Important Keyword: CTC, ITR Form, Salary Income, Slab Rates, tax deductions.
Table of Contents
Income from Salary & Taxes
In India, a significant portion of taxpayers comprises individuals who earn a salary. It’s imperative for these individuals to grasp the nuances of their salary components and how they impact their tax obligations. Understanding these elements can empower them to navigate tax-saving opportunities effectively.
- Basic Salary: This forms the foundation of an individual’s salary structure and is fully subject to taxation. It serves as the benchmark for other allowances and deductions.
- House Rent Allowance (HRA): HRA is designated to assist with rental expenses. Its tax treatment hinges on factors like actual rent paid, HRA received, and the city of residence. Under specific conditions, it can qualify for partial or complete tax exemption.
- Dearness Allowance (DA): DA is dispensed to cushion against inflationary pressures and is entirely taxable.
- Conveyance Allowance: Intended to cover commuting costs between home and work, this allowance is generally fully taxable unless specific exemptions apply.
- Medical Allowance: While medical allowance is fully taxable, reimbursement for actual medical expenses within prescribed limits can be exempt from tax.
- Special Allowance: This component encompasses additional payments beyond basic salary and is typically fully taxable.
By comprehending these components and their tax implications, salaried individuals can optimize their tax planning endeavors. Leveraging tax-saving avenues such as HRA exemptions, deductions under Section 80C, and other allowances can help minimize tax liabilities and enhance take-home earnings. Staying abreast of tax regulations and seeking guidance from financial experts can further refine tax strategies tailored to individual circumstances.
What is Income from Salary?
Salary Income represents the regular earnings received by an individual from their employer, typically on a monthly basis. It encompasses various forms of compensation provided by the employer, such as bonuses, allowances, perquisites, and more. Additionally, pension payments received post-retirement, excluding family pension, also fall under the ambit of Salary Income.
The components constituting Salary Income include:
- Wages: Payments received for services rendered.
- Annuity or Pension: Regular payments received post-retirement.
- Gratuity: Lump sum payment received upon completion of service.
- Fees, Commission, Allowances, Perquisites, or Profits in Lieu of Salary: Additional forms of compensation provided by the employer.
- Advance of Salary: Amounts received in advance against future salary payments.
- Transfers from Unrecognized Provident Fund to Recognized Provident Fund: Transfers of funds between different provident fund accounts.
- Employer’s Contribution to Recognized Provident Fund in Excess of Prescribed Limit: Contributions made by the employer exceeding specified thresholds.
- Leave Encashment: Payment received in exchange for unused leave days.
- Compensation Resulting from Variations in Service Contract: Additional compensation provided due to changes in contractual agreements, etc.
It’s important to note that this list is illustrative and not exhaustive. Salaried individuals can file Income Tax Returns (ITRs) using various forms such as ITR 1, ITR 2, ITR 3, and ITR 4, depending on their sources of income.
Now, let’s delve into the distinction between CTC and Take Home Salary:
CTC, or Cost to Company, signifies the total expense incurred by the employer for an employee. It encompasses not only the basic salary but also all allowances, benefits, and contributions made by the employer towards retirement benefits. Allowances and benefits may include House Rent Allowance (HRA), Leave Travel Allowance (LTA), Special Allowance, among others. Retirement benefits typically comprise contributions to the Employee Provident Fund (EPF), Gratuity, etc. Additionally, employers may offer additional perks such as medical insurance coverage, meal allowances, phone bill reimbursements, etc. Hence, CTC provides a comprehensive view of all costs associated with employing an individual.
Here is the example of components of CTC mentioned in your offer letter:
| Component | Amount (in INR) |
|---|---|
| Basic salary | 3,50,000 |
| HRA | 1,00,000 |
| Special Allowance | 80,000 |
| Performance Bonus | 50,000 |
| Medical Insurance | 5,000 |
| PF (12% of Basic Pay) | 30,000 |
| Total CTC | 6,15,000 |
However, your take-home salary shall include your gross salary minus allowable exemptions minus income tax liability.
