How to save Tax on your Salary

“The Taxman Cometh!”

It is said that the only two certainties in life are death and taxes. While it may seem appropriate to club the two items – PersonalFN would like to help you lighten the load. Here is a Guide that will tell you what you need to know on how to save tax on your salary.

Lets start at the beginning.

Frequently Asked Questions
(Click on the question to go to the answer)

1. What key heads is Salary divided into?


2. What are my tax-saving options on salary?


3. How should I restructure my salary to save tax?


4. Which allowances and reimbursements are exempt from tax?


5. How can I use HRA to save tax?


6. Can I claim HRA if I live in a house that I own?


7. Can I claim HRA if I'm not currently paying any rent?


8. Can I claim both HRA and take home loan deduction benefit to save tax?


9. How can I use LTA to save tax?


10. What is the current block for LTA journeys?


11. I have travelled with my cousins, can I claim LTA on their travel fare also?


12. How do I calculate LTA exemption to save tax?


13. I have not used my LTA for one block (one or both journeys), can I carry it forward?


14. How can I use Medical Reimbursements to save tax?


15. How can I use my Transport Allowance to save tax?


16. I have two children. How can I use my Education Allowances to save tax?


17. How can I use Food Coupons to save tax?

1. What key heads is Salary divided into?
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   Salary is generally divided into following key heads:
   
   Wages and allowances
   It includes all monthly remuneration paid by an employer to the employee like base salary, bonus, house rent allowance, conveyance allowance, etc. These components are fully taxable except to the extent specifically exempt (like house rent allowance, Medical expenses reimbursement).
   
   Perquisites
   It includes all benefits provided by an employer to the employee like company leased accommodation, car, free education, etc. This represents provision of a facility rather than an allowance for expense. These components are taxable based on the value prescribed as per the perquisite valuation rules.
   
   Profit in lieu of salary
   It includes non-recurring, one-off payments received by the employee e.g. joining bonus, compensation for termination of employment or modification in the terms of employment etc.


2. What are my tax-saving options on salary?
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   Tax planning for salaried individuals can be divided into two categories:
   
   
   • Salary Restructuring; and
   • Investment in Tax Saving instruments
   
   You can avail both the above options to save tax.


3. How should I restructure my salary to save tax?
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   Salary Restructuring is a lesser known domain of tax planning. You can structure or restructure your salary so as to reduce the tax outgo by including exempt allowances and reimbursements. Instead of going for a high basic salary you can take reimbursements and allowances which are exempt from tax.
   But note that your EPF, Gratuity and Superannuation are all a percentage of your Basic, so by reducing your Basic to allow for higher allowances and reimbursements, you will also be reducing your EPF, Gratuity and Superannuation. And note that EPF is exempt from tax, gratuity is exempt from tax up to Rs. 10 lakhs in your lifetime, and the commuted pension portion of Superannuation is non taxable.



4. Which allowances and reimbursements are exempt from tax?
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   Following allowances and reimbursements are not taxable upto certain exemption limits:
   
   
   • House Rent Allowance ('HRA')
   • Leave Travel Assistance ('LTA')
   • Medical reimbursements
   • Transport Allowance
   • Education Allowances
   • Food Coupons
   
   
   
5. How can I use HRA to save tax?
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   HRA stands for House Rent Allowance.
   
   It is taxable under the IT Act subject to specified exemption limits.
   If you do one of the following then your HRA is fully taxable, not exempt:
   
   
   • reside in your own house; or
   • do not pay rent for house occupied by you.
   
   However if you are living in a rented house and you are the one paying the rent, then HRA exemption can be availed for the period during which you occupy the rented house during the relevant tax year.
   
   Also, to claim the exemption, your employer is required to obtain appropriate and adequate proof of payment of rent for the entire period for which you want to claim exemption.
   
   An exception to the 'proof required' rule is that if you are a salaried employee drawing HRA up to Rs. 3,000 per month, you do not have to provide a rent receipt to your employer.
   
   Exemption amount is calculated as follows:
   
   

   In Chennai/ Delhi/ Kolkatta/ Mumbai	In other cities
   Least of:	Least of:
   Actual HRA	Actual HRA
   Rent paid in excess of 10% of salary	Rent paid in excess of 10% of salary
   50% of salary	40% of salary

   
   'Salary' for purposes of HRA includes dearness allowance if you're getting it, but excludes all other allowances and perquisites.


