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These days, a very interesting debate has erupted among employed people regarding tax planning. It is generally believed that under the new tax regime, only annual salary up to Rs 12 lakh can be tax free. However, due to some special calculations and tax rebate under Section 87A, it can be stretched to a maximum of Rs 17.75 lakh. But as soon as your earnings cross this magical figure, the heavy tax burden suddenly starts draining your pockets.
But did you know that even on an annual package (CTC) of ₹19 lakh, you can legally reduce your tax to ‘zero’ completely? Yes, for this you do not have to make any new or huge investment from your pocket, rather just talk to the HR of your company and make a smart change in your salary components i.e. salary restructuring.
Same salary, but huge difference in taxes: understand the story of two friends
To understand this entire mathematics, let us look at the example of two employees working in the same company, whose annual CTC is exactly equal to ₹ 19 lakh. At the end of the year, when it comes time to pay taxes, the first employee pays a huge tax of around Rs 1.5 lakh. At the same time, the other employee, out of his wisdom, does not pay even ₹ 1 tax and his tax bill becomes zero.
The only reason for this big difference is that the salary structures of both are designed differently:
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Traditional Salary Structure (Old Style): Earlier, in the case of the employee, basic salary was fixed at ₹7.60 lakh, House Rent Allowance (HRA) at ₹3.80 lakh, Special Allowance at ₹6.65 lakh and PF contribution at ₹9,000. Since there is no tax exemption on things like HRA in the new tax regime, her total taxable income reached above Rs 17.5 lakh and she had to pay tax of more than Rs 1.5 lakh.
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Smart Salary Structure (Modern Way): Another savvy employee, instead of taking straight cash as ‘Special Allowance’ (which is fully taxable), got a large portion of his package converted into corporate NPS and tax-free reimbursement allowances.
Take this tax-free reimbursement in place of ‘Special Allowance’, this is how the mathematics works
Under the smart salary structure, another employee got his package of ₹19 lakh restructured in this way, which is completely valid and tax-free in the new tax regime:
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Corporate NPS (14% company contribution): ₹1,06,400
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Business Coupons/Meal Allowance (Food Coupons): ₹96,000
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Fuel and Vehicle Maintenance (Car Expenses): ₹1,50,000
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Official Driver Salary Reimbursement: ₹1,80,000
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Gadget and Equipment Allowance: ₹45,000
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Broadband and phone allowance: ₹30,000
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Learning and Development (Skill Upgrade): ₹25,000
Adding all these tax-free allowances and corporate NPS contributions, the total non-taxable amount comes to around ₹6.32 lakh. Thanks to this smart restructuring, the net taxable income of the second employee reduced from ₹17.5 lakh to just around ₹11.18 lakh. Since this figure falls within the tax-free slab of the new tax regime, his total tax liability reduces to zero.
Strict rules to save tax: Take special care of these 3 things
As attractive and beneficial as this method of saving tax looks, the rules of the Income Tax Department are equally strict for it. To take advantage of this tax benefit properly, you will have to take special care of these things:
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Must be part of the offer letter: The first and foremost condition for this is that all these reimbursements and NPS contributions should be an official part of the salary offer letter or appraisal letter given by your company.
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Original bill and proof mandatory: According to the rules, to claim these allowances, employees will have to submit original bills, vouchers of related expenses and concrete proof of their official use to the finance department of their company from time to time.
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No self claim while filing ITR: Keep in mind that you cannot claim these corporate benefits directly while filing your own Income Tax Return (ITR). This should be routed through Form-16 of your company only.