Joined a new firm? Or just received an increment? Well, now is the time to make the right use of all those flexi components you often ignore in your salary structure, since these can help you reduce your tax liability. How? Lets decode.
Every company calculates the salary of their employees based on their CTC, or cost to the company. This is the total amount that the company spends on you during a financial year. There are many components within CTC that can help you save taxes. Let’s see how.
For every salaried individual, the CTC is divided into three components. The first is the fixed component, the second is reimbursements or flexi components and the third is other components. Fixed components usually constitute basic salary, HRA and special allowance. The basic salary makes up to 40-50% of CTC. While special allowances are completely taxable, HRA, which makes up to 50% of the basic salary, can be used to claim tax exemptions.
In order to claim house rent allowance (HRA), the condition is that the company is paying you HRA, and you’re paying house rent. The calculation of exemption will depend on three things:
1. The HRA amount received 2. In metro cities, basic salary + 50% of DA. In non metro cities, basic salary + 40% of DA 3. Amount equal to Actual rent paid-(Basic salary+ 10% of DA)
Tax exemption will be calculated on the least of the three.
In order to reduce an employee’s taxable income, the employer adds many components to his/her salary, which are known as flexi components or reimbursement.
In the course of employment, the company provides its employees with prepaid food vouchers like sodexo coupons. In other words, the company gives food allowance, under which the employees get Rs 50 as allowance for eating one-time, and Rs 100 for eating twice a day. So, if an employee works 22 days in a month, they’ll receive Rs 2,200 monthly, and Rs 26,400 annually, which will be tax-free.
In the same way, employees have the option to reimburse expenses related to internet, phone, books, newspapers, magazines, car lease and maintenance, leave travel allowance, health club expenses and driver salary, among others. The employee can select this option by visiting their HR Portal.
Now, let’s understand how the reimbursement model works. To claim one, you need to present documents related to that expense like bills to your company. Tax can be saved on the actual value of the expense, or the value allotted to this head, as mentioned in salary, whichever is less. The reimbursement amount is deducted from the salary, which automatically reduces the income, and hence, the tax payable on it.
Let’s understand this through an example. Say Alok earns Rs 10,00,000 annually. The company allots Rs 26,400 for food coupons, Rs 1,20,000 for driver salary, Rs 32,400 for vehicle maintenance or fuel expenses, Rs 24,000 as health club reimbursement and Rs 18,000 as internet reimbursement. If he opts for all these flexi components, which amount to Rs 2,20,800, his income will be reduced to Rs 7,79,200
According to the tax calculator of bank bazaar, if Alok claims deductions worth Rs 1,50,000 under section 80C, which will include his contribution to EPF, his total taxable income will be reduced to Rs 6,31,000. If he does not opt for reimbursements, the total taxable salary will stand at Rs 8,50,000. After claiming a standard deduction of Rs 50,000, Alok will be liable to pay Rs 30,000 in taxes. However, if he does not include flexi benefits, he will end up paying Rs 75,400 in taxes. All in all, he will end up paying Rs 45,000 more in taxes.
Other components include EPF, NPS, Gratuity, Insurance premium and variable pay. While contributions towards EPF, NPS and insurance premiums are tax free, the amount received as variable pay is subject to taxes.
If, like Alok, you have the option to take flexi benefits, then do so immediately. Many people do not opt for these benefits fearing paperwork or reduction of in hand salary. This isn’t right, because if you attach the bills and claim reimbursement, you will receive this money back. Moreover, no tax will be levied on them. If you don’t opt for flexi components, all of these components will be taxed. But remember, all companies have different salary structures. You can avail flexi benefits only if your company gives you an option to do so. You can contact your company HR for more details.
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