1. What is Salary Income?
Salary Income is simply the paycheque or a fixed amount that is given to employees every month by the employer. An amount obtained by you from your employer is considered part of your salary such as a bonus, perquisites, allowances, etc.
2. What are the integrals elements of the salary as per the law?
As per section 17(2) of the Income Tax Act, 1961 has provided an inclusive definition of salary that phrases the various parts of the salary are mentioned below- Annuity or Pension Wages Advance Salary Gratuity Fees, perquisites or benefits in the context of salary An amount shared from a disregarded provident fund to recognized provident fund. The contribution of the employer to the recognized Provident Fund in excess of the prescribed limit. Leave Encashment Bonus or reward as a result of interpretation in the benefits contract
3. Type of the Components from Salary Income
Fixed Pay- Fixed pay is a fixed amount that is given to an employee by his/her employer in return for the services. Basic pay, HRA (house rent allowance), and DA (dearness allowances) are a part of your fixed pay. You are eligible to acquire this amount without the consideration of any targets, etc. Variable Pay- Variable Pay depends on 2 main factors: the company's network performance and the employee’s performance. Variable pay consists of the bonus and performance incentives and commission pay. A performance incentive or commission is a cost that is importantly dependent on the achievement of targets like sales, call hours, etc. It relies on the employment agreement between you and your employer. Retirement Concessions- These retirement benefits are the employer’s assistance, donation, and contribution towards an acknowledged provident fund, pension scheme, or compensation. CTC (Cost To Company)- The CTC simply includes a total of fixed pay, allowance, variable pay, perquisites, and retirement concessions. Allowances- The allowances are an integral part of your total CTC. The breakdown of allowances depends on the different types of allowances and employment concessions. The popular allowances include (house rent allowance) HRA, travel allowance, conveyance, medical allowance, etc. Perquisites- Perquisites are returns that are provided in compliment to an employee’s regular salary. Salary prerequisites can be as easy as a company-sponsored concession, fuel repayment, etc., or may include interest-free loans, medical facilities, etc. The widespread perquisites are usually rent-free accommodation, ESOP/ Sweat Equity Shares, Employer’s contribution towards superannuation fund, and loan for nil or lower interest rate.
4. Difference between take Home Salary and CTC?
CTC or Cost to Company is a yearly payment to an employee in exchange for his/her services and certain benefits. However, when you obtain your salary at the end of the month it is not equal to your CTC. Now, let's understand it with an example- suppose your CTC is Rs. 24,00,000 per annum. Then it does not mean that you will receive simply Rs 2,00,000 per month (Rs 24,00,000 / 12 months). This happens because of other deductions from your CTC. Before crediting an employee’s salary in his/her account, other deductions are levied such as HRA, LTA, education allowance, conveyance, contribution to provident fund, etc. The major distinction between CTC and take-home salary is the taxes deducted by the employer.
5. Required Documents for tax on salary income
Form-16- Form-16 is used to provide the information related to the tax deduction to their employees by the companies. Form-16 possesses all the valid details required to prepare and file your income tax return. In simple words, form-16 is a type of certificate that is furnished by your employer and it certifies the details of salary and amount of deducted TDS. Form-16 is issued under section 203 of the Income Tax act 1961. It is also known as a salary TDS certificate. Form-26AS- Form-26AS is a compact annual tax statement that contains information about tax deducted or collected at the source and TDS on various salaries, interest, self-assessment, and advances tax. The Budget for 2020-21 had declared the modified Form 26AS providing a more comprehensive profile of the taxpayer going further the details of tax organized and deducted at source. In the month of May, the Income Tax Department announced the new annual report in Form 26AS.
6. Income Tax Return
ITR (Income Tax Return) is a form that taxpayers are believed to submit to the Income Tax Department of India. In this form, All information related to the taxpayer’s yearly income and the whole amount of tax to be paid is mentioned along with a refund that needs to be credited for that specific year. The Department of income tax has announced seven types of forms to date. The Relevancy of these ITR forms differs on the basis of earned income, source of the income of tax-payer, and category of income.
7. Taxability of Components of Salary
We have understood the various components of salary and the difference between your take-home salary and CTC. Now, let’s explore the taxability of each salary component so that you can plan your taxes.
