Taxation for Salaried individuals in India

Salary Structure

How do I understand my Payslip?

Some important components of a Pay slip are:

• Basic Salary: It’s the fixed part of the compensation structure and forms the basis for calculation of other components of your salary e.g. HRA, EPF, Gratuity etc.
• Allowances: It is the amount receive by an individual by his/ her employer in addition to salary to meet some service requirements. Allowances include Dearness allowance (DA), House Rent Allowance(HRA), Medical Allowance, Travel Allowances(TA) etc.
• Perquisites: These are non-monetary benefit which received from an employer like laptop, Mobile, Car, Telephone, Staff Quarter etc.
• Deductions:
  Provident fund: This amount is 12% of basic salary. These contributions also give tax exemption under section 80C of the Income-tax Act. An employee may choose to increase his/her contribution towards provident fund, but the employer will match a maximum of 12%.
  Professional tax: This tax is levied at the state level, and reflects only if the employee resides in those states. The maximum amount of professional tax that can be levied by a state is Rs 2,500. States such as Maharashtra and Karnataka have this tax.
  Income tax: This section shows the tax deducted at source by your company. This tax is deducted according to your tax slab and the documents you may have submitted proving your investments in tax-saving financial instruments. The salary slip also shows perks, exemptions and rebates.

Form 16

What is Form 16?

Form 16 is the TDS certificate that an employer issues to an employee when TDS is deducted by them. This form carries all the required details that help the employee in filing their tax returns with the Income Tax department in India. If in one financial assessment year employee has changed jobs then the employee needs to be provided Form 16 of both companies.

The Form 16 has 2 parts, Part A and Part B:

Part A of the Form 16

Following information is available in Form-16 Part A

• Name, address and PAN of the employer and the employee.
• TAN of the employer
• Details of taxes deducted and paid to the government

Part B of the Form 16

Following information is available in Form-16 Part B

• Taxable salary of the employee
• Breakup of the deductions of sections 80C e.g. EPF, NSC, Life insurance premiums, PPF, etc.
• Tax refund or any payables due.
• Deductions under Chapter VI-A

How to calculate taxable income from Salary using Form 16?

Taxable income from Salary can be calculated as follows:

• Identify the Income chargeable under the head 'Salaries' (this figure is given in Part B of Form 16, heading 6)
• Subtract deductions under section VI-A to the extent it is exempt
• Subtract the annual TDS deducted (this figure is given in Part A of Form 16 - identify the annual TDS deducted from the “Summary of amount paid/credited and tax deducted at source thereon in respect of the employee”)
• The result is your taxable income from salary.

Allowances

What is Dearness allowance (DA)?

It is the allowance paid to employees to mitigate the impact of inflation and is some fixed percentage of the basic salary

Taxability

Dearness allowance is 100% taxable.

What is Medical allowance and Medical Reimbursement?

Medical allowance is a fixed allowance paid to the employees of a company on a monthly basis for medical expenses during the period of employment. It is paid irrespective of whether they submit the bills to substantiate the expenditure or not. However, medical reimbursement is a payment made to employees against specific medical bills submitted by them, subject to entitlement.

Taxability

While medical allowance is fully taxable, Medical reimbursement comes under Section 80D, wherein the maximum limit prescribed is Rs. 15,000 p.a. If bills regarding medical reimbursement are not submitted on time by an employee, 30% of Rs. 15,000 will then become the taxable amount.

What is Transport Allowance/ Conveyance Allowance?

Allowance granted to an employee to meet his/ her expenditure for the purpose of commuting from residence to work.

Taxability

Transport Allowance of upto Rs. 19,200 per annum or Rs. 1,600 per month is exempt from tax

What is Leave Travel Allowance (LTA)?

Allowance granted to an employee to meet his/ her expenditure for a trip within India. The exemption is only for the shortest distance on a trip and can only be claimed for a trip taken with the spouse, children, and parents, but not with other relatives.

Taxability

LTA is exempt up to the actual expenses. It can be claimed by furnishing bills for the expenses incurred during the trip.

What is Special Allowance?

All other allowances are termed “Special Allowance”

Taxability

Special Allowance is 100% taxable.

What is Bonus?

Bonus is a reward that is paid to an employee for his good work towards the organisation.

Taxability

Bonus/ performance incentive is 100% taxable.

What is Professional Tax?

Professional tax is a tax levied by the various State Governments of India on salaried individuals, working in government or non-government entities, or in practice of any profession, including Chartered Accountants, Doctors, Lawyers etc or carry out some form of business.

