Employment provides a regular compensation more commonly called ‘income from salary’. Salary is one of the most basic motivations behind the qualified workforce and employers. However, it is not an informal understanding. In fact, your salary income is a part of a legitimate contract between you as an employee and your employer.
What is Income from Salary?
Salary means the money received by a person, referred to as an “employee” from an organization, referred to as an “employer” for offering specific services in connection with employment. What are the components, such as allowances, of this income received through salary and how are they calculated? You can find all these components listed in your salary slip.
Salary Vs CTC
If you are a salaried person, the total expense incurred by your employer to avail your services for a year is called Cost to Company (CTC). CTC includes a basic salary, allowances, perquisites, a performance-linked-variable component, health insurance, provident fund, gratuity, etc
Components of Salary
i. Basic Salary:This is a mandatory component of salary income and generally comprises 35%-50% of the gross salary. It is a fixed component and excludes bonuses, incentives, overtime and allowances. The amount earmarked for gross or basic salary depends on the designation, seniority, functional area and industry. The basic salary is fully taxable.
ii. Allowances:There are a variety of allowances that employees/employers can pick from, basis respective organization policies and/or mutual understandings. Some of the standard allowances offered by a vast majority of employers are listed below:
a. Dearness Allowance (DA):DA, a certain percentage of basic salary, is linked to movement in inflation rates. DA is generally paid by the government to employees working in government departments and public sector undertakings.
b. House Rent Allowance (HRA:The HRA component is paid so that you can pay your rent with that amount. You can claim exemption from taxes for rent paid to your landlord/landlady.
c. Conveyance Allowance:Conveyance Allowance, also called Transport Allowance, is paid to help you cover your costs of travel from your home to your workplace. Rs 1,600 per month or Rs 19,200 per annum is exempt from taxes. With effect from 2018, the conveyance (Rs 19,200) and medical (Rs 15,000) allowances have been replaced with a standard deduction of Rs 40,000.
d. Leave Travel Allowance (LTA):If you are planning to go on a vacation, anywhere in India, the cost of travel via air, rail or road (public transport), subject to given limits, is exempt from tax. This exemption is offered under section 10(5) of the Indian Income Tax Act, 1961.
e. Books and Periodicals Allowance:If you love reading, the government supports your hobby by exempting your expended amount from any taxes. Expenses incurred for buying newspapers, periodicals and/or books are exempt from taxation.
iii. Provident Fund (PF)
a. Contributions made both by you and your employer are deposited in a PF account.
b. PF is a savings account that offers guaranteed returns on deposits.
c. A minimum of 12% of your basic salary is deducted and deposited
d. The rate of interest is higher than the bank term deposits
e. The amount deposited is deductible from taxable income.
f. If the money is withdrawn after 5 years from the date of resignation/retirement, the amount withdrawn is also exempt from tax
a. Income Tax:Depending on your investment declaration, your employer would compute your annual tax liability and deduct the same in equated amounts each month in that financial year. The tax deduction may be more if you do not furnish evidence of investments made as declared by you at the beginning of the financial year.
b. Professional Tax:Professional tax is levied by the state government and all salaried employees, self-employed professionals such as chartered accountants, doctors, and lawyers are liable to pay the same. The maximum professional tax deducted from your salary, each financial year, would be Rs 2,500.
Perquisites, called perks in common parlance, refer to fringe benefits that are offered by organizations to their key employees. Perks are generally not paid as money but as provisions to use certain facilities for personal use. For example, company car with driver, company accommodation or membership to premium clubs etc. The value of such perks gets added to the taxable income.
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How to Check your Tax Deductions from Salary?
i. Form 16:Form 16 is issued by your employer and is a statement mentioning salary income and certifying that taxes have been deducted from your salary income. When you receive your Form 16, check whether your PAN is mentioned correctly so that the TDS reflects against your PAN in the income tax records.
ii. 26AS:You may log in to either the TRACES website or your income tax filing account to check your 26AS Form or Annual Information Statement. You must validate whether the deducted amount has been deposited with the government.
Tax Saving Options for Salaried Professionals
There is a plethora of options for you, to save taxes if you earn through salary income. You may consider a few of them listed below:
i. Term Insurance:A term life plan pays out the sum assured to the beneficiary in case of your unfortunate, untimely demise. Term life plans are safety nets and will give you peace of mind that your family will continue to sustain you even if you are not around. Amounts paid towards premiums can be deducted from taxable income under section 80C.
ii. Health Insurance:Health insurance is much needed in today’s times when healthcare costs are increasing by the day. You may cover yourself and your family with a family floater Mediclaim/health insurance plan that will cover most hospitalization expenses. You do not have to dip into your savings to pay those exorbitant medical bills. Health insurance premium payments are deductible, from taxable income, under section 80D
iii. Unit Linked Insurance Plans (ULIPs):The returns from ULIPs are exempt from tax under section 10(10D). The money paid towards premium can be deducted, under section 80C, from taxable income. ULIP investments offer the following added benefits:
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a. Bonus additions for long-term investments (5 years+)
b. Diversified portfolio investment without affecting taxability
c. Tax-free partial withdrawals after five years
d. Invest up to the age of 99 (option available in Invest 4G ULIP from Canara HSBC Life Insurance). You can use the same plan to build a corpus until 60, then have a tax-free pension income for life. Upon your demise higher of the corpus or sum assured it passed to your legal heirs.
iv. Public Provident Fund (PPF):PPF is a Central Government guaranteed investment cum tax saving instrument, offering a 7.1% rate of interest. The amount deposited in PPF accounts is deductible, under Section 80C, from taxable income whereas all withdrawals are exempt from taxes. Partial withdrawals are permitted only from the 7th year onwards.
v. National Pension Scheme (NPS):You must try and invest at least 10% of your income into NPS to build a corpus for your retirement. On retirement, you can withdraw 60% of this corpus and opt to get a pension from the balance of 40%. Contributions to NPS are also deductible, under sections 80C section 80CCD(1B), from taxable income.
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Salary income can be structured in different ways so that you get maximum returns and at the same time reduce your tax liability. The breakup of your salary depends on the organization and industry you work for. Needless to say, you can try negotiating with your employer so that you work out the most tax-efficient structure. On the other hand, putting your money in the right investment option will help you save on taxes further because such investments can be deducted from your taxable income before computing your final tax liability.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.