As the new financial year begins, employees across sectors receive emails from HR departments asking them to choose a tax regime and declare tax-saving allowances. This annual exercise isn’t just a formality—it’s a strategic opportunity to optimize your salary structure and reduce your tax outgo under both the old and new tax regimes.
A well-structured salary not only ensures compliance but also maximizes your take-home pay through smart use of tax-saving allowances. Let’s break down how to effectively use key salary components for better tax efficiency.
Understand Your Salary Structure First
The foundation of any tax-saving strategy is understanding your complete salary structure. A flexible pay package allows you to adjust components like HRA, car allowance, communication reimbursements, and NPS contributions to minimize taxable income. When these allowances are structured right, the savings can be substantial.
House Rent Allowance (HRA) and Home Loan Deductions
House Rent Allowance (HRA) is a significant tax-saving tool under Section 10(13A) of the Income Tax Act. The exempt amount is the least of the following:
- Actual HRA received
- 50% of basic salary for metro cities (40% for non-metro)
- Rent paid minus 10% of basic salary plus dearness allowance
Ensure your landlord’s PAN and rent receipts are properly submitted in your investment declaration.
If you’re servicing a home loan, you can also claim interest deductions under Section 24(b). For this, submit the loan sanction letter and interest certificate from the lender as proof.
Optimizing Car Allowances
Car allowances come with specific caps and documentation requirements. A standard exemption of ₹1,800 per month (plus ₹900 for a driver) applies when an employee uses their own car partly for official duties. Key documents needed include:
- Fuel and maintenance bills
- Driver’s salary slips and employment agreement
- RC book and driver’s license
For employer-owned cars, reimbursement for official use is fully exempt. But if a company leases a car and includes it in your CTC, it is treated as a taxable perquisite, with a fixed monthly tax depending on engine capacity.
Alternatively, if you lease a car independently and claim reimbursements, ensure the lease agreement, original bills, and payment proof are submitted. Policies differ across companies, so align this component with your employment terms.
Communication and Internet Reimbursements
Employees can claim telephone and internet allowances by submitting post-paid invoices. This allowance is typically tax-free when substantiated with proper documentation.
Employer Contributions to NPS
The National Pension System (NPS) is an effective long-term tax-saving instrument. Employer contributions are tax-exempt under both regimes. For central government employees, up to 14% of basic salary and dearness allowance is exempt under the new regime. For others, the cap is 10%.
This component not only offers immediate tax savings but also contributes to your retirement corpus, aligning financial planning with long-term goals.
Final Thoughts
- Review and restructure your salary components annually.
- Focus on allowances that offer the highest exemptions.
- Maintain proper supporting documents for every claim.
- Understand the employer’s policy for car leases and NPS.
- Make tax-saving choices that also support long-term financial health.
Optimizing your tax-saving allowance basket is not just about reducing tax—it’s about financial intelligence. By leveraging available exemptions, aligning your benefits, and maintaining documentation, you can enjoy a higher net salary and stay compliant under both tax regimes.
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