What a salary structure should include and how we can reduce our salary tax liability

This article will help us to figure out how to reduce your tax liability under salary head and how to set salary structure for AY 2020-21. This article will cover various allowances which any type of employees will able to claim in his or her return, also various types of deduction under chapter VI-A will be covered here along with details of various investments schemes.

I hope this article will help you in your tax planning.

S. No Sub head of Income Taxability Treatment
1 Basic Pay Always taxable
2 Dearness Allowance (DA) Always taxable
4 Bonus Always Taxable
5 Children Education Allowance Rs. 100 per month per child.

i.e. max. Rs. 200 per month. (Max for 2 children)

Total max benefit: Rs. 200*12 = Rs. 2400

6 Hostel Allowance for children Rs. 300 per month per child.

i.e. max. Rs. 600 per month. (Max for 2 children)

Total max benefit: Rs. 600*12 = Rs. 7200

7 HRA Exemption HRA Exemption amount is least of the following

i) HRA Received

ii) Rent Paid – 10% of Salary

iii) 40% of Salary (50% if house situated at Mumbai, Kolkata, Delhi or Chennai)

This can be reduced to zero by proper planning.

[Note: Salary will be inclusion of Basic Pay plus Dearness Allowance (if provided by the terms of employment) plus commission based on fixed % of turnover]

8 Leave Travel Allowance LTA can only be claimed if the employee goes on a vacation as bills for the same would be required to furnished.

Exemption shall be available as per provisions of section 10(5) of Income Tax Act, 1961.

9 Uniform Allowance This allowance is exempt up to the amount spends by employee during the financial year.

This can also use for better tax planning and good salary structure.

10 Telephone Allowance This allowance is exempt up to the amount spends by employee during the financial year.

This can also use for better tax planning and good salary structure.

11 Books Allowance This allowance is exempt up to the amount spends by employee during the financial year.

This can also use for better tax planning and good salary structure.

12 Recognised Provident Fund Employer’s Contribution –  Not Taxable upto 12% of salary

Employee’s contribution will be eligible for deduction under section 80C

Any income earned on it will be exempt upto 9.5%

Lumpsum payment received on retirement or termination of service will be exempt from tax subject to condition that minimum 5 years of service should be completed

13 Section 80C

(Max benefit under section 80C, 80CCC, 80CCD (1) cannot exceed ` 1,50,000)

S.No. Deduction detail
1. Tuitions fee of children.
2. LIC Instalment.
3. PPF Investment
4 Employee’s Share to PF
5 Principal payment of home loan
6. Investment in Sukanya Samridhi Yojana
7 Fixed deposit with bank or post office (minimum tenure shall be 5 year)
8 Senior Citizen saving scheme
9 Contribution to notified Pension Fund set up by Mutual Fund or UTI.
10 Investment in PPF / EPF
11 Investment in NPS
12 Purchase of national saving certificate.
13 Investment in Unit Linked Insurance Plan. (ULIP)
 14 Amount contributed (for a fixed period of not less than 3 years) by Central Government employee to his NPS (tier-II) account – Applicable from AY 2020-21
14 Section 80CCD (2) First taxable as salary and then deductible u/s 80CCD(2) upto 14% of employee’s salary in case of Government employees and 10% in case of Non – Government employees
15 Section 80CCD(1B) Additional Contribution to NPS of Rs. 50,000. This is also available over and above the limit of Rs. 1,50,000
16 Section 80G Donation deduction is also available, if we donate in specified fund which mention in section 80G subject to limit specified in provisions of section 80G.
17 Section 80E

(Interest in Education Loan)

Interest paid as part of education loan EMI is fully allowed as deduction.
18 Section 80EEA (Interest on home loan)

(From AY 2020-21 onwards)

80EEA deduction is available only for those tax payers who own home for the first time, max amount available for deduction is interest payable on loan or Rs. 1,50,000 whichever is less.

Note: The stamp duty value of residential house property does not exceed Rs. 45 lakhs

19 Medical Insurance

(Section 80D)

  • In case of the individual, Rs. 25,000 for himself and his family
  • If individual or spouse is 60 years old or more the deduction available is Rs 50,000
  • An additional deduction for insurance of parents (father or mother or both, whether dependent or not) is available to the extent of Rs. 25,000 if less than 60 years old and Rs 50,000 if parents are 60 years old or more.
  • For uninsured super senior citizens (80 years old or more) medical expenditure incurred up to Rs 50,000 shall be allowed
  • A deduction of Rs. 5000 will be allowed under this section for payment of preventive health check-up of either the individual himself or his family members which includes spouse, parents and dependent children.This deduction is NOT in addition to the deduction of Rs.25000/ 50000 stated above, but is included in the above deduction

For the point of Investment, here we provide analysis among different investment plan, so that a person can easily choose on the bases of return, time and tax saving.

Investment Risk Profile Lock in Period Interest Rate
Senior Citizen Saving Scheme Risk Free 5 Years or 8 Years 8.60%
Sukanya Samridhi Yojana Risk Free 21 Years 8.40%
ULIP Equity Related Risk 5 Years 8-10% Expected
Fixed Deposit Risk Free 5 Years 7.50%
NSC Risk Free 5 Years 8.10%
NPS Equity Related Risk Till Retirement 8-10% Expected
PPF Risk Free 15 Years 7.9%
Equity Linked Saving Scheme Equity Related Risk 3 Years 12-15% Expected

I hope you found your answer in above article, if you have any doubt you may directly contact to me on my mail id cakeharsingh25@gmail.com.

Thanks a lot for giving you precious time.

(Republished with Amendments)

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    1. cakeharsingh25 says:

      Dear Sharma Ji,

      I agreed with you, i want to convey the same thing but at the point of writing of this article, might be i forgot to collect correct wording.
      Yes, 80CCD(2) deal with employer contribution which is available up to 10% of salary, and here salary only include basic pay and dearness allowance.

      Thanks for you valuable feedback

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January 2021