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How to structure your salary to save tax
September, 05th 2016

When negotiating terms of employment with a propsective employer, we focus on increasing CTC, without paying much attention to the salary structure. Though a higher CTC is an important aspect of salary negotiation, it is equally important to structure it well to maximize take-home pay and minimize tax outgo.

While you may not have complete control over the way your salary is structured, employers today areflexible enough to design it your way. However, before taking a final call on a particular pay structure, consider your long-term and short-term financial goals. Modifying the tax structure can simultaneously impact your net take home and your retirement corpus as some components of the package may not come to you immediately and others may be either full taxable or tax-free.

Generally the CTC can be broadly divided in four components— basic, allowances, perquisites and retirement benefits/contributions. Each component is treated in a different way for tax purposes and can impact your tax liability.

It is vital to decide how much of your CTC should make up the basic salary, because it is fully taxable. If the basic is too high, your tax liability will shoot up. Other components of salary exemptions, such as the HRA and Provident Fund benefits, are linked to basic pay. Designing a tax efficient pay structure is always a trade-off between higher take home and maximum tax benefits.

Junior employees need a higher monthly payout. They can get that by opting for a lower basic salary and adding other fixed allowances in the salary structure such as food allowance, medical reimbursement, conveyance allowance, telephone, etc. These allowances are fixed and payable monthly. Employees may get taxed on these to a certain extent, but at a lower rate. Senior employees fall in a higher tax bracket. For them, tax savings gets priority over a higher take-home salary. Hence, a higher bas ..

The Income Tax Act has prescribed certain allowances for all salaried individuals which are exempt at source. So if these allowances are a part of the pay structure, the overall tax liability may come down to a great extent.

The additional benefits or amenities provided by the employer to an employee are termed as perquisites. The Income Tax Act allows exemption for certain perquisites which if included as component of salary can result in tax savings.

The fourth and the most important component of any salary structure is the retirement benefit contribution which is not payable to the employee immediately and is in the nature of long-term savings for them. While these savings help them lead a dignified life post-retirement, they also result in a lower take home package. It is important to decide the right ratio for these contributions. To motivate individuals to save more towards building a good retirement corpus, tax laws allow certain exemptions and deductions for these contributions. Be diligent while designing your pay structure. Use the table alongside to plan the perfect salary structure.

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