The maximum amount of professional tax that can be levied by a state is Rs 2,500. It is usually deducted by the employer and deposited with the state government.

Taxability

The tax payer is eligible for income tax deduction for this payment

House rent Allowance

What is House Rent Allowance?

House Rent Allowance (HRA) is an allowance given to Salaried individuals for expenses related to rented accommodation. It can be partially or completely exempt from tax.

What if I’m paying rent but I don’t receive any HRA?

Self-employed individuals and salaried employees, who don’t receive any HRA, can claim the benefits of the said component under the section 80GG of Income Tax Act.

How is the tax deduction from HRA calculated?

To calculate deduction from HRA, the least of the following is deducted from the Actual HRA received:

• 50% of {Basic salary + Dearness Allowance (DA)} where the house is in Mumbai, Calcutta, Delhi or Madras
• 40% of {Basic salary + DA} where the house is located in any other city
• Rent paid less 10% of {Basic salary + DA}
• Actual HRA received

Let’s take the example of Simran:

Simran, who resides in Delhi, gets Rs. 5,50,000 as basic salary and Rs.50,000 as Dearness Allowance (DA). She receives Rs. 1,00,000 as HRA and the rent paid by her is Rs. 1,10,000. Taxable HRA will be computed as follows.

Out of Rs. 1,00,000 received as HRA, the least of the following is exempt from tax:

• Rs. 3,00,000 being 50% of {Basic salary + DA}
• Rs. 50,000 being rent paid less 10% of {Basic salary + DA}
• Rs. 1,00,000 being actual HRA received

In this case, Rs. 50,000 will be exempt from tax.

Gross Salary and Cost to Company

What is Gross Salary?

Gross Salary = CTC – EPF - Gratuity

Subtract gratuity and the employee provident fund (EPF) from Cost to Company (CTC), the amount that you get is your Gross Salary. It is the amount that you get before deduction of income taxes and other deduction such as bonus, overtime pay, holiday pay etc.

What is Cost To Company (CTC)?

CTC means Cost To Company. It is a term, which tells the total cost that a company would incur, on you, as an employee in a year.

CTC = Direct benefits + Indirect benefits + Saving Contributions

Let’s take a sample CTC to understand the structure

Description

Direct benefits:
Basic Salary
House Rent Allowance
Conveyance Allowance
Leave Travel Allowance
Medical Reimbursement
Food coupons & Other Allowance
Indirect Benefits:
Bonus
Reimbursements
Savings Contribution:
Employee Provident fund
Gratuity
Employee State Insurance Corporation
Statutory Bonus
Cost to Company	xxx

What are the savings contributions made by an employer to compute the Cost to Company?

An employer makes certain statutory contributions for employee’s long-term saving schemes or social benefits scheme.

Employee Provident Fund: It is the contribution made by employer (12% of Basic salary) against EPF. It is statutory obligation on part of the employer. Employee gets benefit of PF deduction (12% of basic) at his part under Section 80C of income tax.

ESIC (Employee State Insurance Corporation): Employer needs to deposit 4.75% of gross salary of the employee in case employee’s gross salary is less than 15000.

Statutory Bonus: It is statutory bonus which is paid to employees earning up to Rs. 21,000. The minimum bonus payment is capped at 8.33% of Rs.7000 i.e. Rs. 583 per month (or 8.33% of the minimum wages, whichever is higher)

Take Home Salary / Net Salary

What is Net Salary or Take Home Salary?

Take Home pay = Direct Benefits – Income tax – Employee PF – Other deductions, if any

As the name suggests, take home salary is the amounted that gets credited to your salary account every month. It's given by the employer after deducting taxes and other deductions such as public provident fund, professional tax subtraction etc.

Why is there a huge difference between take home salary and CTC?

Let’s explain this with the help of an example

Simran was offered a salary package of Rs. 6,00,000 per year CTC (cost to company). She expected her monthly income Rs. 50,000 and planned her spending accordingly. However, when she received her first pay-slip, she was disappointed to only receive about INR 40-42,000 as her monthly take home pay.

This is because of two reasons:

• CTC is a sum total of various components as mentioned above and not all of them are given to an employee on a monthly basis. Some of them like Gratuity, Employer provident fund and Superannuation benefits are added to long term savings account but do not form part of monthly take home pay.
• Take home pay is after deduction of Income tax at source (called TDS)