Income tax returns differ for various people with a different source of income. Salary income, income from business, freelance, etc., are the different source of income basis on which an individual has to file his taxes. This guide is for people who are salaried and want to understand the components of their salary along with learning some ways to save tax on the same.
“Salary” is a fixed regular payment or remuneration, usually paid on a monthly basis by an employer to its employee, especially a professional or a white-collar worker. Salary paid to an employee is determined by comparing the market pay rates of people who are performing similar kind of work in similar regions and industries. Salary is most often used to mean net salary that a person takes home.
CTC, as Cost to Company is most commonly called, is a term that tells the total cost a company incurs when hiring an employee for a year. CTC includes the cost of many other benefits provided by the company to an employee, also known as perquisites, which is a cost that the company has to bear and hence the name. Simply put, CTC is the amount that the company spends on hiring and sustaining the services of an employee.
CTC is considered as a variable pay that is based on different factors. Therefore, when an employee’s CTC differs, his net or take home salary varies automatically. The cost to company is, hence, never equal to the amount of money that an employee gets to take home.
[ Read: Tax Friendly CTC ]
Gross salary is the salary of an employee calculated after adding all the benefits and before any deductions are made. Basic salary, house rent allowance, leave travel allowance, conveyance allowance, medical allowance, performance bonus, etc. are some of the most prominent components of gross salary.
Net salary or take home salary is the salary that an employee actually takes home, after tax and other deductions are done with. The net salary amount includes the gross salary minus TDS (Tax Deducted at Source), Profession Tax, Employee’s contribution to PF and other deductions as per the company’s policy.
To make things simpler let’s put it this way:
Net Salary = Basic Salary + Other Benefits – Deductions (PF, TDS, etc.)
Basic salary is the most important component of the salary slip. Apart from being the biggest portion of the salary, it is also a fixed amount. Basic salary comprises of around 40-50% of the total 100% of the CTC proposed. This, however, varies from company to company.
This allowance is a common component of the salary structure of people who live in India. HRA comprises of 40% to 50% of the basic salary, depending upon the location of the work. Employees who pay rent for the accommodation of a house or an apartment can claim HRA exemption to lower their taxes.
Medical reimbursement is paid to an employee on a monthly basis, irrespective of whether they submit medical bills or not. Medical allowance is not an allowance that bears exemption, under the IT Act 1961. This allowance is, thus, fully taxable. What is exempt is medical reimbursement for which you should be submitting the related bill to your employer.
[ Watch Video: Medical Expenses Reimbursement ]
Conveyance allowance is a type of allowance given to an employee to compensate for their travel to and from home and office. This allowance is paid by an employer only when the company doesn’t provide their very own transportation to employees. Conveyance allowance will not be provided to employees who travel via office transport. This allowance can be claimed as tax-exempt up to Rs. 1600 pm in normal case and Rs. 3200 pm in case of a disabled person.
Leave travel allowance is extended to an employee when he is travelling on leave with his family or alone. It is one of the best tax saving tools as an employee can claim tax exemption for the expenses incurred on travelling. This exemption is available twice in a block of 4 years. LTA only covers the expenses made on travelling, as the name suggests and not on boarding and food.
[ Read: LTA Exemption Rules ]
This is generally given as a reward to the employees to encourage them to give their best performance. The special allowance is given above basic salary and the amount is fully taxable. Performance bonus depends on an employee’s past performance and is given once or twice a year, as per the company policy.
Any company that has more than 20 employees must comply with the Provident Fund requirements. Both employer and employee should contribute minimum 12% of the basic salary of the latter to his Provident Fund account. The employee has an option to voluntarily contribute more to his provident fund account up to 100% of his basic salary. It is run by the government to benefit the citizens of the country and has main motive to provide a healthy corpus for to an employee on his retirement. The statutory contribution to Provident Fund should be made on a monthly basis. Employer’s contribution to an employee’s provident fund up to 12% of his basic salary is tax exempt. Beyond this Provident Fund earns tax-free interest of 8.65% and employee’s own contribution to Provident Fund also qualifies for tax deduction u/s 80C up to Rs. 1.5 lakh. So for that employee who is looking for a secured investment option with good returns, VPF-Voluntary Provident Fund could be a great option.
As per the provisions of Income Tax Act, every employer is required to calculate the tax payable by an employee on his total estimated income from salary for the financial year and deduct it over the year. At the start of the year, the employee provides the declaration of his tax saving investment and expenses to his employer in form 12BB and based on the declaration received employer deduct the taxes on a monthly basis. At the end of the year, the employee needs to submit the proof of the investment and expenses declared at the start of the year. Based on the proof submitted by the employee, the employer will recalculate the tax payable. Any shortfall will be deducted over the remaining months of the financial year. The employer is under the statutory obligation to deduct and deposit TDS to the government account on regular basis.
