Plan your Salary Structure more efficiently- Save more taxes- Part I

If you are a salaried employee and wondering why are you still paying unnecessary taxes even after investing in almost all tax saving tools? The overall tax incidence for salaried individual depends on the structuring of the salary. Read on –

• The individual should plan his salary structure in such a way that dearness allowance and dearness pay form a part of basic salary. This will help to minimise tax incidence on house rent allowance, gratuity and commuted pension.

Also incidence of tax on the employer’s contribution to a recognised provident fund will be lesser if dearness allowance forms a part of basic salary;

• It is to be noted that commission payable as per terms of contract of employment at a fixed percentage of turnover achieved by an employee, falls within the expression “salary” as defined.

Consequently, tax incidence on house rent allowance, gratuity and commuted pension will be lesser if commission is paid at a percentage of turnover achieved by the employee;

• Commuted pension is fully exempt from tax in the case of government employees and partly exempt from tax in the case of non-government employees who can relief under section 89;

• An employee, being a member of a recognised provident fund, who resigns before completing five years of continuous service, should ensure that he joins a firm which maintains a recognised provident fund for a simple reason that the accumulated balance of the provident fund with the former employer will be exempt from tax, provided the same is transferred to the new employer, who also maintains a recognised provident fund;

• Since the employer’s contribution towards a recognised provident fund is exempt from tax upto 12 per cent of salary, employers may give extra benefit to their employees by raising their contribution to 12 per cent of salary without increasing any tax liability;

• Employees should go in for free medical facilities instead of a fixed medical allowances;

We have segregated this note into two parts, for better and easy readability. Please read on the next write up for more ideas to better structuring of your salary.

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