The Importance of Salary Structure
When it comes to tax-saving allowances, understanding your salary structure is crucial. According to chartered accountant Vijaykumar Puri, partner at VPRP & Co. Llp, the key is ensuring all allowances are properly structured in your salary. “The key is ensuring all allowances are properly structured in your salary,” he advised. Mint helps you understand exactly what documents are needed for each allowance.
House Rents and Home Loans
“The conditions to claim house rent allowance (HRA) exemption are detailed under Section 10(13A) of the Income Tax Act and can indeed be complex,” said Puri. “The amount eligible for tax exemption is the least of the following three components: actual HRA received; 50% of the salary if the taxpayer resides in a metro city (or 40% for non-metro cities); and the amount by which the rent paid annually exceeds 10% of the basic salary and dearness allowance.”
**Key Points:**
• Actual HRA received
• 50% of the salary if the taxpayer resides in a metro city (or 40% for non-metro cities)
• The amount by which the rent paid annually exceeds 10% of the basic salary and dearness allowance
Car Allowances
Car-related allowances can be a complex aspect. Employees typically receive a capped allowance of ₹1,800 per month, translating to about ₹21,600 annually. To claim this, you will need to maintain a meticulous record of your expenses, including original fuel bills and maintenance service receipts. “Car allowance exemptions depend on usage, ownership and documentation. For a car owned by the employee and used partly for official duties, exemption up to ₹1,800 per month (plus ₹900 for a driver) is allowed, provided it is supported by proper logs. In contrast, if the car is owned by the employer and used wholly for official purposes, the entire reimbursement is exempt from tax,” Puri explained. **Key Points:**
• Car allowance exemptions depend on usage, ownership and documentation
• For a car owned by an employee and used partly for official duties, exemption up to ₹1,800 per month (plus ₹900 for driver) is allowed
Leased Cars
As for leased cars, two primary scenarios emerge. In the first, the company takes a car on lease and provides it to the employee for official and potentially personal use. “When the company leases the car, the lease amount gets added to the employee’s CTC as a perquisite,” Puri said. This means the lease value becomes part of the taxable income, offering no direct tax advantage. Employees have to pay a fixed perquisite tax if they use the car for personal use as well. The monthly perquisite tax ranges from ₹1,800 to ₹2,400 depending on the engine capacity of the car leased. If the employee is also claiming reimbursement on the driver’s salary, an additional ₹900 is to be paid. **Key Points:**
• Lease amount gets added to the employee’s CTC as a perquisite
• Employee pays a fixed perquisite tax if they use the car for personal use
Communications Perks
Telephone and internet expenses can also be claimed with post-paid invoices. The National Pension System (NPS) presents an interesting tax-saving avenue, especially for those in higher tax brackets. “The employer’s contribution to the National Pension System (NPS) is exempt under both tax regimes, but the limits differ. For Central Government employees, contributions up to 14% of basic salary and dearness allowance (DA) are exempt even under the new tax regime,” Puri said. For other employees, the cap is 10% of basic plus DA under the old regime, and 14% under the new regime. **Key Points:**
• Employer’s contribution to the National Pension System (NPS) is exempt under both tax regimes
• Limits differ between tax regimes
Old vs New Tax Regimes
When selecting tax regimes, consider your specific circumstances. Let’s take the case of Mr. A, who earns ₹25 lakh annually. Over the course of a year, he invests ₹1,50,000 in tax-saving instruments like ELSS, PPF, or tax-saving fixed deposits under Section 80C. He also contributes ₹50,000 to the National Pension System (NPS), qualifying for an additional deduction under Section 80CCD(1B). On top of that, he claims ₹2,00,000 as home loan interest deduction under Section 24(b). His medical insurance premium of ₹25,000 for self and family gives him further tax relief under Section 80D. As part of his salary structure Mr. A also avails a car lease component through his employer, enabling him to claim tax-saving benefits worth ₹3,00,000. Additionally, he donates ₹150,000 to a registered charitable trust, which qualifies for deduction under Section 80G. Donations to charitable trusts approved under Section 80G typically qualify for a 50% deduction, while contributions to registered political parties under Section 80GGC are eligible for a 100% deduction, both subject to applicable conditions and limits. Together, all these deductions add up to ₹8,00,000—right at the breakeven point where the tax payable under the old and new regimes is nearly the same. If Mr. A manages to push his deductions even slightly beyond this point, whether through additional eligible investments or expenses, the old regime will be more tax-efficient. The new tax regime makes sense when your total deductions and exemptions are less than the breakeven point for your income level. It’s ideal for those with a simpler salary structure, fewer investments, or who prefer hassle-free, low-documentation tax filing. The goal is not just to save tax but also to ensure that these deductions are aligned with your financial goals. According to Puri, the key is to understand the nuances of tax-exempt allowances and ensure transparency in documentation to avoid any issues or penalties.