8. Taxability of Salary Income
|Component of Salary||Taxability|
|Fixed Pay||Totally Taxable|
|Variable Pay||Totally Taxable|
|Allowances||Totally Exempt, Totally Taxable, Somewhat Exempt Compositions to Conditions|
|Perquisites||Totally Taxable, Totally Exempt, Partially Exempt Compositions to Conditions|
|Retirement Benefits||Partially Exempt to Conditions, Totally Exempt,|
9. Tax on Allowances
|(House Rent Allowance) HRA||Least of the following is exempt: a) Actual HRA Received) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi, or Chennai). c) Rent paid minus 10% of salary* Salary = Basic + Dearness Allowances (if a piece of retirement benefit) + Turnover Commission|
|Children education allowance||Rs. 100 monthly per child for a maximum of 2 children are exempt|
|Hostel expenditure allowance||Rs. 300 monthly per child for a maximum of 2 children are exempt|
|granted Transport Allowance to an employee to meet the expenditure for the purpose of commuting between place of residence and duty.||Rs. 3,200 monthly provided a blind or deaf and dumb or orthopedically handicapped with a disability of lower extremities employee.|
|granted allowance to an employee working in any transport business to meet his expenditure during his duty acted in the course of running transport from one place to another.||The amount of exemption shall be lower than the following:70% of such allowance; or Rs. 10,000 per month.|
|Leave Travel Concession or Assistance (LTC/LTA), given to an employee by an employer for going anywhere in India along with his family.||The exemption shall be limited to going anywhere in India along with family twice in four years, Where the journey is performed by Air. Exemption up to Airfare of economy class in the National Carrier by the shortest route, Where the journey is performed by Rail. Exemption up to air-conditioned first class rail fare by the shortest route, If the destinations are connected by rail but the journey is performed by any other mode of transport. Exemption up to air-conditioned first class rail fare by the shortest route, Where destinations are not connected by rail.|
|Servant, Project, Overtime, Telephone, Holiday, City Compensatory, Fixed Medical, Tiffin, Lunch, Dinner or Refreshment, Any Other Allowance||Totally Taxable|
|Any allowance paid or allowed by the Government to its employees (an Indian citizen) posted outside India. Allowances to Judges of HC/SC. Rent-free official residence, conveyance facilities including transport allowance, allowance, and leave travel concession to serving Chairman/Member of Union Public Service Commission.||Totally Exempt|
10. Tax on Perquisites
|Rent-free undeclared accommodation which is provided to Central and State Government employees||Licence fees determined in accordance with rules framed by the Government for allotment of houses shall be deemed to be the taxable value of perquisites.|
|Licence fees determined in accordance with rules framed by the Government for allotment of houses shall be deemed to be the taxable value of perquisites.||Taxable value of perquisites shall be computed in the following manner: (a) The taxable value of perquisite assuming accommodation to be provided to the employee is unfurnished) moreover, add 10% of the original cost of furniture and fixtures in case these are possessed by the employer or actual higher payable charges (if these are taken on rent by the employer). (c) Lessen the value so determined shall be minimized by the amount of rent recovered from the employee there is any.|
|Unfurnished rent-free accommodation provided to other employees||Taxable value of perquisites If house property is owned by the employer, the taxable value of perquisite shall be:15% of salary, if the population of the city where accommodation is provided exceeds 25 lakhs 10% of salary, if the population of the city where provided accommodation is more than 10 lakhs but does not exceed 25 lakhs 7.5% of the salary if accommodation is given in any other city. If house property is taken on rent by the employer, the taxable value of perquisite shall be lease rent paid or payable by the employer or 15% of the salary.|
11. Components for calculating the income tax
There are certain components for the calculation of income tax. while calculating the income tax, there are a few basic terminologies that should be kept in mind. We have mentioned them below:
12. The tax year
In India, A financial year is a one-year period in which income is earned, known as a fiscal year. A financial year commences on the 1st of April and ends on the 31st of March. Large-cap companies use the fiscal year to estimate the profit, costs, and revenue with other authorities. After the end of the fiscal year, A company’s tax can be due till the 15th day of the 4th month. If you want to calculate your income tax in 2022, you need to endure the salary income from April 1st, 2021, to March 31, 2022.
13. Assessment year
An assessment year and financial year both are different. However, many individuals still believe that these both years are the same but that is not the actual case. In reality, both years are disparate from each other. Most taxpayers make mistakes while filing their income tax returns. Such mistakes can lead you to penalties, delays, and interest. An Assessment Year is a period from 1st April to 31st of March during which your earned money in a financial year is taxed. The year that comes just after the financial year is known as an assessment year. Individuals have to file income tax returns in the relevant assessment year. So if you are trying to calculate your income tax on the salary for the financial year 2021-22, then your assessment year will be 2022-23.
14. Salary breakup
The foremost thing for calculating your income tax on salary is to get hold of your salary breakup. The salary breakup can be checked from the salary slip or salary statement. But in case you don’t have a salary slip or salary statement, then You must go to your HR and inquire about it. When you get the salary slip in hand, take a closer look at the slip or the statement so that you can understand the integral components, format, and basic structure of your salary. The tax deductions on salary available to you such as (House Rent Allowance) HRA, (Dearness Allowance) DA, etc. These all things will be beneficial for you to calculate the tax properly.
