. 

The Icing- Employee Provident Fund

If you think that your in-hand salary seems less because of all those tax payments, then you might be wrong. Not all of it goes into paying taxes, 12% of your ‘basic pay’ goes towards Employees Provident Fund (EPF)- a retirement fund for employees for when they retire or leave their job.

Unfortunately, the EPF program is only for those employees who work in a firm with more than 20 employees. To know more about EPF in detail stay tuned on our website.

But you can’t eat your cake and have it too-

A portion of your salary has to go to the government in the form of Income Tax- the tax deducted on your salary by the Income Tax department as per the tax slab you fall under. The government then uses this money for providing public services to us.

To reduce the income tax payable just invest in any of these tax saving investments (PPF or FDs).

Income Tax Slabs 2018-2019

Up to Rs 2,50,000- Nil 

Income from Rs 2,50,000 – Rs 5,00,000- 5% 

Income from Rs 5,00,000 – Rs 10,00,000- 20%

Income more than Rs 10,00,000- 30%

Here's How Rhea Calculates Her Taxable Income

Rhea’s annual income is Rs. 4,50,000. She falls under the 5% tax slab:
Up to Rs. 2,50,000 she doesn’t have to pay any tax. But she has to pay 5% tax on the remaining Rs. 2,00,000 i.e Rs. 10,000. Additionally, she also has to pay a 4% cess. So the total tax that will be deducted from her salary will be Rs. 10,300.

In addition to the income tax payable as per the above-mentioned slabs, an income tax cess is also charged.

What is an Income Tax cess?

A cess is a special tax levied by the government for meeting specific expenses. Currently, a 4% educational cess is levied on your income, meaning any cess collected on people’s income tax payments will go towards educational expenses.

And in addition to the income tax cess people in the higher income tax brackets are also charged a ‘surcharge’.

What’s an Income Tax Surcharge?

It is an additional tax levied on the richer people whose income exceeds Rs. 50  lakh. This is done to make the tax system fair and progressive.  Currently, a 10% surcharge is levied on the income tax payable of individuals earning between Rs.50 Lakh – Rs 1 crore in a year. And a surcharge of 15% is levied on the income tax payable of individuals earning more than Rs. 1 crore in a year.

Different companies have different salary structures, all companies do not provide all benefits, some also offer a few other benefits, but the above ones are the most common ones.

I am sure you’ve fully understood your salary structure by now, if you still find something confusing about your salary slip, comment and let us know, we will break that down for you. You can also use this online calculator to help you calculate your total income in hand. 

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Talkative, clumsy, punny, intuitive are just a few buzzes of this queen bee. An aspiring business journalist looking to find her throne in the corporate world.

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