Basic Components of Salary and its Taxation

CTC is cost to company and the components are

Basic

+HRA

+ Conveyance

+ Mobile/Telephone Expense Reimbursement

+ Medical Reimbursement

+ All allowances

+ Leave Travel Allowance (LTA)

+ Employer contribution of PF

+ Employer Contribution towards ESI

+ Total variable incentives

+ Perks & benefits

+ Insurance Premium (in case of Group insurance)

Basic Salary is your Basic Pay and is fully taxable

Gross Salary/ Gross Pay = salary paid after adding all benefits and allowances but before making any deductions of PF and Tax.

Net Salary / Net Pay = Gross Salary – (PF & Taxes)

Dearness Allowance (DA):

Dearness Allowance is fully taxable and is a cost of living adjustment allowance to mitigate the impact of inflation on people. It is paid to Government employees, Public sector employees (PSU) and lately to private sector employees too, Dearness Allowance is calculated as a percentage of a basic salary

HRA:

HRA is given to meet the cost of a rented house taken by the employee for his stay. The Income Tax Act allows minimum of the following 3 as deduction in respect of the HRA paid to employees. –

Actual house rent allowance received from your employer

Actual house rent paid by you minus 10% of your basic salary

50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro

Meaning of Salary for calculation the exemption of HRA

• Salary means (Basic + D.A + Commission based on fixed percentage on turnover).
• Salary is to be taken on due basis in respect of the period during which the period accommodation is occupied by the employee in the previous year.

LTA or Leave Travel Allowance:

Employer provides LTA to employee for Employee’s travel to any place in India alone or with their family. LTA exemption is limited to the extent of actual travel costs incurred by the employee. LTA exemption only in respect of two journeys performed in a block of four calendar years. Travel has to be undertaken within India and overseas destinations are not covered for exemption

Perquisite:

Is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.

Provident Fund:

Employer has to contribute 13.36% (of Basic + DA & Food concession allowance & retaining allowance, if any) towards PF deduction. It is divided as:

Pension Fund: 8.33%

Provident Fund: 3.67%

Total : 12%

Employee Deposit Linked Insurance (EDLI): 0.5%

Administrative Charges for PF Scheme: 0.85%

Administrative Charges for EDLI Scheme: 0.01%

All employees who earn up to INR 15,000 are now mandatorily required to get enrolled as members of the EPF.

Employee Contribution = 12 % (of Basic + DA & Food concession allowance & retaining allowance, if any)

Standard Deduction:

As per an amendment, tax exemption on medical reimbursement amounting to Rs. 15,000 and transport allowance amounting to Rs. 19,200 in a financial year have been replaced with a standard deduction of Rs. 50,000.

TDS:

Your employer deducts TDS on your salary based on the Income Tax Slab rates for the financial year. If your income is more than Rs 2, 50,000 (the minimum amount which is exempt under Income Tax), the employer has to deduct TDS on your Income. You can choose to disclose all your Incomes like rent from house property, interest income from FDs etc and employer will calculate and deduct TDS based on your total income. This saves you the effort of paying taxes to the government yourself.

Form 16:

Form 16 is a document issued by employer to employee about salaries paid, Perquisites offered, details of deductibles and TDS deducted pertaining to the previous financial year. This is the basic document which is required by the employee to file income tax returns because Form-16 contains income chargeable under the head “Salaries” which is the taxable salary. The same needs to be indicated in Income Tax Returns. It is a certificate stating the details of the salary employee have earned and the tax deducted on their behalf and paid to the government.

Tax Calculation:

If you have other income as well apart from salary then sum up all the income like Income from renting of House property , capital gains from sale of assets , income from other sources like interest on bank deposits, RDs, FDs etc.

Deduct tax benefit from the above computed income like investments made under NSC, LIC, tuition fees, PPF, and repayment of principal of housing loan under section 80C. Similarly, donations made to charitable institutions can be claimed under section 80G, and payment made towards premium of medical insurance policy can be claimed in section 80D.

After summing up all income and deducting the tax benefits, the resultant computation will be taxable income. Now, calculate income tax on this taxable income using the IT slab rates for financial year 2020-21.

Now you are all set for filing tax return. You can now visit the online tax filing site to file your Income Tax Return.

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(Republished with Amendments by Team Taxguru)