How To Structure Your Salary To Minimise Tax Burden

Imagine you are shopping for fruits. A fruit vendor sells ten apples for INR 200. You negotiate with him and get 13 apples for the same amount. You put the apples in a bag and go home. But when you open the bag at home, you find that six apples are missing because there was a hole in the bag. This is an analogy to understand how people negotiate their salaries in India. Many employees focus on getting a higher CTC when they negotiate with prospective employers. However, they do not focus on their tax outgo. It is important to understand how your salary is structured to maximise your take-home pay and reduce your taxes.

Let us find out how you can structure your salary to benefit from low tax.

Salary structure includes various components like:

  • Basic salary

    Your basic salary is generally anywhere between 40% and 50% of your Cost to Company (CTC). Your basic pay is taxable and hence, it is essential to determine how much of the basic salary makes up your CTC. This is a tricky task because a high basic salary means your tax liability can shoot up. However, going for maximum benefits can reduce your take-home pay. It is important to create a sufficient balance between these two when you design a tax-efficient salary structure.
    Senior employees generally fall under a higher tax bracket. At this stage in life, they prefer higher tax savings compared to a take-home salary. Hence, choosing a lower basic pay provides them with greater tax benefits. In contrast, if you are a junior employee, you may require a higher monthly payout. You can achieve this by going for a lower basic salary and opting for fixed allowances like telephone, medical reimbursement, and food allowance. This increases your take-home pay.
  • Allowances

    Allowances are financial benefits given over and beyond the basic pay to an employee. These financial benefits help to take care of various expenses incurred by the employee. Some of the most popular allowances include House Rent Allowance (HRA) and Leave Travel Allowance (LTA).

    House Rent Allowance - If you are a salaried employee and live in a rented house or apartment, you can claim HRA to decrease your tax outgo. However, if you do receive HRA and don’t live in a rented apartment, your HRA is taxable.

    Leave Travel Allowance - Salaried employees in India can avail exemptions on trips under LTA. But this is applicable only if you take a domestic trip with your spouse, dependent parents, brothers and sisters, and children. The number of children is limited to two, unless the birth after one surviving child has resulted in multiple births. You need to submit the bills of your travel expenditure to your employer to receive the exemption. Also, the exemption can be claimed only twice in a span of four years.
  • Perquisites

    Perquisites or perks are additional benefits provided by your employer based on your job or position. Perquisites can be provided either in cash or kind. This includes the provision of a car for personal use, or rent-free accommodation among other benefits. The Income Tax Act provides an exemption on certain perquisites if these are included as components in the salary structure.

    For example, the government waived off TDS on Employee Stock Options (ESOPs) or shares allotted by start-ups to their employees at the time of joining. However, tax is payable on exit which could either be at the time of leaving the organisation, sale to another party or after a period of 5 years from the date of allotment, whichever is earlier.
  • Retirement benefits

    This is a critical component in an individual’s salary structure. This portion of the salary is not payable to the employee immediately. Instead, it is part of the long-term savings plan to take care of your expenses after retirement.

    Saving more for your retirement has tax benefits. The Employee Provident Fund (EPF), for example, is a retirement scheme to help employees save a portion of their monthly income towards retirement. The Income Tax Act has various provisions to encourage people to contribute towards their retirement.

    Your contribution towards EPF is tax-deductible under Section 80C of the IT Act while your employer’s contribution is tax-free. In addition, the interest earned and the amount you withdraw (after the mandatory five years) is exempt from income tax. It is essential to identify how much you want to save for retirement because it has an impact on your take-home pay. Here, the employee has to contribute minimum required. Identify the correct ratio for these contributions based on your personal financial requirements.

    For example, if you fall in the higher tax bracket, you can choose to contribute more towards EPF. This additional contribution earns the same interest rate as EPF and provides better returns than traditional fixed income options like FD. Voluntary PF contributions of up to 5 lakh are tax-free. The limit was doubled from the Rs. 2.5 lakh announced earlier.

    Remember, if your employer’s contribution to PF, NPS and superannuation fund combined exceeds Rs. 7.5 lakh in a given financial year, tax would be payable, effective April 1, 2021.

  • Income tax calculation

    Here is an example of how tax is calculated from an individual’s salary structure.

Taxable annual salary

Salary income (in INR)

Tax exemption (in INR)

Taxable income (in INR)

Basic pay





4,00,000 (50% of basic salary)

200,000 (280,000-80,000: Actual rent paid less 10% of basic salary)


Transport Allowance


19,200 (Rs 1,600 per month as per IT rules)


Special Allowances




Leave Travel Allowance


12,000 (allowed limit if you procure bills)


Medical Bills


15,000 (allowed limit if you procure bills)


Gross Total




As an employee, you may not have complete control over how your salary is structured. However, employers these days are flexible enough to design your salary appropriately. It is best to identify your short-term and long-term financial goals and modify your pay structure accordingly. Also, ensure to fully utilise the Section 80C by investing in tax-saving instruments provided by HDFC Bank.

Under Section 80C of the Income Tax Act, 1961 you can save tax by investing in Tax saving Fixed Deposit. Calculate using FD calculator.

Know how to minimize taxes by proper financial planning by reading here.

* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.