Best Salary Structure to save tax in India (2023)

Best Salary Structure to save tax in India (1)


Salaried people in India are most concerned about the income tax implications because they receive their salary after the deduction of TDS and they find themselves helpless on this issue. Every salaried taxpayer has only one question “How could he/she save income tax legitimately?”. The answer to this question is a proper salary structure along with availing maximum deductions available under the Income Tax Act. The salaried person should plan his/her salary structure in such a manner that he/she could reduce the tax burden legitimately. This article elaborates on various components of salary along with income tax implications associated with them. Let’s read…

What are the tax rates for salaried persons under Income Tax?

The salaries taxpayers can pay income tax under the old tax regime and new tax regime as per the Income Tax Act. The taxpayer has to opt for his preferred tax regime while e-filing ITR on the income tax portal. The tax rates under the new tax regime are lower as compared to the old tax regime but it is to be kept in mind that if you are opting for the new tax regime, you will not be eligible to get the benefit of various deductions and exemptions allowed under the Income Tax Act

Learn More on New Tax Regime under section 115BAC

What are the taxable components of the salary?

Salary derived by any employee consists of various components like basic pay, gratuity, bonus, commission, perquisites, leave encashment, PF, HRA, city compensatory allowance, daily allowance, etc. These all components are taxable under the Income Tax Act but these also carry exemptions in certain cases. The important thing for you is to identify those salary components which carry exemptions under the Income Tax Act so as to plan salary structure accordingly.

Now we will have a detailed analysis of various components of salary structure in the table below:

Nature of Salary Component


Basic Salary

100% Taxable

Dearness Allowance

100% Taxable

Performance Bonus/ Commission

100% Taxable

House Rent Allowance (HRA)

The exemption towards HRA is available only in case you are living in rented accommodation. You will not get a 100% exemption towards HRA. The exemption towards HRA will be allowed as least of the following:

  • Actual HRA Received
  • 50% of salary (40% in case of non-metro cities)
  • Rent Paid in excess of 10% of salary

Leave Salary during employment

100% Taxable

Salary Arrears

100% Taxable, however, you can avail tax relief under section 89

Learn about: How to claim tax relief on salary arrears

Overtime Pay/ Allowance

100% Taxable

Children Education Allowance

Children's Education Allowance will be exempted as the lower of:

  • Rs. 100 per month per child (maximum 2 children) i.e. Rs. 1200 per child per year
  • Actual Allowance Received

Note: If the children of the employee get an education in the school run by the employer, the whole education expenditure is exempt. Therefore, this amount will be a part of the CTC of the employee but will not be considered for taxation purposes.

Food facility or Food vouchers

100% Tax-Free till Rs. 50 per meal

Note: Some employers provide food coupons like “Sodexo” which can be used as payment at various food joints. Rs. 50 per coupon per meal shall be exempt.

Transport Allowance for commuting between the place of residence and the place of duty

100% Taxable, however in case of handicapped employees- exempt up to Rs. 3200 per month

Hostel Allowance

Hostel Allowance will be exempted as lower of:

  • Rs. 300 per child (Maximum 2 children) per month
  • Actual amount received

Medical Allowance

100% Taxable

City Compensatory Allowance

100% Taxable

Special Allowance

100% Taxable

Uniform Allowance

Exempt as the lower of:

  • Uniform Allowance Received
  • Actual amount spent

Academic Allowance

Granted for encouraging academic, research, and training

Exempt as the lower of:

  • Actual Allowance Received
  • The actual amount spent by the employee

Helper Allowance

Granted to meet cost incurred on a helper for the performance of duties

Exempt as the lower of:

  • Actual Allowance Received
  • Actual expenditure incurred

Travelling Allowance/ Daily Allowance

Granted to meet the cost of travel/ daily charges on tour or transfer of duty

T.A./D.A. received by the employee shall be exempted to the extent of expenditure incurred by the employee towards travel/ daily charges

Conveyance Allowance

Granted to meet expenditure on conveyance in performance of duties of employment

Exempted to the extent of actual expenditure incurred

Cab or Transport Facility for employees

If the employer provides a transport facility through a cab/ bus to the employee for to and fro to the office, the amount spent by the employer in providing the service will be a part of the CTC but the value of the perquisite for the taxation purpose will be nil.

