How To Optimise Your Cost To Company (CTC) To Save Income Tax


Every employee should exercise due diligence with regard to salary structure before negotiating the terms of employment with his or her prospective employer. To increase the figure of CTC or cost-to-company, many employees tend to overlook the salary structure. However, the best part is that the current generation employers offer their employees enough flexibility to design it as per their choice. The first and foremost thing for an employee should be his or her long-term and short-term goals before taking a final call on a particular pay structure. Ideally, one should try to maximise the take-home pay and minimise the tax outgo.

Basic salary
Employees should take note of the fact that the basic salary is fully taxable. Therefore, it is paramount for them to decide what portion of CTC should be their basic salary. A higher basic pay means a higher tax liability. However, it does not imply that you go for a low basic pay because the other components of salary exemptions such as HRA (house rent allowance) and employee provident fund are linked to the basic pay. Essentially, designing an efficient tax pay structure is a trade-off between higher take-home pay and maximum tax benefits.


Another way to save tax is to include allowances in your pay structure. The Income Tax Act has prescribed certain allowances for all the salaried individuals that are exempt at source. Such allowances include HRA, medical reimbursement, transport allowance, LTA/LTC, uniform allowance/corporate attire, children education allowance, children hostel allowance, professional pursuit/research allowance and performance bonus (annual).


Again, the Income Tax Act allows an exemption for certain perquisites (additional benefits or amenities provided by an employer to an employee), which if included as a component of salary can result in tax savings. Important ones are meal voucher, health club, sports and similar facility, gift voucher, mobile/telephone reimbursement, books and periodicals and company leased car.

Retirement benefits

These include provident fund contributions and contribution to NPS or National Pension Scheme. In provident fund, where an employer’s contribution is exempt up to 12 per cent of salary, the contribution made by an employee qualifies for tax deduction up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. In NPS, employer’s contribution is exempt up to 10 per cent of salary and that of employee qualifies for deduction up to Rs. 50,000 over and above the limit of Rs.1.5 lakh under Section 80C.

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