The way structuring of salary is done determines the total tax outgo in case of an Individual. Even though there is no hard and fast method for structuring of salary, the following factors should be kept in mind in structuring the salary:
I – Dearness allowances and dearness pay should form a part of basic salary. This will help in minimising tax incidence on house rent allowances, gratuity and commuted pension. Also, tax liability on employerâ€™s contribution to a recognised provident fund will be lesser if dearness allowance forms a part of basic salary;
II – The commission should be paid at the fixed percentage of turnover achieved by an employee as the same would be considered within the expression â€˜salaryâ€™. And, thus the tax liability on house rent allowances, gratuity and commuted pension will be lesser if commission is paid at a percentage of turnover achieved by the employee;
III – As uncommuted pension is always taxable, employees should get their pension commuted. Commuted pension is fully exempt from tax in the case of government employees and partly exempt in case of non-government employees who can claim deduction u/s 89.
IV- An employee, being a member of 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 the simple reason that the accumulated balance of the provident fund with the former employer will be exempt from tax, provided the balance is transferred to the new employer, who also maintain a recognised provident fund.
We have tried to keep the posts as short and readable as possible, thus we have segregated this post in three parts. Please check part II for more on this subject.
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