Your taxable salary will look like this for CTC mentioned above:
| Component | Amount (in INR) |
|---|---|
| Basic salary | 3,50,000 |
| HRA | 1,00,000 |
| Special Allowance | 80,000 |
| Performance Bonus | 50,000 |
| Total Salary | 5,80,000 |
| Less: PF (12% of Basic Pay) | (30,000) |
| Less: Tax Liability | (23,400) |
| Total Taxable Salary (Take home salary) | 5,26,600 |
Understanding Salary Slip and its Format
A salary slip, simply put, is a document provided by employers to their employees every month, outlining a breakdown of their earnings and deductions. It typically includes details such as Basic Salary, House Rent Allowance (HRA), Leave Travel Allowance (LTA), Bonus payments, as well as various deductions and other components.
This document holds significant importance for employees due to several reasons:
- Proof of Employment: The salary slip serves as a legal confirmation of employment and validates the salary received. It contains information about the individual’s last drawn salary and job designation, making it useful for various purposes such as visa applications, university admissions, and more.
- Income Tax Planning: With its detailed breakdown of earnings and deductions, the salary slip aids in income tax planning. It includes components related to tax deductions, allowing employees to estimate their tax liability and plan their finances accordingly. This proactive approach helps in maximizing tax benefits within the provisions of the Income Tax Act of 1961.
- Acquiring Loans: Lenders often require proof of income to assess an individual’s creditworthiness when applying for loans, credit cards, mortgages, etc. The salary slip serves as a crucial document in this regard, as it demonstrates the borrower’s capacity to repay loans based on their monthly income.
- Access to Government Subsidies: Certain government subsidies and welfare programs may require evidence of income eligibility. The salary slip can be used as proof to avail of such benefits, ranging from medical care to food grain subsidies.
Overall, the salary slip plays a pivotal role in an employee’s financial life, providing transparency and documentation of their earnings and deductions, and facilitating various financial transactions and government-related processes.
Sample Salary Slip Format
Salary Format and its Taxability
| Serial No. | Component | Definition | Taxability |
|---|---|---|---|
| 1 | Basic salary | This is the fixed component of your salary. It is also the basis for other components of Salary. | It is 100% taxable. And a part of your take-home salary. |
| 2 | Dearness Allowance (DA) | Only Government employees get DA. DA is paid to counter the inflation impact. It is calculated as a percentage of the Basic Salary. | It is 100% taxable. And a part of your take-home salary. |
| 3 | Commutation/ Transport Allowance | Granted to cover the cost of travelling between home and work. | The lower of the following will be exempt from tax:1. INR 1600 per month or 2. Conveyance actually receivedIn the case of handicapped employees exemption of up to INR 3200 per month is allowable. |
| 4 | HRA | HRA is paid to meet the house rent expense. This may consist of 40% – 50% of your basic salary. | The lower of the following will be exempt from tax: 1. 40%/ 50%* of your Basic Salary 2. Actual rent paid minus 10% of the Basic Salary 3. HRA received from the employerIn the case No rent is paid then HRA will be 100% taxable.*50% if staying in a metro city. |
| 5 | LTA | It allows an employee to take on a trip within India. The allowance is based on actual expenditure incurred. An employee can take two trips in a block period of four years. | The exemption is allowed for the actual expenditure incurred for the trip subject to certain limits. Any expenditure incurred during the trip for purposes other than travel will not be exempt LTA. |
| 6 | Children Education Allowance | This allowance is granted to promote the education of children in India by the Income tax department. | The amount of exemption will be a maximum of INR 100 per month per child (Maximum allowable for 2 children) |
| 7 | Children Hostel Allowance | To promote a higher literacy rate this allowance is granted to individuals whose children stay in a hostel for education. | The amount of exemption will be a maximum of INR 300 per month per child (Maximum allowable for 2 children) |
