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Understanding your salary structure

Salary is that magical amount, which everyone waits for every month and every little expenditure ends up being planned around it. And if you’re the only earning member of the family or it’s the only source of income for your family, it’s the one thing you bank upon each month. The impact salary has on your life, makes it even more important for you to understand your salary structure and how tax efficient it is. You can have an efficient salary structure if it allows you to save on taxes and is also compliant with the prevailing laws.

The following are the common components of salary –

Basic Salary and Dearness Allowance

Basic salary is usually the first component and a major part of your salary. It is the basic pay that you receive from your employer and fully taxable. It is the most influential part of your salary as many other components are based on your basic salary, such as dearness allowance, house rent allowance, employer and employee contribution to provident fund, etc.

Dearness allowance is the cost of living adjustment allowance, and is given to government employees, public sector employees and pensioners. This allowance is given to reduce the impact of rising inflation. This part of your salary is also fully taxable. As your basic pay and dearness allowance are fully taxable, you can save on taxes by taking advantage of the deductions, by investing in listed avenues under Chapter VI-A of Income Tax Act. This way, you not only save tax but also save for the long-term.

Other Allowances

Allowances are given in addition to your basic pay, for specific requirements which are necessary for your personal wellbeing or essential part of work. House rent allowance is given by the employer to cover house rent expense, this is partly taxable. Entertainment allowance is given to compensate for any expenses that may occur while entertaining clients or potential clients as part of company work. These can be lunch meetings or dinners that you host on behalf of the company. Government employees can get exemption w.r.t. entertainment allowance as per the provisions of Section 16(ii) of Income Tax Act.

Conveyance allowance is given to compensate for travel expenses incurred from your residence to workplace and you can get exemption up to Rs.19200 per annum. You also get Medical allowance, which is a fixed amount given to compensate for medical treatments. Tax benefit can be claimed up to Rs.15000, if the medical bills are submitted on time to the employer. Depending on the employer, there are various other allowances given to an employee.


Perquisites are additional benefits given by your employer, usually non-cash in nature. These might include accommodation, car, concessional loans, club membership, free gas, free electricity, etc. Reimbursements of expenses incurred by you for such facilities are also included as perquisites.

Some of the non-taxable perquisites include refreshment provided during office hours, use of health club or sports club, interest free loan provided by employer, etc.


Gratuity is a sum of money paid by an employer in gratitude for the services provided by you. However, there are certain eligibility criteria, which need to be satisfied, to receive the gratuity amount. For instance, you should have worked for at least five years with the company to be eligible for gratuity.

If you are a government employee the amount of gratuity received is fully exempt, whereas if you are an employee of private sector enterprises, it is partly exempt (up to maximum of Rs.10 lakh) as per the provisions of Income Tax Act.

Provident Fund

This fund is created to provide financial security for employees after retirement. Both you and your employer contribute to this fund. You have to contribute 12% of your basic salary and the employer contributes nearly 3.6% (from your 12%), in the fund.

The employer’s contribution is fully exempt from tax and the contribution you make is also eligible for deduction under Section 80C.

So, take a good look at your salary slip and understand each component of it and see what tax benefits you can get.

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