TAX and savings

Clueless about salary structure? What’s LTA, HRA? How can I save my tax? I don’t even know how much is my taxable income.

Do you have the same questions? Look no further. ChotaNarad is back doing what it does best- helping the people from campus in settling down in the corporate world. Here it comes for all you finance-ignorant souls. Breezing you through the understanding of salary structure and tax-savings..



Hello Friends. I still remember when I received a mail from the finance deptt of my company asking to submit all the investment declarations and proofs. I was clueless as I didn’t know anything about taxes, investment and reimbursement etc. But I researched a lot and here I am sharing with you guys the basics of tax declaration and savings.


I know it’s a bit tough to plan your Tax Savings so as to save your Income Tax as much as possible especially for people who’ve just jumped in from the colleges.


Here is some insight to solve this riddle.

I will explain the salary structure first, and then with the help of an example will try to make it clearer.

The Basic components of your Gross salary would be (not talking about CTC here as it includes Gratuity and Medical premium and similar things):


1) Basic salary

2) House Rent allowance (HRA)

3) Reimbursements (like Medical, petrol and others depending on the Company)

4) LTA (Leave Travel Allowance)

5) Provident Fund (that your company deducts directly from Salary)

6) Rest is taken as Adhoc (= Gross - sum of previous 5 components)


Basic salary and adhoc are Taxable whereas other components like HRA, LTA & Reimbursements are Non Taxable provided you claim them through proper means (Rent Receipt and Bills) and PF is part of your Investments (max 1 lac).

HRA

Another important thing that people find hard to understand is claiming HRA, because to claim the HRA amount (as mentioned in the Package of the company), you need to show bills for HRA amount + 10% of Basic salary.

for e.g.

HRA mentioned in the Package is 1,00,000 and Basic salary is 1,50,000, then to claim entire 1,00,000 you need to show rent receipts amounting 1,00,000 + 15,000 (10% of Basic) annually. We can divide this by 12 to get Monthly rental.


Lets take an example now, lets say your Gross is Rs 3,00,000 and the structure is as follows:


Basic Salary = 1,50,000 Rs

HRA = 75,000 Rs

Reimbursements = 36,000 Rs

LTA = 24,000 Rs

PF = 9,600 Rs

Adhoc (rest) = 5,400 Rs

____________________

Gross Total = 3,00,000 Rs




Income Tax slab (for the year 2007-08) is like this:

Range TAX

1 - 1,10,000 (for Male & 1,35,000 for Female) = NIL

1,10,000 - 1,50,000 @ 10% = 4,000

1,50,000 - 2,50,000 @ 20% = 20,000

2,51,000 and above @ 30%


Now to make your Income Tax zero, what we need:


1) Claim complete HRA amount i.e. 75,000 taking into consideration the explanation on HRA above.

2) Submit appropriate Bills for Reimbursements like Medical, Telephone & Others based on your Company structure.

3) Same is applicable for LTA (Travel Bills).

3) Provident Fund: Generally company Pays 800 p/m that amounts to 9,600 annually, it becomes part of your 1 Lac Reimbursements.


Till now we have saved 75,00,000 + 36,000 + 24,000 + 1,10,000 (exempted already) = 2,45,000.

So now to make Tax zero, you need to invest the rest i.e. 3,00,000 - 2,45,000 = 55,000 as your Savings. But Actually only 55,000 – 9,600 = 45,400.


Same Basics you can follow if your package is higher