What is Salary Restructuring?
Salary restructuring is a process through which the various components within the CTC (Cost to Company) of an individual can be added or removed to reduce the overall tax burden. For example, salary components like HRA, LTA, PPF contribution, etc, can be claimed as a deduction under the Income Tax Act. Individuals can reduce their tax liability by adding more such tax-saving options to their salary and restructuring their CTC.
How can Salary Restructuring Minimize Your Tax Burden?
An individual’s salary consists of various components, with the basic salary being the most important. It forms the basis for calculating key tax-saving elements such as House Rent Allowance (HRA) and Employee Provident Fund (EPF).
Since the basic salary is always taxable, it is recommended to limit it to no more than 40% of the CTC. Here are the most efficient ways to restructure your salary to minimize your tax burden -
Major Reimbursements and Their Limits for Salaried Employees
| Pay Head |
Details |
Typical Limit |
| House Rent Allowance (HRA) |
Provided for paying rent. Tax exemption depends on rent paid, salary, and location. |
Based on salary and rent paid, no fixed limit. |
| Leave Travel Allowance (LTA) |
Covers travel expenses for vacations within India. Requires proof of travel. |
Limited to actual travel expenses: 2 trips in 4 years. |
| Medical Reimbursement |
Covers medical expenses for self and dependents. Requires submission of bills. |
Up to ₹15,000 (if applicable, as per old tax regime). |
| Meal Vouchers/Allowance |
Offered as part of the salary to cover food expenses. |
₹50 per meal (approx. ₹2,500 per month). |
| Conveyance Allowance |
Provided for daily commuting expenses. |
₹1,600 per month (if applicable). |
| Children’s Education Allowance |
Tax-exempt allowance for children’s education expenses. |
₹100 per month per child (up to 2 children). |
| Professional Development Allowance |
Covers expenses for skill enhancement or job-related training. |
Actual expenses; company-specific policies. |
| Uniform Allowance |
Provided to cover costs of maintaining uniforms required for work. |
Actual expenses; subject to company policy. |
| Telephone/Internet Reimbursement |
Covers expenses for official communication services. |
Actual bills, as per company policy. |
Major Tax-saving Allowances for Salaried Employees
House Rent Allowance (HRA):
- Partially exempt if the employee resides in a rented house.
-
The exemption amount is based on the lesser of:
- Actual HRA received.
- Rent paid minus 10% of salary.
- 50% of salary if living in a metro city (40% for non-metro cities).
Child Education Allowance:
- Exempt up to ₹100 per month per child.
- Applicable for a maximum of 2 children.
Hostel Expenditure Allowance:
- Exempt up to ₹300 per month per child.
- Applicable for up to 2 children.
Leave Travel Allowance (LTA):
- Exemption can be claimed for travel expenses within India during vacations.
- Subject to specific limits and conditions under the Income Tax Act, 1961.
- Available for 2 journeys in a block of 4 calendar years.
Meal Coupon Allowance:
- Exempt based on meals provided during working days.
- Monthly exemption: ₹2,200 (22 working days) or ₹2,600 (26 working days).
- Annual exemption: ₹26,400 or ₹31,200, depending on the calculation method.
Note: To claim these exemptions, employees must provide valid proof (e.g., rent receipts, travel tickets, or bills) and adhere to the conditions specified under the Income Tax Act.
Salary Restructuring Tips to Minimize Tax Liability
There are various components of salary. The Income Tax Act allows individuals to claim a deduction or exemption for various salary components like HRA, LTA, and PPF. Here is a list of the various salary components that you can use to restructure your salary -
- Basic Salary and Allowances:
While the basic salary is taxable, allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and medical allowances can be tax-free within specified limits. To claim these exemptions, ensure you have valid proof and meet the conditions set by the Income Tax Department.
- Tax-Exempt Investments:
Invest in tax-saving options like EPF, PPF, NSC, and ELSS to claim deductions under Section 80C of the Income Tax Act. These investments not only reduce your taxable income but also help build a secure financial future.
- Salary Restructuring:
Work with your employer to restructure your salary to include more tax-free allowances. For instance, opt for a higher HRA if you pay rent or request meal and travel allowances to replace taxable components.
- Flexible Benefits Plans:
Leverage flexible benefit plans offered by employers to include tax-free components like medical insurance, meal vouchers, or car allowances tailored to your needs.
- Bonuses and Perquisites:
Negotiate for performance-based bonuses and non-monetary benefits, such as company-provided accommodation, vehicles, or memberships. While these have specific tax implications, they can help minimize tax liability.
- Home Loan Interest:
If you have a home loan, claim deductions for the interest paid under Section 24 of the Income Tax Act. This can substantially lower your taxable income.
- NPS and Section 80CCD Benefits:
Contributions to the National Pension System (NPS) provide additional deductions under Section 80CCD. Both employee and employer contributions can be claimed, offering long-term savings and tax relief.
Taxable Salary Calculation on Salary Example
The example below shows how restructuring your salary to add other components like HRA, LTA, etc., can help you maximize tax savings.
| Taxable annual salary |
Salary income (in INR) |
Tax exemption (in INR) |
Taxable income (in INR) |
| Basic pay |
8,00,000 |
- |
8,00,000 |
| HRA |
4,00,000 (50% of basic salary) |
200,000 (280,000-80,000: Actual rent paid less 10% of basic salary) |
200,000 |
| Transport Allowance |
96,000 |
19,200 (Rs 1,600 per month) |
76,800 |
| Special Allowances |
60,000 |
- |
60,000 |
| Leave Travel Allowance |
20,000 |
12,000 |
8,000 |
| Medical Bills |
15,000 |
15,000 |
- |
| Gross Total |
13,91,000 |
2,46,200 |
11,44,800 |
In the above example, it is clear how including tax-saving components in your salary can reduce your taxable salary and overall tax liability. Therefore, restructuring your salary can help you save on taxes.
Hope this guide helped you gain some insight on how you can restructure your CTC to save taxes. If you are still confused or need help, you can simply get in touch with our experts, who will help you achieve maximum possible tax savings. Book an online CA now!
