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
