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Sunday, July 10, 2016

Restructure the basic Salary

The basic, probably the chunk of your salary, includes basic pay, HRA and often dearness (DA) and special allowance. Apart from HRA, every component is fully taxable. An easy way to reduce tax liability is to cut basic pay and adjust it as perks or long-term benefits. If you have a special allowance component, adjust it as a tax-free component.However, you need to weigh the pros and cons before tinkering with your basic. Your HRA (usually, 40-50% of the basic) and EPF (12% of the basic) are directly linked to the basic. Also, if you want to apply for, say, a car or home loan in the short term, you may not want the basic pay to be too low.

A higher basic would mean a higher HRA, DA and provident fund contributions. The DA will be taxable and the PF contributions are tax-free, but it will reduce your take-home salary. On the other hand, reducing the basic pay will mean a lower contribution towards retiral benefits, which may not be good in the long run.

Also, if you live in a rented house, recalculate your tax benefits on HRA before lowering the basic. The idea, is to have an HRA as close to the actual rent you pay, which should ideally be a figure close to the HRA you receive plus 10% of you basic. Choose one of the following two ways to restructure the salary with maximum tax benefits.

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