How to Structure your Salary as per New Tax Regime?

How to Structure your Salary as per New Tax Regime?

It’s a time of the year that keeps you busy planning your taxes. Everyone looks for different ways to save tax. Now with the introduction of a new tax regime, there is also confusion in choosing between two of these tax regimes – the new tax regime and the old tax regime to save more tax. However, you may not usually pay much attention to the salary structure and its impact on tax savings. Do you? Even while opting for new employment and negotiating the salary, the focus is always more on the CTC part rather than the structure of salary. Optimising your salary structure is extremely important to reduce tax outgo. Let’s see how you can optimise your salary from a tax perspective and as per the new tax regime.

The Union Budget 2020 has introduced a new income tax regime under Section 115BAC of the Income Tax Act, 1961 which gives you an option to pay lower income tax rates by forgoing most of the deductions and exemptions. The new tax regime has lower rates in comparison to the old tax regime.

Budget 2022 have made further changes to reduce number of slabs available under new regime:

Let’s take a look at the tax slabs:

The government has given an option to choose between a new tax regime and an old tax regime as per the convenience. In case you are opting for a new tax regime, you need to inform your employer in writing or by submitting a specific declaration. In case you fail to inform, TDS will be deducted by the employer as per the old tax regime.  On your salary, tax is deducted at source as per the applicable tax slab rates on your income. Though rates are low in the new tax regime, many exemptions and deductions are not allowed. Apart from deductions that you can claim under Chapter VI-A of the Income Tax Act, 1961 on your tax-saving investments and other eligible expenditures and home loan interest, etc. you also need to forgo the exemptions and deductions that you get eligible to claim as a salaried individual on perquisites and allowance. Following are the exemptions and deductions that are not allowed under the new tax regime –

• Leave travel allowance (LTA)
• Professional tax
• House rent allowance (HRA)
• Children education allowance
• Relocation allowance
• Helper allowance
• Other special allowances

However, the following exemptions and deductions are allowed under the new tax regime

• Transport allowance for a specially-abled person
• The compensation received for the cost incurred on travel as a part of employment
• Conveyance allowance 
• Daily allowance

The new tax regime allows a deduction for employer contribution towards NPS (National Pension System) and also for new employment (80JJAA). 

Impact of salary structure on taxation

Salary structure has a major impact on your tax aspect. In the old tax regime, some of the components of salary such as leave travel allowance and house rent allowance, etc. were allowed for claiming the deductions to bring down your taxable income. On the other hand, the new tax regime does not allow any such deductions and exemptions. Hence, salary structure may hugely impact your tax outgo when you opt for a new tax regime. Before we understand the tax perspective, let’s know some of the major components of the salary –

• Basic salary – This is your base income comprising 30% to 50% of your total salary. Basic salary is completely taxable in both regimes.
• Allowance – There are various allowances your employer pays depending on your designation or role. This includes house rent allowance (HRA), leave travel allowance (LTA), medical allowance, dearness allowance, conveyance allowance and other special allowances. This can be fully taxable or partially taxable depending on the allowance type your employer includes in your salary.
• Employee provident fund – This is an employee benefits scheme to which you and your employer contribute on a monthly basis. This is basically for long-term savings. An employer’s contribution of up to 12% of salary is exempted from tax. Anything more than 12% is taxable in the hands of employees. This tax rule remains the same in both the old tax regime and the new tax regime.
• Perquisites: Monetary benefits of perquisites offered by your employer such as rent-free accommodation, car for personal usage etc, are added and become a taxable part of your salary.
• Professional tax: It is a tax levied on income earned by salaried individuals by the state government at a prescribed rate. Professional tax is not allowed for deduction under the new tax regime.

Under the new tax regime which is applicable for the financial year 2020-21, some of the components of your salary such as house rent allowance (HRA), medical allowance, leave travel allowance (LTA), etc, will not be of any help in reducing your taxable income. As the option is given to choose between the old tax regime and new tax regime to salaried individuals, giving an option to choose between two salary structures could get a complicated aspect for employers also. The Income Tax Department has also given an option to switch between a new tax regime and an old tax regime every year depending upon the convenience. This is only applicable to salaried individuals.

Though the applicable income tax rates are on the lower side, restructuring of your salary may further help you save tax under the new tax regime. Restructuring of salary by reducing the allowance part may help you from an income tax perspective under the new tax regime.