| 8 | Underground Allowance (Mines) | This allowance is granted to employees working in underground mines. | The amount of exemption allowable is a maximum of INR 800 per month. |
| 9 | Tribal area Allowance | This allowance is provided to the residents of scheduled, hilly and agency areas such as Madhya Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh, Odisha, Tripura and Assam. | An employee can get an exemption of a maximum of INR 200 per month. |
| 10 | Island Duty Allowance | This allowance is granted to members of the armed forces who are assigned duties on islands. | The maximum amount of exemption allowed to such employees is INR 3,250 per month |
| 11 | Allowance to employees of Transport undertaking | This allowance is granted by roadways, railways and airways in place of the daily allowance. | The amount of exemption allowable shall be least of following:1. 70% of the amount received as allowance.2. INR 10,000 per month. |
| 12 | Travelling or Tour Allowance/ Conveyance Allowance/ Uniform Allowance/ Daily Allowance/ Helper Allowance (for office Purpose)/ Research Allowance | These allowances are granted to meet with the respective expenses. | Total amount spent will be the exempt amount. |
| 13 | Special Allowance and Performance Bonus | These allowances are over and above your Basic Salary. A performance bonus is usually linked to your past performance and is usually paid once or twice a year. | It is 100% taxable. And a part of your take-home salary. |
Deductions Component and its Taxability
| Serial No. | Component | Definition | Taxability |
|---|---|---|---|
| 1 | Professional Tax | It is a tax on employment. This tax is deducted from your salary by the employer and deposited to the state government. | Professional Tax is allowed as a deduction from your salary income. |
| 2 | Employee’s Provident Fund (EPF) | Usually, 12% of your basic salary goes towards the Employee’s provident fund. This amount is matched by the employer subject to certain limits which may vary as per company policies. | This is a forced investment since every company with over 20 employees, has to contribute towards PF. It is allowed as a deduction from total income. |
| 3 | Tax Deducted at Source (TDS) | Based on your total taxable income, your tax is calculated as per the applicable slab rate. This tax is deducted from your salary by your employer and deposited to the Government on your behalf. You can find your TDS from form 16, part A which is generated by TRACES and provided to you by your employer. | This amount represents the tax deducted from your salary and deposited to the government by your employer. This can be lowered by utilizing the deduction limits optimally. |
Standard Deduction:
The standard deduction, introduced for salaried taxpayers under Section 16 of the Income Tax Act, allows them to claim a fixed deduction from their income, regardless of the actual expenses incurred. It aims to provide equity between salaried employees and self-employed individuals who can claim various business-related expenses. From Assessment Year 2020-21 onwards, the standard deduction is set at INR 50,000, deducted from the “Income taxable under the head salaries.”
It’s important to note that the deduction cannot exceed the salary amount, with the maximum deduction being either INR 50,000 or the salary amount, whichever is lower. Notably, this deduction is not applicable under the New Tax Regime.
Impact of Standard Deduction on Pensioners:
Recent clarifications from the Income Tax Department state that pension income from former employers is taxable under the head “Salaries.” Consequently, pensioners can claim a standard deduction of INR 50,000 or the pension amount, whichever is lesser. However, this benefit is only available if the pension income is taxable under the salary head. If it’s taxed as income from other sources, the standard deduction won’t apply.
Retirement Benefits:
Pension:
Pension is the periodic payment made by an employer to its retired employee as compensation for their services during employment. This income is taxable under the head “Income From Salary.”
There are two main types of pension:
- Uncommuted Pension: This refers to periodic pension payments received after retirement. It’s fully taxable for both Government and Non-Government employees under the head “Income from Salaries.”
