T A X P L A N N IN G F O R S A L A R

The scope of tax planning under the head "salaries" is very much limited as the assessee-
employee does not have much to say in the salary structure. However, a scheme of remuneration
which is just to both, the employer and employee, is a welcome step. Employer should frame the
salary structure of his employees so as to keep the tax incidence of his employees at lowest
possible point and the employee should plan to avail all tax concessions/exemption to minimise
the incidence of his tax. The following points may be noted in this context.
Advance of Salary
An employee should avoid taking advance of salary as it is taxable on receipts basis and may
increase the incidence of tax. Instead, the employer may be persuaded to give loan, adjustable
against future salary, thereby reducing the tax incidence of the employee. However, such loan
should not exceed Rs 20,000 to avoid chargeability of interest on loan facility.
Commutation of Pension
Pension is a recurring taxable income. Instead, if an employee gets it commuted, he may seek
exemption in respect of the commuted value [under Sec. 10(10A)]. In case of government
servants, the commuted value is fully exempt. In the case of other employees, it is partly exempt.
Excess of commuted value over exemption limit [under Sec. 10(10A)] is taxable, but the
assessee is entitled to relief [under Sec. 89(1)] in respect of such excess.
Change of Employment before 5 years Service under Recognised Provident Fund [Sec.
10(12), Rule 8 of Part A of the Fourth Schedule]
If an employee serving as a member of recognised provident fund seeks to make a change of his
employment before the expiry of 5 years, he is assessable on the accumulated balance becoming
payable to him. If under new employment, he is also to serve as a member of recognised
provident fund, it is advisable to get accumulated balance transferred from old employment to
new employment to reduce the incidence of tax.
Conversion of Unrecognised Fund into Recognised Fund
The employer may be persuaded to get the unrecognised fund converted into recognised fund.
This will avoid taxability of the accumulated balance in future.
Perquisite Value of Furniture [Rule 3(1)]
Where furnished house accommodation is provided by the employer to the employee, the
perquisite value of furniture is taxed at 10% p.a. of the original cost of the furniture owned by
the employer. If the furniture is hired, its perquisite value is the hire charges by the employer.
This increases the incidence of tax of the employee. As an alternative, the employer may grant
interest-free loan but not exceeding Rs 20,000 to the employee to purchase furniture. In that
event, nothing would be taxable on account of this perquisite. This will reduce the incidence of
tax of the concerned employee.
Tax Incidence of Perquisite/Allowance
Wherever it is optional for an employee to choose between perquisite and allowance, he should
analyze the tax incidence of the two. He should opt for a scheme which minimizes his tax
incidence. For example, medical allowance is fully taxable but reimbursement of medical
expenses of public hospitals is fully exempt-Reimbursement of private nursing home is also
exempt up to Rs 15,000. Thus, the scheme of reimbursement is better than the scheme of
medical allowance.
Similarly, where income under the head "salaries" excluding the value of non-monetary
perquisites, does not exceed Rs 50,000, the perquisites under Sec. 17(2)(iii) will not be charged
to tax. Thus, the employee should opt for non-monetary benefits in such cases to minimise the
incidence of tax.
Leave Travel Concession vs. Leave Travel Allowance
Leave travel allowance is fully taxable even if it is entirely spent. Instead, if travelling expenses
are reimbursed as per scheme of Sec. 10(5), it is fully exempt. Therefore, an employee should
opt for leave travel concession.
Gratuity
Exemption in respect of gratuity is available when it is paid to an employee (i) on his retirement;
or (ii) on his becoming incapacitated prior to retirement or on termination of his employment; or
(iii) to legal heir if the employee dies. Thus, receipt of gratuity should be avoided while in
service.
Where an employee is serving with more than one employer and he has availed full exemption
limit of Rs 3, 50,000 at the time of retirement from one employer, he should avoid the receipt of
gratuity from other employers as it is fully taxable. Instead, he should persuade the employer to
increase his share to the provident fund. If the fund happens to be recognised and the employee
has served for 5 years, the payment of accumulated balance from recognised fund is fully
exempt.
Surrender of the Facility/Perquisite if not intended to be Used
Where a house accommodation is provided to the employee, its value as per rules is always
taxable even if house is not actually occupied by the assessee [CIT v. Bawa Singh Chauhan
(1984) 16 Taxman 180 (Del.). Thus, an employee is advised to surrender the perquisite/facility
before the income accrues to him to avoid tax on notional income.
Saving and Investments
If an employee has not exhausted the full permissible deduction under Sec. 80C, he should either
increase I contribution to approved savings or explore investment opportunities under Sec.
80CCG and Sec. 80CCD reduce his tax incidence.
Pay Structure
The employer may bifurcate the salary into exempted perquisites and allowances. Bifurcation of
salary structure into tax-free perquisites and allowances which are wholly exempt or partially
exempt will help to reduce the tax incidence of the employees with no extra cost to the employer.
Thus, the employer may bifurcate a part of the salary in the form of allowance which are exempt
under Sec. 10(14) (i) or (ii) or Sec. 10(13A).
The employer may also pay a part of the salary in the form of perquisite which are fully exempt
or which are valued at concessional rate.
D.A. or D.P. be Paid as Part of Salary
If the dearness allowance or dearness pay is made a part of basic salary, it will reduce tax
incidence in the hands of employee in respect of house-rent allowance, (Sec. 10(13A)-Rule 2A),
gratuity [Sec. 10(10A)], and commuted value of pension (Sec. 10(10A)].
Salary Earned Outside India
Where an employee, posted abroad, is covered under private employment, he should plan his
residential status as non-resident and remuneration earned outside India, should not be received
in India.
Relief under Sec. 89
If an employee gets salary of more than 12 months in one previous year, he should make a claim
of relief under Sec 89 of the Act. Relief can also be claimed in respect of gratuity received
during employment.
Claim of Exemption
Where any remuneration is exempt, the employee is advised to claim the exemption to avoid or
reduce incidence of tax. For example, remuneration of diplomatic personnel is exempt under
Sec. 10(6) (ii). Similarly, remuneration of an employee of a foreign enterprise for services
rendered in India may be exempt under Sec. 10(6)(vi). An employee is advised to claim such
exemption, whenever available.
Repayment of interest on Educational loan [Sec. 80E]
Repayment of interest on loan taken by an employee from approved financial corporation for his
higher education or for the purposes of higher education of his relative, is allowed as deduction
in computing total income under Sec. 80E. An employee may avail this benefit to reduce
incidence of tax.
Contribution under Pension Scheme [Sec. 80CCD]
Where an employee has made contribution under pension scheme approved by the Central
Government, he is entitled to claim deduction in respect of such contribution in computing his
total income. It will reduce incidence of tax.
Medical Expenditure [Sec. 80D/Sec. 80DD]
In computing total income of an individual/HUF, medical insurance premium paid out of taxable
income, by any mode other than cash, on the health of the assessee, wife, parent and dependent
children or expenditure incurred for medical treatment of a dependent is allowed to be deducted,
subject to the prescribed limit in this behalf. An employee may claim such deduction, if
applicable.