How you can optimize your tax-saving allowance basket

Smart salary and allowance structuring can boost your take-home under both tax regimes

- Anil Poste

As the new financial year starts, you might have received an email from HR asking you to choose a tax regime and tax-saving allowances to include in your salary. If your employer offers a flexible salary structure, you can optimize your allowances for tax efficiency.

Remember, not all tax-saving allowances are created equal. Some more than others can provide substantial tax benefits, significantly impacting your take-home salary and tax outgo.

According to chartered accountant Vijaykumar Puri, partner at VPRP & Co. LLP, the first critical step is understanding your salary structure. "The key is ensuring all allowances are properly structured in your salary," he advised.

Mint helps you understand exactly what documents are needed for each allowance.

On house rents and home loans
"The conditions to claim house rent allowance (HRA) exemption are detailed under Section 10(13A) of the Income Tax Act and can indeed be complex," said Puri. "The amount eligible for tax exemption is the least of the following three components: actual HRA received; 50% of the salary if the taxpayer resides in a metro city (or 40% for non-metro cities); and the amount by which the rent paid annually exceeds 10% of the basic salary and dearness allowance."

This information must be correctly updated in the Investment Declaration along with your landlord's details.

Chirag Wadhwa, founder, Wadhwa Chirag & Associates, CAs, clarified that "one of the key conditions to claim HRA is that the employee should not own a residential property in the same city where they are residing. However, if the individual owns a flat in a different city and it is rented out, they can still claim HRA and home loan interest exemption without any issues".