In this technological world, even the tax departments have improved a lot. Now it seems very difficult to avoid income tax. In country like India, where Indirect taxes already pockets a lot of taxes, income tax is another burden that everyone wants to avoid.

Avoiding income tax is difficult now, since much of the data is already available with income tax department to accurately calculate income tax payable by you.

However, you can plan your taxes. Here is a step wise procedure to efficiently plan your salary structure and reduce the tax burden.

Income Tax Act, 1961 have provisions where it allows income tax reliefs on some allowances received by employees. A list of allowances and extent to which it is allowed is produced below for your reference:

  1. House Rent Allowances: HRA is exempted up to limit prescribed under the section 10(13A). Exempted HRA is to be calculated in the following manner:

    Section 10(13A): 1. Actual HRA received
                               2. 50% of the basic salary (Metro Cities), 40% of the salary for other cities.
                               3. Excess of rent paid over 10% of salary
    It is to be noted that HRA is allowed on monthly basis. For example, every month employees have to consider the rent they paid or HRA received.
    HRA exemption is not allowed to employees who did not paid any actual rent.
    With help of the excel file attached, you can calculate the optimum HRA to save maximum tax.

  2. Transport/Conveyance Allowance: Transport allowance provided to employees to commute between work place and place of residence is exempted up to Rs.800 per month.

  3. Children Education Allowance: Clause 14 of Section 10, specifies the allowance which are exempted up to the limits specified. These allowances are specified under the rule 2BB of Income Tax Rules. Under rules 2BB, Rs. 100 per month per child up to a maximum of two children.

  4. Hostel Expenditure: Any allowance granted to an employee to meet the hostel expenditure on his child is exempted up to Rs. 300 per month per child up to a maximum of two children.

  5. Medical reimbursement: Allowances under income tax are fully taxable unless specifically exempted. People general confuse between medical reimbursement and medical allowance. Medical allowance is fully taxable and medical reimbursement against actual bills is exempted up to Rs. 15000 in a year.

  6. Above were the some allowances which are popular and applicable to almost all employees, however there are many other allowances which are applicable to employees working in extreme conditions such as transport employees, hilly regions etc.

  7. Entertainment allowance is exempted in case of government employees.

Based on the above allowances, I have prepared an excel file. You can use this excel file to arrive at optimum salary structure by comparing the tax impact.

You can split your CTC among different heads and arrive at optimum structure. For your reference even tax is computed.

The excel file is simple to use, you just have to fill the cells colored yellow. You can also arrive at the optimum HRA allowance to reduce the tax impact.

Download the file to calculate salary break up in excel by just filling your CTC. You can download the file and calculate the structure of your salary CTC to reduce the impact of tax on your salary income.

I have explained the optimum HRA allowance for example purpose in this excel file. You can fill the CTC and arrive at the optimum HRA allowance with trial and errors.

Download  Salary-breakup-in-excel-fill-the-CTC.xlsx

Posted 2 years, 3 months ago by CA Pulkit Sharma

Thank you very much for explaining the different allowances in detail. I have a doubt whether medical allowances are exempt on actual basis or limits are specified?

Posted 2 years, 3 months ago by Rahul Rai

Fixed medical allowance are fully taxable. Reimbursement of medical expenses is exempted upto Rs. 15000.

Posted 2 years, 3 months ago by CA Pulkit Sharma

Thank you.

Posted 2 years, 3 months ago by Rahul Rai

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