- Commuted Pension: This involves a lump sum payment received at retirement. For Government employees, commuted pension is fully exempt from tax. However, for non-government employees, the tax treatment varies.
| Particulars | Tax Treatment |
| Gratuity Received by pensioner | ⅓ of the pension which he is normally entitled to receive is exempt from tax |
| Gratuity Not Received by pensioner | ½ of the pension which he is normally entitled to receive is exempt from tax |
Pension and family pension are distinct entities. Pension is received by an employee after retirement and is taxable under the head Salary. On the other hand, family pension is granted to the nominated family members of the deceased employee and is taxable under the head Income from Other Sources.
Gratuity:
Gratuity serves as a retirement benefit provided by an employer to an employee. Eligibility for gratuity arises after completing five years of service with the organization. However, it’s disbursed only upon retirement or resignation. The tax treatment of gratuity varies based on the type of employer:
For Government Employees: Gratuity received by government employees (central/state/local) is entirely exempt from tax for the employee or their family.
For Non-Government Employees: Tax treatment depends on the applicability of the Payment of Gratuity Act:
Employees Covered under the Act: The least of the following amounts is exempt from tax:
Actual gratuity received INR 20 Lakhs Last drawn salary (Basic + DA) multiplied by the number of years of service completed, multiplied by 15/26. Fractional years exceeding 6 months are counted as a full year.
Employees Not Covered under the Act: The least of the following amounts is exempt from tax:
Actual gratuity received INR 20 Lakhs Average salary of the last 10 months (Basic + DA), multiplied by the number of years of service completed, multiplied by 1/2. Fractional years are disregarded.
Leave Encashment Salary:
Leave encashment involves converting unused leave days into cash. Taxation of leave encashment depends on the timing of receipt:
During Employment: Leave encashment received while still employed is fully taxable for all employees.
At Retirement:
For Government Employees: Leave encashment salary is fully exempt from tax.
For Non-Government Employees: The least of the following amounts is exempt from tax:
Actual amount received INR 3 Lakhs Average salary of the last 10 months (Basic + DA + Turnover Commission) Amount equivalent to the salary earned as leave encashment (not exceeding 30 days’ worth of leave for each year of service).
Voluntary Retirement Scheme
Exemption under Section 10(10C) allows certain compensation received upon voluntary retirement to be tax-free, provided specific conditions are met. The exemption applies to amounts received for service in various sectors such as public sector firms, cooperative societies, universities, and more. The exempted amount is determined as the least of several factors, including three months’ salary for each completed year of service, salary at retirement multiplied by the remaining months of service, INR 5,00,000, or the actual amount received.
Who’s Eligible for VRS?
Employees meeting specific criteria, such as ten years of service or reaching the age of 40, can claim Voluntary Retirement Scheme (VRS) exemption under Section 10(10C). This applies to all employees except directors and mandates that the VRS is aimed at reducing employee strength without filling resulting vacancies. Additionally, the retiring employee cannot join another company under the same management.
Relief Under Section 89:
Section 89 provides relief for tax liability arising from large sums received in advance or arrears. To calculate relief, one must first compute total tax payable and tax rates for the relevant years. The relief amount is then calculated based on the VRS amount received in preceding years.
Importance of Filing ITR:
Salaried individuals must file Income Tax Returns (ITR) if their gross total income exceeds INR 2,50,000 (INR 3,00,000 for senior citizens) or if they possess assets abroad or need to carry forward losses.
Which ITR to File?
Salaried individuals typically file ITR 1 if their total income is below INR 50 lakhs, have only one house property, and limited agricultural income. ITR 2 is for those with multiple income sources, including salary and capital gains, while ITR 3 is for those with business or professional income.
Tax Calculation for Salary Income:
Salary income is taxable based on accrual or payment, whichever comes first. After totaling all earnings and deducting exempt allowances and Section 16 deductions, the remaining figure represents taxable salary income. This income is taxed at applicable slab rates, and any disparities between deducted TDS and calculated tax liability must be addressed during e-filing of ITR.
