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Got a promotion and a salary hike? How to minimise taxes on a higher income?

Vipul

Vipul Bhavsar  |36 Answers  |Ask -

Tax Expert - Answered on Feb 12, 2025

Vipul Bhavsar is a chartered accountant from The Institute of Chartered Accountants of India. He has over 16 years of experience in corporate advisory, taxation and financial reporting.
His interest areas are consulting, income tax, GST and due diligence.
He founded his CA firm, V J Bhavsar and Associates, in 2010 through which he offers services like virtual CFO, trademark registrations, company /LLP formation, MIS reporting, audit, tax and TDS compliances, accounts receivable/payable management and payroll processing.... more
Asked by Anonymous - Feb 11, 2025Hindi
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I recently got a promotion with a significant salary hike, but my tax liability has also increased. My CTC includes basic pay, HRA, performance bonuses, and stock options. I’m looking for advice on how to structure my salary better to minimise taxes. Should I opt for more allowances or explore other exemptions? Also, how do stock options affect my tax liabilities? I'm 29, an IT professional working in Bangalore.

Ans: Dear Sir,
Kindly provide figures as to ascertain the exact benefits and exemptions values that may be available/claimed. Moreover, the Tax Liability can be arrived at after considering New Scheme and Old scheme as well.
Please provide full data to answer your query
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |8103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 14, 2024

Asked by Anonymous - Oct 12, 2024Hindi
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Hello Sir, Hope this mail finds you well ! Recently there has been a change in my salary structure. On an annual basis, my Basic salary has increased by 2.44L, HRA has reduced by 1.49L, Flexipay has increased by 1.6L. In the Flexipay, I can claim tax exemption for LTA upto 2.3L (earlier it was 40K) and my car allowance has been removed (earlier it was 2.9L). Under the new salary, I can claim tax exemption for Fuel (21K), Driver (10K), Meals (26K), Professional Dev. (20K). In my Old salary also I used to claim Fuel & Driver allowance. Also under both Old & New structure, I had opted for Employer NPS contribution (10% of basic). My annual target bonus has been reduced by 2L, PF has increased by 30K, Gratuity increased by 12K. However my Gross Salary under both Old & New structure is the same. I do not have any loans and stay in my own house so I do not claim HRA. I will be opting for New Tax regime. Based on the above description, since my bonus is reduced but my gross salary is same does it mean I will be actually getting more money in hand on monthly basis rather than waiting for annual payment. Will my New Salary Structure help me save more taxes OR my Old salary was more Tax efficient ? What investment & tax exemptions should I do to save more taxes under New salary structure & New Tax Regime ? Please advise.
Ans: Let’s begin by appreciating the good news! Your basic salary has increased, which means a higher contribution to your Provident Fund (PF) and Employer's National Pension Scheme (NPS). These will boost your retirement savings.

Let’s now carefully evaluate the changes in your salary structure.

Key Changes in Salary Components

Basic Salary Increase: Your basic salary has increased by Rs 2.44 lakh annually. This will result in higher PF and NPS contributions.

HRA Reduction: Since you own a house and don’t claim HRA, the reduction in HRA doesn’t impact you negatively.

Flexipay Increase: The increase of Rs 1.6 lakh in Flexipay is beneficial. You can claim exemptions for certain components under this.

LTA Increase: Your LTA claim limit has increased significantly, from Rs 40,000 to Rs 2.3 lakh. This is a huge benefit if you plan to travel and claim these exemptions.

Car Allowance Removal: The removal of the Rs 2.9 lakh car allowance may slightly affect your tax savings, as this was an exemption earlier.

Tax-Free Perks in Flexipay: You now have additional tax-exempt options like fuel (Rs 21k), driver (Rs 10k), meals (Rs 26k), and professional development (Rs 20k). These can lower your taxable income.

Target Bonus Reduction: Your target bonus has reduced by Rs 2 lakh. This means your annual payout may be lower, but since the monthly structure remains the same, you may see more in-hand salary.

Impact on Take-Home Salary

The removal of car allowance and the reduction in the bonus may seem like a loss, but the increase in Flexipay and basic salary offsets this.

Since your bonus is lower, and bonus tax is typically higher, your monthly salary may actually see an increase. The higher Flexipay exemption components can also contribute to a better in-hand amount each month.

Thus, in terms of monthly cash flow, you are likely to have more money in hand rather than waiting for the annual bonus.

Tax Efficiency of New Salary Structure

You’ve opted for the new tax regime. This regime doesn’t allow you to claim deductions under sections like 80C, 80D, etc. However, it has lower tax rates, which can benefit you with the higher basic salary and fewer deductions.

Let’s now explore how this salary structure aligns with the new tax regime.

Tax Exemption Opportunities Under New Salary

Employer NPS Contribution: You can still benefit from the employer’s NPS contribution. This can save you taxes up to Rs 50,000 under section 80CCD(1B).

Professional Development and Meals: You can claim these in the new salary structure, reducing your taxable income.

Fuel and Driver Allowance: Since these were already claimed in your old structure, there’s no significant change here. They still help lower your taxable income.

Gratuity and PF: These are part of your salary savings, which will contribute to your retirement fund but won’t immediately impact your tax savings.

Which Salary Structure is More Tax Efficient?

