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How to make your salary tax efficient?

How to make your salary tax efficient?Many People have the grudge that their salary is low compared to the tax paid by them which is high. It is very urgent and necessary to find some ways of making the salary tax efficient. There are many ways and methods which can be used to get the same. Adopting these ways can make wonders in saving the tax of salaried persons.

How to structure the salary?

For tax efficient salary planning, the salary package should be inclusive of some tax-free payments rather than getting the total as basic salary. Some of the common payments are:

  1. House Rent Allowance (HRA),
  2. Conveyance Allowance,
  3. Medical Allowance,
  4. Educational expenses of children, etc.
  5. Leave Travel Concession and
  6. Food Vouchers.

According to section 10 of the Income Tax Act, for HRA, 50% of salary is allowed as deduction in case of people staying at metropolitan cities. But it is limited to 40% in case of people staying at other regions of the country.

Medical expenditures up to a limit of Rs. 15,000/- is exempt from tax, but if an amount is received which is more than Rs. 15,000/-, it is taxable.

The conveyance allowance provided to an employee is totally exempt from tax under section 10(14) (1) (c)  of the Act.

A combination of the many allowances, perquisites and other benefits determines the tax on one’s salary.  It is a good idea to see what benefits can be availed.  After all what you have saved is a reflection of what you have earned.

Some allowances of salary:

1.       Employee provident fund contribution: One important point to remember is that EPF contribution has to be done with outmost care. One can adjust it depending upon their other investment requirements. It is good to increase the employer’s contribution up to 12 per cent of the salary, since the same is tax free. We get tax benefits on some allowances for many things but most of the perquisites are taxable like that of normal salary.

2.       Superannuation fund contribution: Some employers provide contributions for superannuation funds for their employees.  The eligibility of the employees depends upon the terms of the policy, for the lump sum payment received by them on retirement.

3.       Gratuity: The Income Tax Act gives a tax exemption of Rs. 10 lakhs on the gratuity received by the employees, provided some conditions are fulfilled. So, it is good for employers to contribute towards gratuity regularly. But there is still uncertainly regarding whether the Direct taxes code will be effective from April 2013.

Other means of making salary tax efficient:

A good way not much used particularly applicable to people getting high salary preferring their money being invested for a quite long term, is the exemption one can get for contribution made by the employers to the National Pension Scheme. This is better than any other exemption available to the salaries persons. So the employer can give 10 % of the basic salary and dearness allowance of an employee into his NPS account. It also contains an equity component. It is something that very few salaried people use.
Another way is purchasing a car.  Instead of buying on your own and the company reimbursing you some of its expenses, if your company buys the car and gives you all its expenditures, then you can get tax benefit.

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