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Can You Make Your Salary More Tax Efficient In The AY 2023-24?
Written by Gagandeep Arora - Date - 15th April 2022
Salary is the compensation you receive as an employee after hard days of work at the end of the month. The prospect of discussing our salary is a scare for most of us, as we do not understand how to plan to spend our earnings wisely. As rightly said by the famous author Timothy Ferriss, ” Money is multiplied in practical value depending on the number of W’s you control in your life: what you do, when you do it, where you do it, and with whom you do it.” Similarly, our planning of salary will give us a tax-efficient salary for AY 2023-24. .
The salary structure has various components to it. The taxation of each component varies as per existing tax rules and regulations. Maintenance of proper balance between taxable pay and the money you take home is possible. In India, there are different income tax slabs and income tax is charged according to these slabs. The salary includes basic salary, dearness allowance and retaining allowance. Each component plays a different role for taxable purposes. Eventually, you will end up taking less to your house if not planned accordingly. The aim of an individual should be to have a tax-efficient salary structure.
Basic Salary
This is the first component of the salary structure and is taxable entirely. This is computed keeping in mind your cost to the company. The basic pay is the taxable part of your salary so this amount will make a major difference. Still, if we opt for maximum benefits in the salary then we will take less amount back home. At different stages of life, your attitude towards life will differ. For a senior employee, the preference could be to tax-saving investments rather than a take-home salary. Maybe for a young employee take-home pay will matter more than tax benefits. This is a very important component of the tax-efficient salary structure in India.
Allowances
These are perks given to employees over the basic salary to take care of their basic expenses of the employees. The most popular ones are House Rent Allowance and Leave Travel Allowance.
1. House Rent Allowance
It generally comes as a part of your salary. A salaried employee if living on rent in an apartment can claim HRA as a tax benefit and hence reduce his tax liability. If an employee does not live in a rented apartment then HRA will be taxable.
2. Leave Travel Allowance
A salaried employee can avail of the benefit under LTA. If you take a domestic trip with your spouse, dependent parents, brothers and sisters, and children. The bills of the actual expenditure need to be submitted. The exemption can be claimed only twice in four years.
3. Additional Benefits
Perks given by the employer in cash or kind based on your job like a car for personal use or rent-free accommodation, some of these perks are tax-free if included in the salary structure. These benefits help to construct a tax-efficient salary structure in India.
4. Retirement benefits
The most important component of an employee’s salary is this amount which is not given immediately to him. It is an amount that is saved from their monthly income and kept as a retirement fund. The Income-tax department gives the provision that the amount contributed to the EPF account by the employee is exempted from tax. Section 80 C of the Income Tax Act states that the employer's contribution towards EPF is tax-deductible under the Income Tax Act. If an employee can identify the correct ratio for these contributions based on your personal financial needs, it will have a great effect on the pay you take back home.
5. Investment in National Pension Scheme
Employee’s contribution up to Rs.50, 000 is eligible for deduction over and above the limit of Rs. 1, 50, 000. The Income Tax Act AY 2023-24 gives the withdrawal provisions of Exempt Exempt Taxable and 40% of the corpus is proposed to be tax-free.
Conclusion- Planning Is The Key
The onset of the new financial year, which is FY 2022-23 for this year, is the best time to plan your salary components wisely to take a tax-efficient salary home. At this time of the year you would need to structure the Cost to the Company and give the allowances to be claimed, deductions or investments details well in advance to your employer so that the Tax Deducted at the Source (TDS) is planned and deducted on monthly basis. There are chances that you do not have complete control over the way your salary is structured but nowadays employers are flexible to structure it your way. Taking into consideration your long term and short-term financial goals, you can modify the tax component and alter the amount you take back home.
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