15. Taxable income
Once you get the detailed breakup of your salary, you need to compute your taxable income. Taxable income is considered as an income on which you need to pay tax and that contains all the other income sources apart from your salary.
|Income from Salary||The income you obtain from your job such as salary, leave encashment, allowances, etc.|
|Income from Property||Income from home, property, or land (rented or self-assessed)|
|Income from Business/Profession||Earnings from a part-time job or profession|
|Income from Gains||Income from the selling a capital asset|
|Income from other sources||Residual income such as earnings from the fixed deposit (FD), gifts, etc.|
Income tax is not just about providing our money to the government. But paying the income tax provides many benefits such as savings, easy visa applications, loan approval, etc. There are various deductions included in section 80C. If any individual wants to deposit his/her money in the following options then he/she is eligible to claim the deduction under section 80C of the income tax act of India. All these deductions are available under various sections 80 of the Income Tax law. Gross Income – Deductions = Taxable Income Note: (Gross income is the sum of all the incomes from all the sources) We advise you to go through the details of section 80 while calculating the taxable income. Section 80 contains all types of deductions like investments made on life insurance policies, mutual funds, interest on savings, PPF, NSC, SIPs, mutual funds returns, home loans, etc. According to the latest tax regime, your deductions can go up to 2.5 lakhs per annum. Making an investment plan can help you to save a lot of your annual income.
TDS stands for the Tax Deducted at Source which simply means the tax is deducted directly from your salary. A large number of people use TDS to avoid concerns and for maintaining a hassle-free tax pattern. You do not need to be upset, you get a refund on this, so if there is a chance that more TDS has been deducted, it can be claimed by the submission of the relevant documents back to evade the Tax Deducted at Source (TDS).
18. The Calculation of Payable Tax
The final step is to do the calculation of the payable tax. To get the payable tax amount, you need to deduct all the applicable deductions and TDS, the amount that you get is the tax amount you need to pay to the Indian government. If your net income is below the Rs. 2.5 lakhs, then you are not required to pay any income tax. But in case your gross income is more than this limit, then you are liable to pay income tax according to your salary slab.
19. The tax rate for a salaried individual below 60 years
|Up to 2.5 lakhs||None|
|Income Slab||Tax Rate|
|2.5 lakhs – 5 lakhs||10% of exceeding amount|
|5 lakhs – 10 lakhs||20% of the exceeding amount|
|Above 10 lakhs||30% of the exceeding amount|
|Investment options||Interest||Minimum lock-in period||Assured return||Associated risk|
|ELSS||12% to 15% (depends on the oscillation of the market)||3 years||No||High|
|NPS(National Pension Scheme)||9% to 11%||til investor does not get off the retirement of 60 years||No||High|
|ULIP||8% to 10% (relies on market fluctuation)||5 years||No||Moderate|
|Fixed deposit||Up to 8.40%||5 years||Yes||low|
|Sukanya Samriddhi Yojana Scheme||7.50%||8 years||Yes||low|
Frequently Asked Questions
Is pension income taxed?
Yes. Pension income is taxable.
Which ITR should a salaried individual file?
Salaried individuals can file the ITR-1 by the 31st of July every next year. In case the salary of an individual exceeds Rs. 50 lakhs then ITR-2 must be filed by them.
Is the provident Fund calculated on the gross salary?
The Provident fund is calculated in most cases on the basis of an employee's salary (working in the private sector).
What are the other components of salary income?
The breakdown of allowances depends on the different types of allowances and employment concessions. The popular allowances include house rent allowance HRA, travel allowance, conveyance, medical allowance, etc.
Is it mandatory to file ITR?
Yes. Filing Income Tax returns is mandatory for all registered taxpayers and any individual who is earning more than 2,50,000 to 5,00,000 lakh is mandated to pay the tax returns.
Who is exempted from ITR?
Those registered taxpayers whose net income is below the exemption limit of Rs.2 .5 lakh, don't have to file ITR by using the ITR-1 form.
Is basic salary taxable in India?
Yes. The basic salary is taxable in India. The Income Tax Act, 1961 does not provide any exemption or deduction on the basic salary, dearness allowance, and variable pay in the form of commission, bonus, etc.
Is income tax calculated on CTC?
Yes. Income tax calculation is done based on the CTC. An individual’s CTC includes basic pay, variable pay, allowances, and perquisites. Your CTC is your gross pay. Out of the gross profit, exemptions and deductions are deducted.