Income tax rates for individuals below the age of 60 years are as follows under old tax regime:
| Income Slab | Tax rate (Old Tax Regime) |
|---|---|
| Up to Rs. 2,50,000* | No Tax |
| Rs. 2,50,000 to Rs. 5,00,000 | 5% |
| Rs. 5,00,000 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
Under the old tax regime, in the case of senior citizens basic exemption limit will be Rs. 3,00,000/- and for super senior citizens, the basic exemption limit will be Rs. 5,00,000/-.
Income tax rates for individuals below the age of 60 years are as follows under new tax regime:
| Income Slab | Tax rate (New Tax Regime) (up to AY 2023-24) |
|---|---|
| Up to Rs. 2,50,000* | No Tax |
| Rs. 2,50,000 to Rs. 5,00,000 | 5% |
| Rs. 5,00,000 to Rs. 7,50,000 | 10% |
| Rs. 7,50,000 to Rs. 10,00,000 | 15% |
| Rs. 10,00,000 to Rs. 12,50,000 | 20% |
| Rs. 12,50,000 to Rs. 15,00,000 | 25% |
| Above Rs. 15,00,000 | 30% |
| Income Slab | Tax rate (New Tax Regime) (AY 2024-25 onwards) |
|---|---|
| Up to Rs. 3,00,000 | No Tax |
| Rs. 3,00,000 to Rs. 6,00,000 | 5% |
| Rs. 6,00,000 to Rs. 9,00,000 | 10% |
| Rs. 9,00,000 to Rs. 12,00,000 | 15% |
| Rs. 12,00,000 to Rs. 15,00,000 | 20% |
| Above Rs. 15,00,000 | 30% |
Under the new tax regime, the basic exemption limit for senior citizens and super senior citizens is fixed at Rs. 2,50,000 only. However, for others, it remains higher.
Surcharge is applicable at various rates based on total income: 10% if total income surpasses Rs. 50 Lakhs but does not exceed Rs. 1 Cr, 15% for incomes above Rs. 1 Cr but not exceeding Rs. 2 Cr, 25% for incomes above Rs. 2 Cr but not exceeding Rs. 5 Cr, and 37% for incomes exceeding Rs. 5 Cr.
Additionally, there’s a Health & Education Cess of 4% imposed on the total of income tax and surcharge.
Document Checklist for Filing ITR for Income from Salary
Form 16 or salary certificate
Form 16 is a crucial document issued by employers to their salaried employees. It provides a comprehensive overview of the individual’s earnings, deductions, exemptions, and tax deductions for a given Financial Year. Even if no tax has been deducted, employees can request a salary certificate for documentation purposes.
Form 26AS serves as a consolidated Tax Credit Statement, offering crucial details to taxpayers:
- Taxes deducted from the taxpayer’s income.
- Taxes collected from the taxpayer’s payments.
- Advance Taxes, Self-Assessment Taxes, and Regular Assessment Taxes paid by the taxpayer.
- Details of any refunds received during the year.
- Information regarding high-value transactions like shares, mutual funds, etc.
Checking Form 26AS before e-filing the Income Tax Return is vital to ensure that all tax credits are duly claimed and accounted for.
The salary slip, received monthly from the employer, provides a breakdown of earnings including gratuity and leave encashment. It’s crucial to keep track of these details, whether taxable or not, for Income Tax Return (ITR) filing.
In case of a job change within a financial year, all Form 16s should be considered for accurate tax assessment.
For pensioners, the pension certificate obtained through Form 16 from the bank is essential documentation as pension is considered taxable income.
Provident Fund (PF) Passbook contains details of contributions made by both employees and employers. Understanding the taxability of these contributions is important, and having the passbook handy helps in referencing.
Form 12BB, also known as Investment Declaration or Investment Proof, is a disclosure of tax-saving investments for the financial year. Employers use this information to calculate and deduct TDS accurately, making it necessary to submit Form 12BB at the beginning of each financial year.
Read More: LTA (Leave Travel Allowance): Meaning, Rules, Tax Exemptions and Conditions to claim
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
