Understand your Salary Structure & Save on Income Tax - Software Professionals

Hi all, 

Many of the young Software Professionals find it really difficult to understand the complex Salary structure and payslips, they are receiving every month. Months pass and they see this IT deduction in their salary slip, but they are not able to do anything concrete in order to save this. 

In this post, I will try to explain about the planning for Income Tax saving in Software Industry. I hope that this post will help some of the new guys entering the Software industry to save their hard earned money. 

Understanding your Salary Slip:

There are some common terms which appear in your salary slip. You need to understand what do these mean.

1. Fixed Components - These are the components which you would be getting surely per month. E.g. Basic, HRA, Traveling Allowance etc. 
2. Flexible Components - Yearly bonus, performance linked portion of your salary etc. 
3. Modifiable Component - Most of the companies nowadays allow you to modify or distribute a part of your salary in the way which suits you. E.g. In this component if you have 10,000 rupees, then you can decide how much should be your HRA in this, how much should be food coupons, medical sundry etc. etc. 

OK, now lets go ahead and save Tax (let's try as much as possible). First of all, understand very clearly that after a certain salary limit, you won't be able to escape 100% from Income Tax, so it is best to know the rules and try to save as much as possible in the right way. 

Here are the quick ways to save your Income tax - 

1. Section 80(c) - Most of you would be knowing about this section. The limit for exemption in this section is 1 Lakh per financial year. Life Insurance, Provident Fund (PF), Public Provident Fund (PPF), New Pension Scheme (NPS) etc. come under this section. For a starting professional, my suggestion is to try and save this 1 Lakh limit surely, if you are above the package of 3.5 Lakh per annum. Your company would surely be deducting PF every month from your salary; approximate yearly contribution with that data. You can open a PPF account in any SBI, and put some money in that every year. What you put in PPF cannot be withdrawn for quite sometime. Take some insurance, and the premium for that also can be claimed under this section. For person to be really prepared for risks, he should have a Term Insurance, an Accidental Insurance, a Mediclaim Insurance. Details of insurance would be covered in a separate post. 
2. HRA Exemption - You can claim the rent you are paying as exemption. There are some complex rules based on the class of cities you are living in. But, what you need to do is, declare the rent you are paying every month by submitting a receipt and Rental agreement with your organization. The rent paid would be directly exempted, as per the standard calculation. But, HRA cannot exceed 60% of Basic salary.
   
3. Traveling Allowance - You can claim maximum 800 per month deduction in this category. That means 9600 per year. 
4. Mediclaim Insurance can be claimed under a different section upto Rs. 30,000/- per year.
5. Food Coupons - You can take maximum upto Rs. 3,000/- per month as Food Coupons, or in your Food Prepaid Card. This money shall be non-taxable. i.e. Max 36,000 could be made non-taxable this way. Is Food Coupon, really a good option or not, shall be covered in a separate post. But, those who are anyways eating out, can avail this surely.
6. 20,000 rupees per year is allowed to be exempted under Rajeev Gandhi Equity Linked Scheme, though I am not a big fan of the same. 
7. Initial Limit - Upto 2 Lakh rupees income is non-taxable. 
8. There are other things like Buying home and getting exemption on Home Loan, but that i do not want to cover here. Because home loan and related things, are altogether a different topic to be covered, and I shall be doing it soon in a new post. 

Now, for an example, let's see a quick calculation. A person saves in the following way:

• PF                                 -   30,000
• PPF                               -   30,000
• NPS                              -   10,000
• Term Insurance              -   10,000
• Accidental Insurance      -     5,000
• LIC Plan                        -    15,000
• Total (Section 80C)        - 1,00,000      A
• Mediclaim Insurance     -      5,000      B
• Food Coupons             -    36,000      C
• Traveling Allowance      -      9,600      D
• HRA Exemption            -   1,20,000     E

Even with the very basic planning as shown above, you can easily save (A+B+C+D+E) Rs. 2,70,600/- per year from coming under your Taxable Income. Above this you have the limit of Rs. 2,00,000/ - which is non-taxable. Hence, upto a package of 4.7 or even upto 5 Lakh p.a., you can save yourself from paying even a single penny as Income Tax. 

I shall try to cover each section in more detail in my coming posts, but this post should be helpful in doing the initial declaration in your salary structure, so that your Income Tax deduction stops right now, as there is no fun in paying the IT first, and then taking it back as Income Tax Return. 

Remain to subscribed to understand more, about saving your taxes in simple ways. See YOU :)