Health Club Facility to employees

If the employer provides a health club/ gym facility to all employees, then the value of the perquisite shall be ‘Nil’ for taxation purposes.

Use of laptops and computers

100% tax-free; the value of perquisite shall be taken as ‘Nil’ for taxation purposes

Moveable assets other than laptops and computers

The value of the perquisite shall be taken as follows for the taxation purposes:

  • If owned by the employer: 10% per annum of the actual cost of the asset
  • If rented by the employer: Amount of rent actually paid less amount recovered from the employee.

Medical facility/ Insurance for employees

  • The value of medical treatment provided to an employee or to any member of his family in any hospital maintained by the employer shall not be taxable as a perquisite.
  • Insurance premium towards the health of the employees under a scheme approved by the Central Government or IRDA

Phone & Broadband Bills Reimbursement to employees

100% tax-free to the extent of actual expenditure incurred by the employee

Motor Car facility with or without a driver to employees

100% tax-free up to Rs. 1800 per month for the car up to 1600CC (Rs. 2400 per month in case of the car above 1600CC) plus Rs. 900 every month for the driver’s salary

Cash Gift to employees

100% taxable in the hands of the employee

Gifts other than cash gifts or gift vouchers or tokens to employees

Tax-Free up to Rs. 5,000

Life Insurance Premium paid by the employer

The actual amount paid by the employer will be treated as a taxable perquisite.

Gratuity during employment

100% Taxable

Contribution to EPF by the employer

  • Employer’s contribution to PF up to 12% of the Salary (Basic + DA) is exempted from tax.
  • There is a further capping of Rs. 7,50,000 on employer’s contribution to PF, superannuation fund, and NPS in aggregate.
  • Any contribution exceeding Rs. 7,50,000 by the employer will be a taxable perquisite.

In addition to structuring the salary package in a proper manner, it is also important to take benefits of various deductions allowed by the Income Tax Act. Some of these deductions are as follows:

Deductions under Income Tax Act


Nature of Deduction


A maximum deduction of an amount up to Rs. 1,50,000 is allowed under section 80C on an actual payment basis in any of the following:

  • Life Insurance Premium
  • Public Provident Fund
  • National Savings Certificate
  • 5 Year’s Tax Saver FD
  • Tuition Fees of children
  • ELSS Funds
  • Tax-saver Mutual Funds
  • NPS
  • ULIP
  • Sukanya Samridhi Yojana
  • PF contribution
  • Housing Loan Principal


Deduction for investment in NPS to the extent of additional Rs. 50,000 over & above Rs. 1,50,000 deduction u/s 80C


Health Insurance Premium paid towards self, family, and parents.

For Details Read: Deduction for Medical Insurance Premium under section 80D


Interest paid on education loan is deductible from your salary without any ceiling


Donations paid to eligible trusts or charitable organizations are deductible to the extent of 50% to 100% while calculating taxable income

Read More: Deduction under section 80G


Donations made to a political party or electoral trust are 100% deductible from your taxable income

Read More: Deduction under section 80GGC


If you are not getting HRA but you are paying rent for residential accommodation, you are eligible to get a deduction under section 80GG up to an amount of Rs. 60,000.

Read More: Deduction under section 80GG


Interest paid towards housing loan for the self-occupied house is deductible up to Rs. 2 lakhs while income tax return filing

Note: It is important to note that deductions under sections 80C to 80U are allowed only if ITR filing has been done by the taxpayer. In case no ITR has been filed, you will not be eligible to claim any such deductions.

Conclusion: Salaried persons should structure their salary in accordance with the above exemptions available under the law. Further, they should ensure appropriate investments to get the maximum deduction for which he/she is eligible. Also, a comparative analysis of tax under the old regime and new regime is important.

Read Related Articles:

How to calculate Tax liability in Debt Mutual Funds

What is Form-16: Everything you should know about

How to File ITR-1 Sahaj online

Tax-Free Perquisites for employees in India

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