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Understand Salary and its components – Basic, HRA, Travel Allowance, PF, Standard Deduction. Difference bewteen CTC & take home salary. Tax exemptions & benefits.
Contents
# Salary Income
# Retirement Benefits
# Income Tax Calculation
# FAQs
Salary Income
- Income from salary
- Income from house property
- Income for capital gains
- Income for business or profession
- Income from other sources
Income from salary is the first head of income which is further subdivided into other components. You would first need to understand the components of the salary income and then you can find out the correct tax liability. To understand the salary you need to first understand the different components of the pay slip. Then you need to find out the difference between the CTC and take home salary, the retirement benefits deducted from the salary and then you can calculate tax.
Pay Slip Components
- Basic Salary:
This is considered to be the fixed amount of your pay slip which is the basic pay your employer promises you apart from the other salary benefits. The basic salary is also used to calculate the contribution to the provident fund (EPF) as the contribution is expressed as a part of the basic salary.
- Dearness Allowance:
Dearness allowance (DA) is an allowance provided to you to account for inflation which increases the cost of living.
- Housing Rent Allowance:
If you live in a rented house, you can claim HRA to reduce your tax. It allows partial or full exemption of rent paid, following Income Tax guidelines.
- Leave Travel Allowance:
LTA allows tax exemption for travel costs within India, for the shortest distance. It includes costs for spouse, children, and parents. It is allowed twice in a block of four years with proper travel documentation.
- Bonus:
Bonus varies by company and is typically performance-based. It is taxed at 100% as it is treated as income.
- Employees’ Provident Fund Contributions:
Both employer and employee contribute 12% of the basic salary and DA to EPF. It builds a retirement fund with 8.55% interest. Mandatory for companies with 20+ employees under EPF Act 1952.
- Standard Deduction:
Introduced in Budget 2018, a fixed INR 50,000 deduction is allowed from salary income, replacing medical and conveyance allowances.
- Professional Tax:
Levied by State Governments, up to a maximum of INR 2,500 annually. It is deducted by the employer and paid to the State Government.
Let us now understand the difference between the CTC (Cost to Company) and take home salary. The company may entitle you with other benefits like food coupons, pick and drop facility, rent free accommodation, gratuity, etc. These benefits add up and form the total amount of hiring you for the company which is known as cost to the company. So, the CTC would include the salary paid every month, the retirement benefits which are payable when you retire or leave the organization and non-monetary benefits like free meals, free transport, etc.
Compared to CTC, the basic take home pay would include the gross salary paid to you after deducting the tax-free allowances like HRA, LTA, etc., and the income tax payable by you.
Retirement Benefits
In calculation of taxation on your salary income a lot of tax benefit is given on the amount of money spent on planning for retirement. These benefits are known as retirement benefits. Let’s discuss all retirement benefits in details:
Additional Salary Components
- Leave Encashment Exemption:
As an employee, you should always check with the employer regarding their leave encashment policy. The policy varies from company to company—some allow carry forward of leave days, while others allow encashment. The amount received is taxable.
- Advance Salary:
Under Section 89(1), tax relief is available if you receive a portion of your salary or family pension in advance.
- VRS (Voluntary Retirement Scheme):
Under Section 10(10C), exemption is allowed if compensation on voluntary retirement meets certain conditions:
- Compensation must be received on voluntary retirement
- Amount should not exceed INR 5,00,000
- Must comply with Rule 2BA
- You must be an employee of a qualifying authority
- Employees who claimed benefits under Section 89 are not eligible
- Pension:
Any pension received is taxable in the year it is received. Pension is usually paid in annuity form. You may commute up to 1/3 of your accumulated pension and receive it tax-free under Section 10(10A). However, annuity payments are taxed according to your income tax slab.
- Gratuity:
Gratuity is paid by the employer when you retire or resign after completing 5 years of service. Tax on gratuity depends on whether you’re covered under the Gratuity Act. If the gratuity is paid to your family upon death, it is fully tax-exempt.
Income Tax calculation
After you calculate the taxable income from your salary, you can calculate your tax liability. However, the following should be kept in mind while calculating tax –
- Salary income is not the only taxable income that you have. There are various sources that also contributes towards income besides salary for example it can include income from property, stocks, interest etc. all these income are added together and then on the accumulated amount tax is charged depending on the slab that the income falls in.
You also get deductions and exemptions from the gross taxable income calculated from all the heads of income. You have to deduct such tax-free deductions and exemptions to arrive at the net taxable income.
- The net taxable income would then be taxed as per the given slab rates –
| Income | Tax Rate |
|---|---|
| Up to INR 2,50,000 | No Tax |
| INR 2,50,000 – INR 5,00,000 | 5% |
| INR 5,00,000 – INR 10,00,000 | 20% |
| INR 10,00,000 and above | 30% |
The above table is applicable for taxpayers up to 60 years of age. In case of taxpayers between the age group of 60 years to 80 years, the tax exemption limit is INR300000. For taxpayers above the age of 80 years tax exemption limit is INR 500000. 4% of the total amount of tax calculated is charged as the health and education cess.
- Tax Deduction at Source (TDS) on Salary:
Every employer deducts a certain amount from your basic salary and deposits it with the income tax department on your behalf. The tax is calculated based on your salary and investment declarations. These deductions are reflected in Form 16, which details the TDS for the financial year. These TDS deductions affect your total tax liability.
- Form 16:
Form 16 is a TDS certificate issued by the employer. It provides a complete summary of tax deductions made from your salary during the financial year. It has two parts:
- Part A: Employer details (name, address, PAN, TAN, etc.) and summary of TDS.
- Part B: Detailed breakup of salary, deductions, exemptions, and net taxable income.
- Form 26AS:
This is an annual tax statement provided by the Income Tax Department. It includes details of TDS deposited by your employer and any advance/self-assessment taxes paid by you. It is available online on the IT department’s portal.
- Deductions:
You can reduce your tax liability by claiming deductions under various sections:
- Section 80C to 80U: Includes deductions for investments (like LIC, PPF, ELSS), medical insurance, education loan interest, etc.
- Section 10(10D): Provides tax exemption on life insurance maturity amounts under specific conditions.
