Income from Salary: Meaning, Calculation, Allowances

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:

ii. Allowances:

a. Dearness Allowance (DA):

b. House Rent Allowance (HRA:

c. Conveyance Allowance:

d. Leave Travel Allowance (LTA):

e. Books and Periodicals Allowance:

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f. If the money is withdrawn after 5 years from the date of resignation/retirement, the amount withdrawn is also exempt from tax

iv. Taxes

a. Income Tax:

b. Professional Tax:

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:

ii. 26AS:

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:

ii. Health Insurance:

iii. Unit Linked Insurance Plans (ULIPs):

Also Read - How to Invest in NPS?

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):

v. National Pension Scheme (NPS):

Also Read - Is Pension Taxable?

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.