Cost to Company (CTC) is the total salary that is agreed upon as an employee’s compensation. Net salary is the amount of money that comes in his or her bank account post taxation. One should ensure that the various perks, allowances available are used judiciously to maximize the net salary.
The magical three words for most persons employed in the corporate world are ‘Salary is credited’. But there is a big difference in the compensation mentioned in your appointment letter and the amount that finally gets credited in your bank account and some of us get a shock looking at the difference. Therefore it is very important to understand the salary structure and also ensure that at the time of joining a company, one structures his or her salary along with the HR department to maximize the take home pay (net amount that gets credited to the bank account).
We list down some ways to maximize salary and minimize tax liability:
Medical Allowance: Medical Allowance up to Rs. 15000 is allowed as deduction from the salary amount that is used for tax computation provided bills for the amount are submitted to the employer.
Telephone Reimbursement: Amount paid towards telephone bills are exempt from tax up to a maximum of Rs. 12000. You will of course have to submit the relevant bills to your employer
LTA: LTA stands for Leave Travel Allowance. The Income-Tax department allows you to claim tax exemption on the amount spent on travel for you and your family twice in a block of four calendar years. It is a good tax saving device for salaried employees. Read our article on LTA to understand it better.
Food Allowance Coupons: Food Allowance coupons are a good way to escape the tax net, as the amount paid in this manner is not taxable. Nowadays of course some of the stores have a surcharge on the bill if coupons are used to pay but the coupons are redeemable freely at most restaurants.
HRA: House Rent Allowance (HRA) is another component of your salary, which will help you lower your tax liability if you stay in a rented house. The amount exempt from tax is the lower of the following: (a) Actual HRA received (b)50% of your Basic Salary if you live in the metros or 40% of Basic Salary if you live elsewhere (c) Rent paid in excess of 10% of Basic Salary.
Perks like transport, driver, club memberships: Companies offer perks like driver facility, transport to and from office, club memberships, magazine subscriptions. Depending on your requirements and interest levels, you can have such perks as part of your gross salary and this would be exempt from tax in your hands.
Superannuation Scheme: Senior level employees get the benefit of a superannuation scheme in which he or she makes a contribution and the amount exempt is up to Rs. 1 lakh.
It is important to ensure that one submits proper bills and does not misuse the facilities provided by the company.
Your employer may or may not be offering the above allowances and perks to you. Hence it is important to discuss with your HR department, take a look at your tax structure and the various salary components available from your company as part of the salary package and analyze if you have an optimum salary structure.