As an employer, you must help your employees save tax. But helping comes only if you understand how. Here’s a roundup of tax saving solutions you should know about.
Salary Components That Reduce Tax Burden
There are certain allowances for salaried employees that are exempted. And when the salary structure is adjusted and restructured to reflect these allowances, they can significantly reduce the tax burden.
Some of the common allowances are as follows:
- HRA (House Rent Allowance) – This allowance is for an employee living in rented accommodation. To claim this deduction, it is essential that it forms a part of the salary.
The lowest of these will be tax-free:
- Actual HRA received.
- Excess rent paid that should be less than 10% of basic salary.
- 50 % of salary plus dearness allowance in case of a house located in metro cities (Mumbai, Kolkata, Delhi or Chennai); 40% in case the house is located in non-metro cities.
- LTA/LTC (Leave Travel Allowance/Concession) – LTA is given to employees so that they can meet their travel expenses incurred for travel — with family — to in India. ‘Family’, here, includes spouse, children, parents, siblings, who are wholly or partially dependant on the employee. It can be availed by submitting travel bills/ tickets to the employer. The exemption on LTC is subject to certain terms and conditions.
- Car maintenance allowance – If the employer-owned car is used by the employee, and the employer reimburses driver’s salary, insurance, maintenance and fuel expenses the taxable value will be Rs 2,700 per month (car with engine capacity up to 1,600 cc) or Rs 3,300 per month (car with engine capacity more than 1,600cc).
If the employee owns the car, an exemption of Rs 2,700 per month or Rs 3,300 per month in respect of the driver salary, maintenance and fuel expenses borne and reimbursed by the employer.
- Children’s education allowance – Claiming education allowance is yet another way of saving tax as it is deducted from the taxable income. An employee gets 100 INR per month or 1200 INR per annum per child (up to a maximum of 2 children) for children’s education expenses.
- Hostel expenditure allowance – The Income Tax helps employees meet the hostel expenditure of children too. The allowance allows a deduction from taxable income – 300 INR per month or 3600 INR per annum per child (up to a maximum of 2 children).
- Uniform allowance – This one is granted to meet the purchase and maintenance cost of the official uniform worn to dispense employee duties. This cost is tax-free.
- Medical allowance – This financial year has brought a huge relief in terms of medical expenses for self and dependents. From FY 2019-20 onwards, the standard deduction has been raised to Rs. 50,000.
Along with these, there are few other facilities that help reduce the tax burden.
- Phone bill reimbursement – Here phone bill includes telephone, mobile bill, and broadband connection which is reimbursed by the employer and is non-taxable.
- Meal vouchers – The food allowance or meal voucher given to the employee by the employer is also tax-free. These vouchers are solely for the employee and are not transferable. The limit of this allowance is 50 INR per meal, calculated on 22 working days a month and 2 meals per day.
- Gift voucher- A gift (even in the form of token or voucher) given to the employee by the employer is not taxable. The limit here is 5000 INR annually.
Now that allowances and facilities are out of the way, it’s time to discuss the retirement component.
- EPF – Under the EPF Act, both employer and employee have to contribute 12% of (employee’s) basic salary and dearness allowance to the PF account. The tax liability here falls under the EEE ( Exempt Exempt Exempt) category wherein the money invested in EPF, the interest earned, and the money withdrawn are all exempted from income tax, subject to certain conditions.
- NPS – Under the NPS (National Pension Scheme), employees can claim a self-contribution of up to 50000 INR under section 80CCD (1B) as a tax benefit.
Employee salary consists of various components that can save tax. Sadly, most do not take it into account while negotiating salary packages. Although employees do not dictate the salary structure, employers nowadays are much receptive and open to building tax-saving compensations.