6. Can I claim HRA if I live in a house that I own?
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   No.


7. Can I claim HRA if I'm not currently paying any rent?
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   No.


8. Can I claim both HRA and take home loan deduction benefit to save tax?
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   Yes, as far as the IT Act is concerned – the two sections on HRA and Rental Income are completely separate, so you can avail HRA deduction and also home loan tax benefits.
   For example:
   Suppose you are renting a house close to where you work, but your home is elsewhere, and you are repaying a home loan on your home property. In this case you can avail your HRA deduction, as well as take the tax benefit of the home loan. The two sections (dealing with HRA and Home Loan benefit) are completely separate in the IT Act.
   (Also remember, if you are renting out the property on which you have taken the home loan and are receiving rental income, your rental income is taxable, after the standard deduction of 30% - for more information please see our Section on Income from House Property)


9. How can I use LTA to save tax?
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   LTA (Leave Travel Allowance) is taxable under the Act subject to prescribed exemption. The exemption is available based on the expenses you actually incur on travel fare, subject to the following:
   
   
   • the travel is undertaken by you and can include your family members; and
   • is for proceeding on leave to any place in India.
   
   This exemption can be claimed only in respect of two journeys performed in a block of four calendar years.


10. What is the current block for LTA journeys?
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    The current block is for journeys performed during the years 2010 to 2013. But note, LTA block is measured in Calendar Years and not Financial Years, so the current block is Jan 1st, 2010 to Dec 31st, 2013.


11. I have travelled with my cousins, can I claim LTA on their travel fare also?
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    No. LTA is exempt for travel undertaken by your family members, where “family” is defined as:
    
    
    • your spouse and children; and
    • your parents, brothers and sisters
    
    Keep in mind that your family members have to be wholly or mainly financially dependent on you for you to claim LTA on their journeys. Also, the above-mentioned exemption does not apply to more than two children born after 1 October 1998.


12. How do I calculate LTA exemption to save tax?
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    As per the Rules, the conditions/ limitations for the exemption are as follows
    
    

    Particulars	Amount exempt
    Where the journey is performed by air.	Economy class airfare of the national carrier by the shortest route to the place of destination or amount actually spent, whichever is less.
    Where the places of origin of journey and destination are connected by rail and journey is performed by any mode of transport other than air.	Air-conditioned first class rail fare by the shortest route to the place of destination or amount actually spent, whichever is less.
    Where the place of origin of journey and destination (or part thereof) are not connected by rail
    Where a recognised public transport exists	First class or deluxe class fare by the shortest route or the amount spent, whichever is less.
    Where no recognised public transport system exists	Air-conditioned first class rail fare by the shortest route (as if the journey is performed by rail) or the amount actually spent, whichever is less.



13. I have not used my LTA for one block (one or both journeys), can I carry it forward?
    
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    Yes, only one out of the two allowed journeys can be carried forward. It should be carried forward to the first calendar year of the immediately succeeding block of four calendar years. The carry forward has no detrimental effect on the new block of 4 years. Apart from 1 journey carried forward from the last block, you will still be eligible for LTA of the 2 journeys in the new block.


14. How can I use Medical Reimbursements to save tax?
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    The reimbursement of the medical expenses of you and/or your family members is exempt from tax to the extent of Rs.15,000 for the year. You should have bills for the amount claimed, for the relevant year.


15. How can I use my Transport Allowance to save tax?
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    Transport allowance provided to you as an employee for commuting between your residence and your place of work is exempt up to Rs. 800 per month (i.e. Rs. 9,600 p.a.).


16. I have two children. How can I use my Education Allowances to save tax?
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    For those salaried employees who have children, education allowance of Rs. 100 per month per child for up to 2 children is exempted (i.e. Rs. 2400 p.a. totally). In case your children are in hostel, the exemption available is Rs.300 per month per child for up to 2 children.


17. How can I use Food Coupons to save tax?
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    Expenses incurred by your employer on provision of free/ subsidized meals to you during office hours at office or business premises, i.e. food coupons, are not taxable as a perquisite, only to the extent of Rs.50 per meal. The exemption is also available in case paid vouchers, which are non-transferable and usable only at eating joints, are provided to employees.
    
    
    • 'Free meals' means 'free food and non-alcoholic beverages'
    • There is no tax on tea or snacks during working hours;
    • Where free food and non-alcoholic beverages during working hours are provided in a remote area or an off shore installation, it is not taxable regardless of the value
    
    The exemption of Rs.50 per meal is available only in respect of meals during office hours.
    
    Accordingly, considering 24 workday month and 2 meals per day, on a conservative basis, the value of eligible number of meals during office hours based on workdays in a month work out to Rs.2,400 (i.e. Rs. 28,800 p.a.).