One of the biggest reasons why many salaried individuals struggle with income tax calculation is their inability to understand salary components and structure properly. The net CTC offered to you by your employer has several tax saving components, and to take maximum advantage of these components, you must have a proper understanding of your salary structure.
As tax season is right round the corner, this is the right time to learn how to calculate your income tax liability using your salary component. This will also help you make the right investments in smart tax-saving instruments such as term life insurance, health insurance and unit linked insurance plans (ULIPs).
Let’s begin by understanding the important components in your salary structure and how they help you calculate and save taxes.
Understanding salary components in your pay slip
1. Total HRA mentioned on your salary slip
2. 50% of basic salary + dearness allowance (DA) in metro cities
3. 40% of basic salary + DA in non-metro cities
4. Actual rent paid minus 10% of basic salary + DA
Remember, if you are making rent payments in excess of Rs. 1 lakh in a year, you have to furnish your landlord’s PAN number to claim deduction.
Example of Salary Components in Your CTC
|Basic Salary||Rs 3,00,000|
|Social allowance||Rs 1,00,000|
|Medical Insurance||Rs 5,000|
|PF(12% of Basic)||Rs 36,000|
|Performance bonus||Rs 75,000|
|Total CTC||Rs 5,96,000|
Before the 2018 budget, employees were eligible to claim deductions on conveyance and medical allowances. Employees are now eligible to claim a flat standard deduction of Rs. 50,000 from your total income.
For example, if your total annual income is Rs. 5,50,000, your taxable income will be considered as Rs. 5,00,000 after applying standard deduction.
Deductions on investments available for salaried employees
You can also invest in various tax saving instruments such as term life insurance, ULIPs and whole life insurance to save taxes. By investing in a ULIP plan such as Invest 4G from Canara HSBC Oriental Bank of Commerce Life Insurance, you can save taxes under Section 80C up to Rs. 1.5 lakh, get life insurance protection and secure your retirement through market-linked returns.
Tax deducted at source (TDS) on salary
You must also know that your employer deducts TDS from your salary and pays it to the Income Tax Department. TDS is deducted based on your salary and the investment declarations that you made in the beginning of the year to your employer. Therefore, it’s important to make declarations carefully and on time.
During June or July or every year, your employer will provide you a TDS certificate with details of tax deducted and submitted to the tax department. This certificate is known as Form 16. If your yearly income only constitutes salaried income, you can just use the Form 16 to file your tax return.
However, if you earn rental income, earn interest or dividends on your investments, or have sold securities such as stocks or bonds in the financial year, you also need to mention that in your income tax return filing.
The ability to decode your salary structure or CTC is a skill that will help you in your financial and professional life. Understanding your salary component not only helps you save taxes but aids you in negotiating for a better salary. If you are not comfortable with these terms, you should ask your HR to explain it in detail.
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