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TAX PLANNING IN SALARY
It is always said that a salaried employee has to pay higher tax since tax is deducted by the employer on salary income. In this article we will discuss the instances of tax planning for a salaried employee.
The definition of salary is very wide and includes not only monetary salary but also benefits and perquisites in kind. But we also have deductions available in respect of salary income like the deduction in the form of entertainment allowance, professional tax or standard deduction of Rs. 40,000/.
The following are some of the methods of tax planning in regard to salary income.
The employee can ask the employer to split the Salary into basic salary plus various allowances and perquisites.
For example, the employee can ask employer to bifurcate Salary into basic salary plus various allowances like children education allowance, hostel allowance, house rent allowance, transport allowance etc so as to get various exemption under section 10(14) of the Income Tax Act, 1961 under Rule 2BB
Further, the employee can ask for allowances like special compensatory allowance, border area allowance or remote area allowance or difficult area allowance or disturbed area allowance depending upon the posting of the employee. Some exemptions are available in respect of these allowances. In this connection, Rule 2BB specifies the exempt allowances.
The employer should ensure that dearness allowance and dearness pay should form part of “salary”. This is because certain items like entertainment allowance, gratuity, commuted pension and the employer’s contribution to the recognised provident fund etc. are calculated on the basis of salary.
Therefore, if dearness allowance, dearness pay etc. are included in salary, the above benefits will also increase leading to higher exemption in the hands of the employee.
Employees’ welfare schemes:
There are several employees’ welfare schemes such as recognised provident fund, approved superannuation fund, gratuity fund. Payments received from such funds by the employees are totally exempt or exempt upto specific limit.
Any payment made by an employer on behalf of an employee to maintain a life policy will be treated as perquisite in the hands of the employee. However, the payment of premium by the employer on behalf of the employee will not be treated as a perquisite in the case of accident insurance policies. This is due to the fact that the employer has a vested interest in the safety of the life of his employee who is engaged in such dangerous occupations.
If commission is payable at a fixed percentage of turnover achieved by an employee such commission should be taken into account for calculating “salary” for the purpose of gratuity etc (As per the judgment of Supreme Court, in Gestetner Duplicators Pvt. Ltd. v. CIT)
Make choice between similar allowances:
In the case of Rent Free Accommodation vs. HRA, it must be noted that the perquisite of rent free accommodation is taxed as per Rule 3(1) of the Income-tax Rules, 1962 and HRA is exempt to the extent mentioned in section 10(13A) read with Rule 2A. The employee should therefore work out his tax liability and net cash flow under both the options and then, decide on whether to receive HRA or choose a rent free accommodation.
If resigning before 5 years:
Where an employee who is a member of a recognised provident fund and who resigns before completing five years of continuous service should ensure that he joins a firm which maintains a recognised provident fund. The accumulated balance of the provident fund with the previous employer will be exempt from tax provided the same is transferred to the new employer who also maintains a recognised provident fund.
Non-residents pension income:
Pension received in India by a non-resident assessee from abroad is taxable in India. If, however, such pension is first received by or on behalf of the employee in a foreign country and later on remitted to India, it will be exempt from tax.
The following are the perquisites which are exempt from tax–
- Use of computers and laptop by employee;
- Medical facility in employer’s own hospital or a public hospital or Government or other approved hospital;
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