[ Read: TDS Payment and Due Dates ]
Professional tax is a tax for the privilege of carrying out certain profession. Rather than being imposed by the central government, it is imposed by the state government. The employer will first deduct tax and then deposit it with the state government. The amount is just a few hundred and is only imposed by certain states. Professional tax is allowed as a deduction from your salary income in the income tax return.
There are different leave encashment policies in different companies. Some employers allow employees to carry forward the number of leave days to the next financial year while some of them allow you to encash them. Some employers even urge the employees to use the leaves as they won’t be providing additional benefits for the number of leaves remaining.
The amount that is paid as a compensation for the remaining leave days is known as leave encashment. Any leave encashment received during the continuance of employment is fully taxable. On the other hand, if you receive leave encashment on the retirement of termination it can be claimed exempt up to Rs. 3 lakh.
If an employee has received any portion of salary in arrears or in advance or if he has received a family pension in arrears he is allowed to get some tax relief under section 89(1) read along with Rule 21A.
Any payment received by an employee in case of voluntary retirement or termination of services is exempted from tax under section 10(10C). It should be noted that if the exemption has been allowed in an assessment year it will not be allowed for any other assessment year.
The tax will be exempted on the fulfilment of the following conditions
An employee cannot get an exemption if he has taken relief under section 89. Also, the exemption can be claimed in the assessment year in which the employee has received compensation.
The pension is fully taxable as salary and paid periodically, on a monthly basis, after retirement. An employee can, however, choose to take a pension in a lump sum amount, known as the Commuted Pension. Commuted pension can be claimed as exempt u/s 10 (10A). He can even choose to get a certain amount of pension at the time of retirement.
Gratuity is a gratuitous retirement benefit that is provided to an employee by his employer. An employee is entitled to receive gratuity if he has completed 5 years of service with the company. Gratuity is paid after resignation or retirement.
Gratuity is fully exempt from tax for a government employee or his family. For non-government employees, the tax treatment of gratuity is different and depends on whether the employer is covered by the Payment of Gratuity Act.
Tax Exemption for gratuity will be the least of the following three, depending on whether the employer is covered or not covered under the Payment of Gratuity Act.
|If the employer is covered under the Payment of Gratuity Act||If the employer is not covered under the Payment of Gratuity Act|
|Rs. 10,00,000||Rs. 10,00,000|
|Amount of Gratuity actually received||Amount of Gratuity actually received|
|15 days of salary for each completed year of service or part in excess of 6 months||Half month’s salary for each completed year of service|
Income tax is not only confined to salary but it also includes income that you have earned from all the other sources. These other sources may be anything and everything from house property, interests earned from fixed deposits/ savings account, profit or loss from selling stocks, property, etc. The income earned from these sources by an individual will be considered to be their gross income and hence, is taxable.
[ Read: Income from Other Sources ]
Tax is levied on the total income that is calculated from all the sources. A person can avail deductions on his taxable income under section 80. These taxes are levied as per the defined tax slabs for that respective Financial Year.
The tax that is deducted by the employer is known as Tax Deducted at Source or TDS which they pay to the Income Tax Department on behalf of their employees. The TDS amount is deducted from the salary after calculating it on the basis of the total income and the investments made by the employee. The employer provides a TDS Certificate to the employees known as Form 16, around May and June, which shows all the calculations of the deductions made monthly.
Form 16 is typically a TDS Certificate that shows the calculation of the amount of TDS deducted by the employer during that whole financial year.
[ Read: Form 16 for Income Tax Return Filing ]
Form 26AS shows the summary of taxes that are deducted on the employee’s behalf and the taxes paid by him. It is provided by the Income Tax department and can be accessed from the department’s official website. It also shows tax refund received by the employee in the financial year.
An individual can easily download the Form, from the official website by following some quick steps.
Employees should remember to claim all the tax benefits and deductions that apply to them while e-filing their tax return. Section 80C of the Income Tax Act allows deductions of Rs. 1,50,000 in many ways of investment. Also, there are many other options through which an individual can avail deductions under section 80C to 80U.
H&R Block India has a team of well qualified and professional tax experts who will file your individual income tax returns for you in minimum time and also help you reduce your tax liabilities. If you haven’t filed your tax return yet, get in touch with us for effective measures. Happy hassle-free tax filing to you!