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Optimum Salary structure- Minimum Tax Liability

Mohan is a 26-year-old management graduate recruited by a startup company in Mumbai recently. The company has offered him a CTC package of Rs 10 lakh. However, the company has given him the flexibility to structure the salary part of his CTC as per his requirements. How should Mohan structure his salary so as to derive maximum benefit?

Mohan needs to consider the following outflows while deciding his CTC structure:

  • An annual rent payment of Rs 2 lakh
  • An annual payment of Rs 1 lakh towards interest on his education loan.

What will Mohan achieve by structuring his salary?

By structuring his salary Mohan can either reduce his overall tax liability or maximise his in-hand salary.

How can Mohan minimise his taxes?

 Allocation of CTC

Let us now look at some possible breakups of Mohan’s CTC and the tax he will be paying on each of them:

We assume that Mohan does not have any children and that he does not use a car.

Basic Salary as a % of CTC 60% 74.5% 80%
Basic salary (Rs) 6,00,000 7,45,000 800,000
House rent allowance (Rs) (Balancing figure) 2,87,800 1,25,400 63,800
Transport reimbursement (Rs)( To the extent exempt 800*12) 9,600 9,600 9,600
Lunch coupons (Rs) (To the extent exempt 26*50*12) 15,600 15,600 15,600
Medical reimbursement (Rs) (To the extent exempt) 15,000 15,000 15,000
Company’s PF contribution (Rs) (12% of Basic) 72,000 89,400 96,000
Total Gross Salary (Rs) 10,00,000 10,00,000 1,000,000
Deductions      
Employee contribution to PF (80C) (Rs) 72,000 89,400 96,000
Interest repayment on education loan (80E) (Rs) 1,00,000 1,00,000 100,000
       
Unutilised deductions u/s 80C (Rs) 28,000 10,600 4,000
 Tax exemption on HRA (Rs) 1,40,000 1,25,400 63,800
 Taxable HRA (Rs) 1,47,800 0 0

 

 

Computation of tax

 

  60% 74.5% 80%
Basic salary (Rs) 6,00,000 7,45,000 800,000
Taxable House rent allowance (Rs) 147800    
Transport reimbursement (Rs)- Exempt upto 9600      
Lunch coupons (Rs) Exempt upto 50*26*12      
Medical reimbursement (Rs) Exempt upto 15000      
Company’s PF contribution (Rs) exempt upto 12% Salary      
Income from Salry 747800 745000 800000
Deductions      
Employee contribution to PF (80C) (Rs) 72,000 89,400 96,000
Interest repayment on education loan (80E) (Rs) 1,00,000 1,00,000 100,000
Net Income 575800 555600 604000
 Income tax Liabilty  46510  44410 54380

We see that Mohan’s tax liability is minimal when the basic salary is 74.5 per cent of CTC. This is the optimal percentage at which Mohan’s tax liability is minimum. As we decrease or increase the basic salary from this optimal percentage, the tax liability increases. Optimal percentage is the percentage at which Mohan is getting the maximum tax benefit from exemption under HRA and deductions under Section 80C combined.

 

 

About CA Karishma

I am a Chartered Accountant by profession and an avid teacher. Writing is my hobby and this blog is a platform to share knowledge and interact with prospective Chartered Accountants. I locate my work at the intersection of Chartered accountancy & education. I teach among others, Taxation at Tapasya Academy for CA, one of the premier institute for Chartered Accountancy course in Andhra Pradesh.

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4 comments

  1. Good One….keep blogging & sharing ur opinions

  2. koi bhi CTC ke liye 74.5% is applicable??

  3. Hi,
    Under 60% how did you arrive at the tax exemption on HRA 140000 figure ?

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