High salaries attract everybody, but what is important is how much you get in hand after tax and other deductions. You have an option to evaluate the salary components and discuss it with your prospective employer, so that you can eliminate those components that are not tax efficient. Generally, CTC the popular acronym for “cost to company” represents your salary package and it has four major parts viz. basic salary, perquisite, allowances and retirement benefits.

Interestingly the Indian Income Tax Act – 1961 doesn’t tax your salary as a whole, rather it taxes the components. Therefore, the companies adapt a shrewd salary structure that is beneficial to them in the long run. They take many factors into consideration such as cash flow, tax benefits and human resource aspects. We are going to discuss the taxability of these salary components separately.


Generally allowances are fixed and are paid every month. The major types of allowances are education allowance, conveyance allowance and house rent allowance (HRA).


When you work in a city, where you don’t have your own house, HRA is provided as part of the salary package. According to Income Tax Act an exemption for the least of the following is provided:

  • a) 50% of salary package, if you are residing in a metropolitan city and 40% in a non-metro city.
  • b) The actual house rent allowance provided or
  • c) Whatever you pay in excess of 10% of your salary package as rent.

Note: Sometimes the entire HRA amount can be exempted from tax on the basis of the above rules.

Know How to Save Salary from Income Tax

Leave Travel Allowance (LTA)

This is to provide concession on the travel cost borne by the employees during their vacation. The tax exemption is allowed for the cost of the ticket purchased by the employee including that of his dependents (terms and conditions apply).

Transport Allowances

Certain other allowances are also completely tax exempt such as transport allowances. If it is less than Rs. 9,600 per year to commute between office and residence, there would be no tax on it.

Children Education Allowance

If it is up to Rs. 1,200 per year per kid along with a hostel allowance of Rs. 3,600 per year, it would be tax exempt.


It usually involves a discounted tax cost.
Car and driver if a company provides a car to its employee, both for personal and official purposes, the taxable cost associated with the personal use is around Rs. 29, 000 per year. The similar cost for a driver is around Rs. 11, 000 per year. It saves a lot of your tax.

Medical reimbursement If medical reimbursement is less than Rs. 15, 000 per year (applicable for both the employee and his dependents) it’s completely exempted from taxes.

3.Retirement benefits provident fund

In this benefit employer’s contribution along with the interest earned on the provident fund contributed by both employee and employer is tax exempt.

4.Superannuation contribution and gratuity is tax exempt under certain conditions.

Know the Tax on Salary in India for Year 2013-14

That’s the reason it’s a good idea to check your salary structure and claim the associated benefits.