The old salary structure had car allowance and a higher bonus. However, the new structure gives you more flexibility with Flexipay and a significant boost to LTA claims. Since you’re not claiming HRA, the reduction here doesn’t affect you.

If you utilize the Flexipay allowances efficiently, your new salary structure will be more tax-efficient compared to the old one.

Investment Strategies Under New Salary and New Tax Regime

Now that you’ve opted for the new tax regime, which limits your traditional exemptions, it’s important to make smart investment choices that align with your long-term goals.

Employer NPS Contribution: Since you’ve opted for this, you’re already on the right track for retirement planning. Continue maximizing this benefit as it offers tax relief.

Focus on Debt Mutual Funds: Since you’ve chosen the new tax regime, you might want to consider debt mutual funds. These offer stability and can be taxed based on your income tax slab.

Maximize PF Contributions: Your increased PF contribution, due to the rise in basic salary, is an automatic way to save for retirement. PF is a great tool for tax-free returns in the long run.

Equity Mutual Funds for Long-Term Growth: While you don’t get section 80C benefits under the new regime, investing in equity mutual funds can still help you grow wealth. Since long-term capital gains are taxed at 12.5% beyond Rs 1.25 lakh, it’s still a tax-efficient option for wealth creation.

SIP Investments: Systematic Investment Plans (SIPs) in equity mutual funds can offer growth while being tax-efficient. However, under the new regime, remember to account for capital gains taxation.

Disadvantages of Index Funds and Benefits of Actively Managed Funds

In your investment strategy, it’s important to note the downsides of index funds.

Limited Growth: Index funds track the market and can’t outperform it. If the market performs poorly, so will your investment.

No Flexibility: Index funds don’t have the flexibility that actively managed funds have. Active funds can move between sectors and take advantage of market changes.

Sectoral Allocation: Actively managed funds can allocate more to sectors that are performing well. Index funds are bound by the index composition.

Actively managed funds, through a Certified Financial Planner, offer better diversification and potential for higher returns. The expertise of a CFP can help you adjust your portfolio as needed.

Disadvantages of Direct Funds and Benefits of Regular Funds

Let’s also consider direct mutual funds versus regular mutual funds.

Limited Advisory Support: Direct funds don’t provide professional guidance. You’re on your own, which might result in missing better opportunities.

Higher Risk: Without expert advice, you might invest in schemes that don’t align with your goals or risk appetite. Regular funds come with the support of an advisor who can guide you.

Benefits of Regular Funds: Investing through a Mutual Fund Distributor (MFD) with CFP credentials ensures you get personalized advice. This can help optimize your portfolio, ensuring it meets your long-term goals.

Final Insights

To summarize:

Your new salary structure, with Flexipay, increased basic salary, and NPS contributions, is more tax-efficient. You will likely have a better monthly take-home salary.

Use the tax exemptions in your Flexipay (fuel, driver, LTA, etc.) effectively to lower your tax burden.

Continue focusing on equity and debt mutual funds for a balanced investment strategy. SIPs are still a great tool under the new tax regime.

Consider working with a Certified Financial Planner to fine-tune your investments and take advantage of actively managed mutual funds. This can help grow your wealth more effectively than index or direct funds.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

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I AM THINKING OF TAKING A LOAN OF 5,00,000 AGAINST MY CURRENT MUTUAL FUND MOTILAL OSWAL SMALL CAP FUND AND REINVEST IT IN SAME FUND FOR NEXT 3 YEARS. I DON'T WANT LIQUIDITY FOR NEXT 3-4 YEARS. SEEING THE MARKET IS LOW RIGHT NOW CAN I EXPECT A REURN? SHOULD I CONSIDER THIS OPTION?
Ans: Taking a loan against your mutual funds and reinvesting in the same fund may seem like an opportunity to maximise gains. However, this strategy carries significant risks.

Key Risks to Consider
1. Market Uncertainty
Small-cap funds are highly volatile.
A temporary market correction doesn’t guarantee strong returns in the next 3 years.
If the fund underperforms, you could face both a loan repayment burden and lower returns.
2. Interest Cost vs. Expected Returns
Loan interest rates on mutual fund pledges typically range from 9-12% per annum.
Your small-cap fund must generate higher returns than the loan rate to make this strategy profitable.
If the fund returns below 12% CAGR, your effective gains will be negligible or negative.
3. Forced Liquidation Risk
If the market corrects further, your lender may sell your pledged mutual fund units to recover the loan.
This could happen at a loss, forcing you to exit at a lower NAV.
4. Overexposure to a Single Fund
Investing additional money into the same small-cap fund increases concentration risk.
Instead, diversification across flexi-cap, mid-cap, and small-cap funds is better.
Alternative Approaches
Instead of taking a loan, consider:

SIP Investment Strategy

Continue SIPs in a staggered manner rather than a lump-sum reinvestment.
This reduces the risk of investing at an unfavourable price.
Diversified Portfolio Allocation

If markets recover, large-caps and flexi-caps may rebound earlier than small-caps.
Diversifying into these categories will balance returns and risk.
Rebalancing Your Current Portfolio

If you have underperforming funds, consider shifting money to stronger funds.
This avoids borrowing costs and interest rate risks.
Final Insights
Taking a loan against your mutual fund for reinvestment is not advisable due to the high risk of market downturns, interest costs, and forced liquidation. Instead, a disciplined SIP approach in diversified funds will offer better risk-adjusted returns.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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